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AXS-ONE

Moderator: Bill Lyons

February 9, 2006

4:00 pm CT

Operator:

Good afternoon. My name is (Kesha). And I will be your conference operator today.

At this time I would like to welcome everyone to the Fourth Quarter 2005 Earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session. If you would like to ask a question during this time, please press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2.

Thank you. I will turn the call over to Mr. Hayden. Sir you may begin your conference.

Matthew Hayden:

Thank you (Kesha) and good afternoon to everyone. I’d like to welcome you to the AXS-One Investor conference call.

We’re here to discuss the company’s Fourth Quarter and 2005 Yearly Results which were reported today after the close of the market.

With us from Management are Bill Lyons, Chairman and Chief Executive Officer as well as Joe Dwyer, Chief Financial Officer.

Just a word about procedures before we begin, after Management has made its formal remarks we will take your questions in an open format.

Also please note in today’s conference call Management may make forward-looking statements including those that were made in the press release.

In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 I’d like to call your attention to the risks related to these statements which are more fully described in the press release and in the company’s filings with the Securities and Exchange Commission.

With these formalities out of the way I’d like to turn the call over to Mr. Bill Lyons.

Bill the floor is yours.

William P. Lyons:

Thanks Matt and hello everyone.

2005 is complete and we’ve made significant progress and we will reap the rewards from our 2005 investments in 2006.

While we were not profitable in the fourth quarter or for the year we expect to be profitable for the Full Year 2006 and more than double our license revenues this year.

We recognized $1.5 million in license revenue in the fourth quarter and had an additional deal close in December for another $750,000 in license revenues. This order from a major healthcare provider was received in the fourth quarter and the customer paid us in the first week of January. And we expect to credit the revenue later in the year after all the contract terms are met.

We believe the second half of 2005 is indicative of what we will see in the future. We’ve closed several significant deals that illustrate the power of our solution. We are increasingly competing against billion dollar high tech vendors and winning some very large deals against them.

Our system does scale. We are the performance leader and we have a total integrated single platform solution. These are significant advantages.

These wins will serve as the foundation for future business as an increasing number of global 2,000 customers realize that managing electronic records is far more than just managing email and that they need a scalable high performance solution to properly manage the millions or even billions of the disparate records that they are now generating.

I will review more of the details of why we are confident in 2006 but first let’s have Joe review the results of the last quarter.

Joe.

Joseph P. Dwyer:

Thanks Bill.

Fourth quarter revenue was $7.9 million a decrease of $1 million from Q4 of last year.

License revenue for the fourth quarter was $1.5 million a decrease of $500,000 from Q4 ’04. However the RCM component of license revenue increased to $1.3 million for the fourth quarter which was 88% of license revenue from $.8 million or 41% of license revenue in Q4 ’04.

The RCM percentage of license revenue has increased in each of the last five quarters and was 74% for 2005 compared with 67% for 2004.

For the quarter 59% of revenues were from domestic operations and 41% from international.

In 2006 we expect that RCM will comprise 80% to 90% of total license revenue.

In December we received an RCM order from a major U.S. healthcare provider for approximately $750,000 which was not recorded as license revenue in Q4. This sale which is a complicated install with third party software will be recorded as deferred revenue until all contract terms have been satisfied which we estimate will be in the later part of 2006. And we received payment from the customer on this order during January.

Service revenue for the fourth quarter was $6.4 million slightly lower than Q3 service revenue of $6.8 million and last year’s fourth quarter of $6.8 million. The decrease is principally the result of a decline in our Enterprise Financial Service revenue offset by increased service revenues from the RCM business.

The services growth profit margin increased to 44.8% in the fourth quarter up from 39.3% in Q4 ’04. The margin increase is a result of a more efficient services cost base on the same quarter-over-quarter revenue.

Total operating expenses for the fourth quarter were $9.4 million a decrease of $1.6 million or 15% for Q4 of last year and slightly higher than the third quarter expenses of $9.3 million. This decrease primarily related to the cost reduction initiatives we put into effect at the end of Q2.

We ended 2005 with 209 employees, 40 lower than December, 2004 headcount.

Our plan is to be conservative with respect to increasing the expense run rate into 2006. However we do plan to continue to modestly invest in the business where it’s appropriate to fuel new license sales and to support our professional service, customer support, and product development effort.

Overall we reported a net loss in Q4 of $1.65 million or about 5 Cents per diluted share compared to a similar loss of $1.72 million in Q4 ’04 or 6 Cents per diluted share.

For the year our total revenues declined 15% or $5.6 million to $32.8 million while our operating expenses also declined by $2.6 million to $41.4 million. The decrease in revenue is primarily related to a decline in our Enterprise Financial business revenue offset in part by an increase in RCM revenue of $1.2 million or 12% in 2005.

We ended the quarter with $3.6 million in cash with an additional $4 million of availability under our bank credit line. We generated $300,000 of cash from operations during Q4 with our net loss for the quarter being offset in part from billing and collection of annual customer maintenance contracts.

Additionally subsequent to yearend we billed and collected a significant multi year maintenance contract which will be recognized as revenue over the next three years. We also collected on several other large receivables.

Accordingly our current cash balance has increased to $8.7 million which is the second highest cash level we’ve reported in any quarter since 1996. This improvement in cash we believe will help alleviate customer concerns about our longevity and give comfort to our current sales prospects.

DSOs were 60 days for the fourth quarter and averaged 55 days for 2005.

Our receivable collections have been good and our accounts are generally current.

Overall our balance sheet is healthy and we’re comfortable with our cash and working capital position. Our operating plan for 2006 is to more than double our 2005 license revenue and post profitable operations for the year.

Based on our current expense run rate our operating income break even point equates to about $3 million in quarterly license revenue.

I’ll turn the call back over to Bill for a discussion of some of this quarter’s achievements and to wrap up before we take your questions.

Bill.

William P. Lyons:

Thanks Joe.

So what’s changed that’s going to make a positive difference to our business in 2006?

The Sun and Storage Tech merger is complete. We are in the Sun price book. Significant of dollars, hundreds of thousands of dollars are being invested by Sun and Sun partners in joint demand generation programs starting at the end of 2005.

The programs delivered qualified appointments for AXS-One, Sun, and their resellers. More than a hundred leads have been generated in North America alone so far. This really becomes viral marketing.

The pipeline is selling. The market is expanding. Our product has improved and more competitive. Our references are increasing in numbers and are credible and enthusiastic.

Our strategy of focusing on the platforms is resonating with customers and partners. The sales team is more confident. The international resellers are in place, trained, and with references. And viral marketing among partner reps is catching on.

Let me take some time to discuss our partnerships particular with Sun since these partnerships are an integral part of our strategy for success in the future.

In 2005 we closed four orders with Sun and Storage Tech worldwide. While this did not meet our plan for the year we were able to lay the foundation fro success in the future.

You’ll recall we announced our partnerships individually with Sun and Storage Tech during the first quarter of last year.

In the second quarter Sun and Storage Tech agreed to merge. And in September it became effective.

Later that month we were finally included in the Sun price book. This is extremely important since there are only a few software companies included and it is a way to ensure Sun and their resellers are incented to sell our solution.

As a result of the work we did in 2005 we expect to close more deals with Sun in the first quarter of 2006 than the whole of last year and then our plan is to increase that number each quarter.

The key to this acceleration is our demand generation programs. In North America we have six demand generation programs in place with our partners and their resellers.

One program for example uses a professional telemarketing company that sets appointments in target accounts for AXS-One and Sun reseller reps to make joint sales calls.

As reseller and partner reps are trained you can see the receptivity of our solution they’re bringing us into their own installed accounts. This is really becoming a viral marketing campaign.

Based on the volume of opportunities we have seen in less than eight weeks I believe that this is going to be a big deal.

In January we completed an Executive Planning Session where all the members of the Senior Executive Team met in Rutherford, New Jersey to review the past and plan for future including assessing the business plan.

Our team is very optimistic about the future and confident in being able to achieve a very strong 2006.

Why? Well, demand is up across the board. Let me give you a few examples.

IDC, 2005 topped $310 million with worldwide compound annual growth rate of 34.5% through 2009.

Radicati, EMEA revenues for email archiving will grow by an average of 74% per year from 2005 to 2009 from 207 million Euros in 2005 to $1.8 billion in 2009.

Gartner Group, by 2008 60% of all global 2,000 companies will implement Enterprise wide records management solutions up from 20% in 2004.

Asia-Pacific, the survey of 140 CIOs in Asia-Pac, 52% say they will have compliance programs by yearend 2006 versus 21% in the prior year.

In 2005 we had one win over $1 million but in our pipeline in 2006 we already have ten times that number.

We have more than 30 resellers serving 20 countries trained in our product across the world.

2005 was the year to establish resellers across the regions and 2006 will be the year to reap those rewards.

For example our South Asia territory covers six countries and they have signed up 13 resellers to cover those territories. We have wins in five of the countries and by the end of the first quarter we should have resellers and references in each country. We expect our first win in India this quarter with more to follow.

North Asia is similar where we gained our first wins in Taiwan and Hong Kong in 2005 and signed up resellers like Fujitsu and ALR. ALR is a subsidiary of CSE.

Based on current activity we know that these resellers will improve their performance in 2006 and help us expand into China.

Australia is similar with the first round of resellers in place and demand generation seminars completed earlier in this quarter.

In the U.S. we have resellers in the top 12 MSAs and we have been conducting regeneration programs with a number of them. A few of those programs I mentioned earlier.

In South Africa we won several (Mark Key) customers in the region last year and they will serve as influential references for other regional companies and agencies.

At the end of last year we won a key government agency that plans to implement our solution as their corporate archive for SAP records, Legacy applications, email and Desktop documents, the platform.

We had several of these platform wins across the world in 2005 and they should becoming valuable to us in 2006.

Finally an update on the T4 business in Europe, we signed our 50th order and now customers such as Virgin Holidays as current customers.

The challenge has been the speed with which we can add additional tool operators to the system. In that regard we have assigned dedicated development resources to address this both in Europe and the United States and we expect this work to be completed next quarter.

This means that the approximately hundred thousands of dollars for the fourth quarter can ramp to at least $400,000 per quarter as we transition to the second half of 2006.

Organizationally we have made changes in the overall structure of our team by combining our UK and European division with our Middle East and African team forming one unified EMEA entity. This will let us manage the business more efficiently and economically.

We believe this change will also help us to accelerate our expansion in Europe and the Middle East as our organization will move more closely align with our partners.

I also wanted to take a minute to address the recent change in our internal sales organization at the company.

We promoted (Rob Milkes) to Senior Vice President in the Americas replacing Matt Suffoletto.

(Rob) has been with us for about four months is a seasoned professional having managed sales teams in companies like SoLetica and Blue (Rose) during the past 20 years.

Prior to his promotion he already had the majority of his team in place many of whom have worked with him in the past. The quality of the sales team has improved substantially over the year and we are entering 2006 in a much stronger position in terms of closing deals than we were at the beginning of 2005.

So while we are still in the early days of this market we are well positioned with our customer references products, partners, resellers, the sales team, and the demand generation programs to make substantial progress this year. We are beginning to see the leverage that this business model can bring.

I’ll be happy to answer any questions that you have.

(Kesha).

Questions-and-Answer Sesssion

Operator:

At this time I would like to remind everyone in order to ask a question press star then the number 1 on your telephone keypad.

We’ll pause for just a moment to compile the Q&A roster.

Your first question comes from Jacob Gold with Gold Group.

William P. Lyons:

Hey Jacob.

(Kesha) we can’t hear Jacob.

Operator:

Hello Mr. Gold. Mr. Gold?

William P. Lyons:

While we’re waiting for you to check that, we got several questions from the internet that we encourage some of our investors to use that as a forum if they’re not going to be able to listen to the program Live.

Joe, do you want to answer some of those?

Joseph P. Dwyer:

Sure, I’ll go through a few of those.

One asked how new partner license revenue is booked.

The answer to that is as we - a partner receives an order from a customer they’ll provide us with a purchase order and we book revenue upon receipt of an order from our partner and shipment of the software.

The question went on to asking what about the payment terms?

Our payment terms are fixed with our partner. They’re not related to the partner’s payment terms with their end user customer.

Another question was how many Senior Vice Presidents do we have of sales in the U.S.

We have one, it’s (Rob Milkes), and all the sales people in the U.S. report directly to (Rob).

Another question talked about the - asking about the tax status in the U.S. and how that affects our earnings in the current and future quarters.

We have about $55 million of U.S. federal tax loss carryforwards. Those do not impact our P&L currently given that we had operating losses. And when we do have profitable operations we’ll be able to take the benefits of those.

Check to see any other questions, Operator.

Operator:

Mr. Gold?

Joseph Dwyer:

I’ll continue in the meantime while we’re waiting for that question.

Further questions asked me about the South African Joint Venture and about T4.

We do have one joint venture in South Africa. That company operates essentially to help sell license and services to South African companies that need to buy from Black and Towered phone companies. We had a 49% interest in that JV.

Let’s see, we also had a question Bill, just giving any update on any Sarb-Ox things that may be coming down the road and how that would impact our future business.

William P. Lyons:

Sure. We get questioned often about Sarbanes-Oxley and we find as people went through with the process of documenting their procedures with the Rule 404 that as they’re moving forward many people are looking to ways to better archive their financial records.

So we often in our conversations with General Counsels and Compliance Officers address Sarbanes-Oxley. There was an article in Marketwise yesterday that we were quoted in asking our opinion of what’s happening with Sarbanes-Oxley.

And while there’s a lot of controversy on how much it costs it clearly appears that while they may modify certain regulations it’s clearly we’re really not going to reverse our direction.

Many other countries in the world are generating their own legislation that mirrors Sarbanes-Oxley.

(Kesha) why don’t you try if you can’t get a hold of Jacob Gold, why don’t you go to the next question?

Operator:

Hello Mr. Gold?

Jacob Gold:

Yes, can you hear me?

William P. Lyons:

Yes, fine.

Jacob Gold:

Yeah, on my speaker. I don’t know why that’s happening.

I just wanted to understand exactly how you increased your cash position. It wasn’t clear to me.

Joseph P. Dwyer:

We had a couple of things that happened and a main factor was that we had a - one of our largest customers prepaid a three year maintenance contract and we received that money in January.

Additionally we received payment on the Q4 order that we didn’t book as revenue. We did get paid for that in January and we had a couple of other relatively large receivables that were paid in January so that brought it up to $8.7 million.

Jacob Gold:

So basically the $750,000 was carried over to Q1 and then there was roughly a $4 million payment that came in.

Joseph P. Dwyer:

In that range.

Jacob Gold:

Okay, and were you expecting that payment to come in?

Joseph P. Dwyer:

Yes, we were. And we’ve been working with the customer for some time.

Jacob Gold:

Okay, and that revenue will be over a three year period so just a cash up front, is that what you were saying?

Joseph P. Dwyer:

That’s right.

Jacob Gold:

Okay, my other question was, you know, last quarter you guys were pretty much close to break even. Was there any reason why, you know, in ’04 things seemed to have gone backwards, downwards?

Is there any reason that contributed to that or?

William P. Lyons:

Well yeah, there were a few reasons I think that we spelled out but just to review them.

License revenue was down. It was $2.5 million or thereabouts in Q3 and down to $1.5 million in Q4.

Services revenue was down slightly. Maintenance was about a push.

But it’s those combinations expense controls were about the same.

But that’s the reason. Remember the - that $750,000 order wasn’t recognized as revenue in the fourth quarter. It will be recognized later in 2006.

Jacob Gold:

Okay, so you’re not sure the $750,000 will be in Q1 ’06 or later, is that what you’re saying?

William P. Lyons:

No, it will likely.

Joseph P. Dwyer:

It’s likely to be towards the end of the year Jacob. It was a complicated install at that time.

Jacob Gold:

Okay, but it seems like, you know, you’ve got a lot of revenue that you know is already in or positive basis in ’06.

Joseph P. Dwyer:

Well that I mean that’s the only major deferred revenue.

But clearly our pipeline is (big) demand generation programs are going so, you know, as we said we’re very bullish about 2006.

Jacob Gold:

Okay, great. I had something else but I can’t find the question. Thank you so much.

William P. Lyons:

Thanks Jacob.

Operator:

Your next question comes from Andy Schroeder with Pier One Research.

William P. Lyons:

Andy.

Andy Schroeder:

Pier One Research, good to talk to you guys.

How are you Bill?

William P. Lyons:

Good.

Andy Schroeder:

And let’s see on the sales cycle, I love hearing that the pipeline is filling up with tangible leads.

So maybe talk about what dynamics you’re seeing in those deals to call them tangible and the component dynamics of those deals, the timing of those deals, partner and not partner. Just describe the deals a little more if you can the ones that are looking in the first half of the year pipeline.

William P. Lyons:

Yeah, this is really exciting Andy because, you know, literally, you know, what’s new is that our partners are spending hundreds of thousands of dollars on demand generation programs. We’re monitoring those programs here at ASX-One.

So we see the lead. We are an integral part of passing the lead to the AXS-One rep and the Sun rep or the Sun reseller. We set up the appointment. They get together. We train the rep. We go out and make the call.

And those people I mean, you know, we have emails all over the place and say, well this guy, you know, he did not have any idea that we did this and he’s taking us to this account, that account.

So literally we have several new reps in new territories that are buried. And, you know, these aren’t accounts that are, you know, the telemarketing companies qualifying them. Do they have money? Do they have budget? Is it in this year’s plan?

So, you know, some of these newer reps have, you know, are wondering where they are that they have this kind of marketing generation.

And, you know, one Sun rep will bring us in. If we’ve done a good job, he introduces us now to his team of half a dozen reps. There’s one of those going on in Cleveland yesterday and today.

So it’s almost you’re seeing the pipeline and the leads real - you know, it’s kind of the coin of the realm our leads.

And even though Sun has it’s own accounts and the resellers have their own accounts, when we bring them leads then it’s kind of like that’s the coin that brings us in there then we make the calls together, they get trained, and there’s an awful lot of excitement in the field here in North America because of it.

Andy Schroeder:

All right. Different question on it’s interesting that you have so much success internationally than in advance of having more success in the U.S. since this is where you’re based.

Any comments on why that’s the way the company is starting to grow or did that on purpose because that’s where you had some of your better reps or any comments on the geographic dynamics of the way you’re growing?

William P. Lyons:

I think that each territory takes a look at their marketplace. And if you say the goal is to get the archive whatever you can that’s correct.

In Asia-Pac, in India for example our partner, Siemens, there’s a 130 SAP accounts in India. We hope to get our first order with them this quarter.

And in China there’s 350, in Taiwan there’s 150.

So we have a focus and our resellers across the region are almost all SAP trained. That eliminates the need for a double bite support because, you know, we can go in on the SAP GUI so we’ve had good success in establish a base of the archive there and now that we have it then now they’re saying, well we have an email need or we have a books and records need email particularly.

So we expect to expand those SAP clients to other elements of the platform. In South Africa they’ve done a very good job on selling their entire platform. In Europe it’s been a little bit more of a mixed bag of email not so much SAP.

And in the United States it’s been a variety of things and it’s far more - it seems to be far more competitive here. We do have a very robust pipeline now.

And I think that the key difference here has been we needed to be far broader. There’s a lot of deals happening here that we just weren’t aware of.

And in these demand generation programs that are uncovering a whole lot of demand that we weren’t aware of in geographies that we didn’t necessarily have a rep in.

So I guess to summarize to say different geographies have different needs, compliances and it’s important in some places. So we kind of went with the strategy of get the archive whatever way your territory works.

Andy Schroeder:

Okay, and on the - you said the - you did one deal over a million in ’05 and there’s ten times that in the pipeline right now.

What kind of decision timelines are those customers on generally speaking or what are their trigger points to make the decision of aye or nay and how competitive is it with you versus others?

William P. Lyons:

You know it’s a variety of accounts from government agencies, large manufacturing and chemical companies, healthcare providers.

So depending on the, you know, some of them, you know, I’ll give you a case in point.

You know, a manufacturing company will probably start with a small installation and upon successful implementation of a few thousand will move towards 50,000.

There’ll be a, you know, the seven figure deal seems like it’s going down a normal track. They just happen to be bigger than a lot of the customers that we have.

Where we saw an awful lot of healthcare and financial services companies in the past we’re beginning to see it branch into other industries from government, chemicals, manufacturing. So we’re very excited about that.

You know, maybe that Gartner statistic is instructive 20% of the global 2,000 or 400 companies, you know, have some sort of records compliance or records management archiving. There’s going to be 800 that do it over the next couple of years.

Andy Schroeder:

But specific to the ones that you’re speaking of in your pipeline is there anything - any triggers that are going to drive them to make decisions sooner in the year versus later in the year and describe what makes you call them tangible versus (unintelligible).

William P. Lyons:

I think litigation support has become a much bigger item as we see this market maturing Andy.

I mean originally everybody was - a good number of people were either driven by regulations like the broker dealers or they were looking for some sort of (ILM) storage savings.

Now it’s they know, they realize or they’re attuned to the fact that they’re spending a lot of money on litigation and if they could get their - if they could get the information in a repository and out they could pay for these things pretty quickly.

I think there’s a whole notion also of Sarbanes-Oxley just, you know, raising the level of interest in the whole compliance area and of course everyday with us seeing Skilling and Ken Lay and what’s happening at Enron, you know, is working in that - in our favor as well.

I think that the - if you look back last year, you know, maybe there were a couple accounts in the pipeline that we could say could be million dollar deals. We closed one. So maybe there was, you know, maybe one or two that were left over from last year.

But most of these were uncovering demand at very large customers that we hadn’t worked at before. So I’d say really kind of normal sales cycle.

But it looks like there are, I don’t want to say all of them, but the majority of these things are approved projects where people have a budget and expect to get something done this year.

That manufacturing company I was saying for instance pays far more than the multi millions it would cost to - on litigation support on costs that they think that they would be able to eliminate.

So its cost justified. It’s in their budget. They have plans to do it. It’s just a matter of how soon can they get to it.

Andy Schroeder:

I think they’ll be asking a lot of people on the call likely then, good luck. Good to see some of your investments in marketing starting to pay off.

So but my last question though is that on your marketing spend I assume that’s going to stay and on a relative basis similar to Q4 probably in the first half of the year then.

William P. Lyons:

Yeah, pretty much so. We’re not going to - what’s encouraging here is that good business is marketing spend is AXS-One’s sweat equity but, you know, other people are putting in the bulk of the dollars.

Andy Schroeder:

Thanks to you and your team for the hard work. Take care.

William P. Lyons:

Thanks Andy.

Operator:

Your next question comes from Mikel Keafer with Jurika Mills Keafer.

William P. Lyons:

Hey Mikel.

Mikel Keafer:

Hey Bill, how are you doing?

William P. Lyons:

Good.

Mikel Keafer:

Could you just talk about your expenses going forward this year? It seems like they should be relatively flat.

But can you talk about any areas where they may be increasing as your greater business?

Joseph P. Dwyer:

Yeah, I can take that Mikel. The - I think to the extent that we experience the revenue increase that we’ve talked about will have variable compensation in that area for the salespeople.

In addition we may be doing some addition of headcount for professional services and (QA) and support people to support that growth.

So it’s primarily variable and a function of the revenue growth.

William P. Lyons:

So kind of flattish sort of to start the year and then slight growth going but as we get bigger numbers as Joe said you get some variable commissions and etcetera.

Did we lose you Mikel?

Mikel Keafer:

No, I’m still here. Could you also talk about what your expectations are for the service side of the business of the Legacy portion there?

William P. Lyons:

For the Legacy portion? I think that the Legacy portion we think we’re in a stable environment, you know, plus or minus 5%, 10%.

We did start to see a turnaround in the RCM business and, you know, there’ll be a percentage of license revenue as we book license revenue a certain percentage, you know, we’ll calculate as expecting professional services for that. You know, there’ll be a bit more here and there as other people have other projects.

But I think it’s going to be a kind of a mirror but much smaller the growth in license revenue, (might get) and a smaller percentage.

Mikel Keafer:

Okay, thanks.

And then one other question I guess there are two other questions here.

If I heard you correctly you said that you expect break even at about $3 million in license revenues per quarter which would imply, you know, $12 million in license revenues for the year.

Just one question, is that correct?

And then maybe if you could talk a little bit about linearity or how you see sort of the quarters going?

You just see sequential increases quarter-over-quarter all year long or they’re going to be (weighted)?

William P. Lyons:

As we said we expect license revenues to grow by more than 100% so that kind of takes us into that ballpark. And at the same time we said we expect to be profitable for the year.

The quarters there is, you know, there’s some seasonality typically in software we’re hoping to be at a growth rate where it’s modest and we don’t see, you know, the same sweeps.

So, you know, we would expect the quarters by and large to go one, two, three, four sequentially increasing from the first on.

Mikel Keafer:

Thanks.

William P. Lyons:

(Kesha).

Operator:

Your next question comes from Orin Hirshman with Aigh (NYSE:AIG) Investment Partners.

William P. Lyons:

Hey Orin.

Orin Hirshman:

Hi, how are you?

William P. Lyons:

Good.

Orin Hirshman:

Just a follow-up on that last question, if you see some progress in the actual reported number in the past Q versus the first Q or Calendar Q, particularly on the license cycle?

William P. Lyons:

Yeah, we don’t want to be precise on the quarters.

But, you know, we would certainly hope to do that.

Orin Hirshman:

Can you just repeat one thing on what the license number was for the entire year, that license number, the last (unintelligible)?

William P. Lyons:

Yeah, we’re 5.

Joseph P. Dwyer:

$5.5 million.

Orin Hirshman:

Okay, I just to follow-up on the last question which I think the question was getting at more was that, you know, if you doubled that and you get into that 12 range then you need $3 million in quarterly licenses to break even, you know, that explains how you kind of break even maybe make a penny here or there.

Can you get much further than that this year or is that not realistic expectations for 2006?

Joseph P. Dwyer:

What we want to do, you know, we’re balancing giving you some guidance so, you know, we wanted to tell you how we’re feeling but recall we said more than 100%.

Orin Hirshman:

Right. And you mentioned that Sun’s ability brought you in some more deals and Storage Tech this quarter than they had the whole last year, if I caught it correctly.

Joseph P. Dwyer:

Yeah we expect to close more this quarter than we did all of last year. They clearly have brought us into more deals than we have as well.

Orin Hirshman:

Okay, you know, what’s the typical deal size that they’re bringing you in versus what you’re seeing on your own or there’s not much difference on that average deal size?

Joseph P. Dwyer:

Probably not much difference. The one - the deals that they’re bringing us into, you know, are their key customers by and large. There’s a small, you know, they do run the gamut. But the ones that we’re focusing on with them are typically the larger deals.

Clearly, you know, the way our contract is with them they get a certain percentage and they pay the reseller if they have a reseller involved. Bear in mind that I think the percentage is somewhere between 70% and 80% of Sun’s revenue comes through resellers.

So when we get a reseller involved the reseller can order off the Sun price book with a part number. Sun gets a portion and the reseller gets a portion.

So we’re completely indifferent if Sun brings in a reseller. We’re actually, you know, encouraged because it’s more people learning our product and they have very good relationships with a number of these customers themselves.

Orin Hirshman:

When you actually record a revenue license number (you come off) a deal that was done with Sun, do you record it as a net license or (is it across the board) if it’s reported below the line?

Joseph P. Dwyer:

It’s recorded at net.

Orin Hirshman:

The net, okay, fine. Very good, okay, thank you.

William P. Lyons:

Thanks Orin.

Operator:

Your next question comes from John Smith with Mosait.

John Smith:

Hi Bill?

William P. Lyons:

Yes, John.

John Smith:

Hi, this is a quick question you mentioned that you’ve been in the price book for I believe its two quarters with Sun now.

Joseph P. Dwyer:

We’ve been in and I couldn’t hear the - you broke up a little bit John.

John Smith:

You’ve been in the price book for about two quarters now.

Joseph P. Dwyer:

At the end of the very end of September, so, you know, one full quarter and a little bit.

John Smith:

So how many competing products would you say are in that same price book?

Joseph P. Dwyer:

None.

John Smith:

Okay, can you talk a little bit about the competitive landscape?

Joseph P. Dwyer:

Sure. You know, the market continues to consolidate over the - I think since the last quarter. CA bought iLumin, Symantec bought IMlogic. HP just bought Outerbanks a little bit of, you know, it’s more database archiving.

And KBS also announced a partnership with Gamma Technologies to get into SAP.

So still lots of consolidation in the marketplace. What we are seeing extraordinarily is that a number of the fields are very large and some people who don’t have, you know the full scope of the product that we have even some of our competitors have brought us into certain situations.

So we’re encouraged by that. We do have competitive advantages on performance and scale and scope of the product that enable us to do well. Where we come up short is the size of our company and our balance sheet and that’s why partners are so important to us.

So we’re getting into RFPs. We’re going in there with our partners and almost always, you know, we’ll get to the short list based on our technology. I think with the teams that we have and enthusiasm that are partners are beginning to embrace we’ll start winning a good deal more of these in 2006 than 2005.

John Smith:

What kind of revenues are we talking about, these targets that you just mentioned that were bought out or been chosen as partners like compared to your, you know, $5.5 million of license revenues? What kind of revenues do these guys have?

Joseph P. Dwyer:

Well all the companies I mentioned are part of billion dollar players.

So it’s, you know…

John Smith:

Within your segment is there a clear winner or, you know, (unintelligible).

Joseph P. Dwyer:

No, I don’t think, I mean, KBS has typically been the market share leader.

But they’re dealing most of the time in very small accounts, you know, a thousand or under type of accounts. We’re dealing in - our strategy is to win some very large prestigious accounts. Let that become very visible so we continue to be the performance and scale leader because we think large corporations are going to be really the early adopters and fully appreciate the need for a total records compliance management solution.

We’ve had some very good success with very large installations. We have very good references. So we think that that’s going to help us execute in 2006.

John Smith:

So KBS concentrates on smaller accounts, is that you were saying?

Joseph P. Dwyer:

Yeah. They have issues on scale if you get up into 5,000, 10,000, 20,000 users you may be able to archive it. You may not be able to find too readily.

John Smith:

You spoke about - you gave us some visibility on ’06 license. What about maintenance revenue do you see that as well doubling or?

Joseph P. Dwyer:

No, no. It wouldn’t double at all. If you remember it’s typically about 18% to 25% probably closer on average to 18% to 20% of new license revenue.

So the way you’d model it is you’d say here’s what their maintenance revenue is going in at the run rate. Here’s their license revenue, 20% of that over the period of time, and you can model it out.

But I don’t have a forecast for you on it.

John Smith:

But it should grow then, right?

William P. Lyons:

Yes.

Joseph P. Dwyer:

Yes.

John Smith:

How much was that - you mentioned a maintenance advance that should be recognized in three years. What is that amount? Is this about $8 million or it’s less?

William P. Lyons:

No, it’s a little over $4 million.

John Smith:

A little over 4?

Okay, and finally partners, are you guys working on or is the strategy to get more partners like Sun? Is that a possibility in ’06?

William P. Lyons:

It is. We’re working on a series of other partner endeavors. Also while we have a very good foundation of resellers across the world we are actively recruiting other resellers to fill in certain geographic areas.

So you’ll see more significant sized partners in the future as well as more resellers.

John Smith:

All right guys, thank you.

William P. Lyons:

Thanks John.

Operator:

You have a follow-up question from Jacob Gold with Gold Group.

William P. Lyons:

Okay, Jacob.

Jacob Gold:

The other question I had, you mentioned that you have a $4 million Line of Credit. You haven’t gone into a Line of Credit to get to $8.7 million in bank, have you?

William P. Lyons:

No, that’s - we have $8.7 million plus $4 million.

Jacob Gold:

Got you, I just want to be clear.

The other thing is, you know, everyone’s been trying to get a handle on this pipeline. So I’m hearing from this call that the pipeline in ’06, in other words in ’05 you closed one deal over a million.

So the pipeline in ’06 has multiple deals. I think I heard the number ten of over a million dollars.

William P. Lyons:

Yes.

Jacob Gold:

Just to be clear in other words the pipeline in ’05 which was a strong pipeline with deals less than a million. The deals in ’06 are more over a million, is that what you’re saying?

William P. Lyons:

Yeah, I’d say, you know, the pipeline is marginally up Jacob but there’s, you know, it’s lagging behind. We have so many of these new leads coming in when we fully realized the demand generation programs; we think the pipeline will be up significantly. You know, just because we have a call schedule we don’t put it in the pipeline.

But as there - people are going there and, you know, seeing the quality of that prospect we expect it to go up significantly this quarter.

Jacob Gold:

Right, and on top of that you’re saying that the potential numbers is a bigger number.

William P. Lyons:

Yes.

Jacob Gold:

Okay and are you still working on that ten step process that you talked about last year?

William P. Lyons:

Yeah, we do use it. We’re, you know, we really are concentrating on maybe the top four or five steps, you know, we have people going through the process.

But we’re kind of saying, okay, what are the closable things here. You know, so maybe getting up to the proposal stage and better.

Jacob Gold:

So when you say pipeline you’re using your six to ten not one to ten (unintelligible).

William P. Lyons:

Well.

Jacob Gold:

One to ten model that you proposed.

William P. Lyons:

Oh, those - it depends what your basis is and, you know, all of those levels are improving.

But when I’m talking about the pipeline in general it’s the total pipeline. I haven’t - you know, I don’t want to say - confuse you. So I’ve always talked about the total pipeline. The total pipeline now is better. We focus on the top categories of it.

Jacob Gold:

Okay, great. And then lastly can you comment a little bit, there’s a person who’s taking Matt’s position. He was with the company for four months and you were very impressed with his progress so you promoted him.

William P. Lyons:

Yeah, he was (Rob) actually was managing the Eastern Operations for us. He hired several people that he was very familiar with. He kind of filled up his territory. In fact he had a - part of his job was to cover certain accounts himself.

So now we have a VP of Sales whose carried a bag, is closing business, understands the sales process, understands the importance of partners and resellers, and has, you know, if he has a strong suit its accountability and consistency.

So he’s instilling those same qualities in his team. So it’s not like a brand new person who came in and said, hello. He’s been here. We know him.

So we got a - you know, we think we have an excellent guy.

Jacob Gold:

And the people that were working under Matt are now reporting to (Rob), is that correct?

William P. Lyons:

All of them, yeah, all of the sales and presales people.

Jacob Gold:

Okay, great. Thank you so much Bill.

William P. Lyons:

I think that was a follow-up question for Jacob. So if there’s another question or two let’s take them and then we want to wrap up.

(Kesha).

Operator:

You do have a follow-up question from Mikel Keafer with Jurika Mills Keafer.

Mikel Keafer:

Thanks. Yeah, just one another quick question. Could you tell me what the average size of a Sun deal for you guys is?

William P. Lyons:

Very hard it’s kind of all across the board. In the pipeline we’ll have deals that are, you know, up to a million and below a hundred thousand.

I think, you know, there - and it depends by geography Mikel, you know, the deals in Asia are typically smaller. United States larger, Europe, you know, somewhat closer to the United States.

So, you know, I think for your purposes, you know, we need to look at maybe a couple hundred thousand.

But they can, you know, there can be wide swings.

Mikel Keafer:

Okay, for the deals you closed last year, was it a couple hundred thousands a pretty good number then?

William P. Lyons:

Yeah.

Mikel Keafer:

Thanks.

William P. Lyons:

Okay, one more question.

Operator:

Your next question comes from Andy Schroeder with Pier One Research.

Andy Schroeder:

All right, just wanted to follow-up on the government side. To what extent does the government play a big part of your pipeline or ’06 plans?

William P. Lyons:

Andy there are some government deals in the pipeline in the U.S. and Europe and Australia. It’s not a significant portion but, you know, clearly there’s - when you’re dealing with the government almost all of those would be big deals.

Andy Schroeder:

And do you expect those deals to have a purchase decision whether it’s you or else wise in ’06?

William P. Lyons:

You know, very hard to tell. They’re - some of the ones that we’re talking to are certainly indicating that they have a need and they want to get something done.

But you just - I wouldn’t - I’m not forecasting them this year if they happen that would be great. You know, we have partners that are working with us. We have partners that have brought us into a variety of things.

So, you know, we’re not spending a lot of cycles other than to support our partners with them.

Andy Schroeder:

Great, thanks a lot.

William P. Lyons:

Okay, thank you everybody.

Let me just summarize by saying we think we’re very excited about 2006. 2005 was a great transition year. We had - it took a lot longer than we had hoped perhaps some of that was because of the Sun and Storage Tech merger. They were two of our important partners. They finally did get together. We now think that they have their organizational issues sorted out.

And with these demand generation programs we’re very encouraged by early results with Sun reps, with resellers. That looks very good. And indeed demand is in all parts of the world is up.

So whether it’s the product, the salespeople, the partners, the resellers, we are bullish for the year and expect to as we said grow more than 100% in license revenue and be profitable for the year.

I appreciate your attention to the call and we look forward to talking to you in the future quarters.

Thank you.

Operator:

This concludes today’s Fourth Quarter 2005 Earnings conference call.

You may now disconnect.

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Source: AXS-One Q4 2005 Earnings Conference Call Transcript (AXO)
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