Guidance Software, Inc Q1 2008 Earnings Call Transcript

Guidance Software, Inc (GUID)

Q1 2008 Earnings Call

May 8, 2008 5:00 pm ET

Executives

Bill Powell - Director of Investor Relations

Victor Limongelli - President and Chief Executive Officer

Frank Sansone - Chief Financial Officer

Analysts

Josh Jabs - Roth Capital

Rajesh Ghai - ThinkPanmure

Kevin Buttigieg - Stanford Group

Priya Parasuraman - Wachovia

Vick Churamani - Lehman Brothers

Presentation

Operator

Good day everyone and welcome to the Guidance Software First Quarter Earnings Results Conference Call. Today’s program is being recorded. At this time, for opening remarks, I would like to turn things over to the Director of Investor Relations, Mr. Bill Powell. Please go ahead, sir.

Bill Powell - Director of Investor Relations

Hello everyone. This is Bill Powell, Director of Investor Relations for Guidance Software. And I would like to thank you for joining us on our first quarter 2008 earnings conference call. As your host for our call this afternoon, it will be my pleasure to introduce Victor Limongelli, President and Chief Executive Officer of Guidance Software, and Frank Sansone, Chief Financial Officer of Guidance Software, to present and discuss with you our financial performance and other operating metrics.

Before Victor and Frank begin, I have a few administrative notes I would like to go through for the benefit of our audience. Guidance Software reports its results on a Generally Accepted Accounting Principles or GAAP basis in conformity with the Securities and Exchange Commission standards. These results may differ from results published by analysts or the media featuring pro forma financial results, which may not be in conformity with regulatory standards. We encourage everyone to review our financial results presented on a GAAP basis, which are detailed in our press release issued today at 4:01 pm Eastern Time.

Some of the information discussed on this call, including projections regarding revenue and operating results, may contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.

Additional information concerning these risks and uncertainties can be found in the company’s most recent periodic reports filed with the US Securities and Exchange Commission. Guidance Software assumes no obligations to update any forward-looking statements.

Let me describe the format for today’s call. Victor will begin the call with an overview of the first quarter coupled with his perspective on our achievements and what he sees happening in our business at this time. Frank will follow Victor with a more detailed review of the numbers. And then we will open up the call to hear from you so that we can take your questions and provide you with answers before ending our call today.

Now, it’s my pleasure to turn the call over to Victor Limongelli, President and Chief Executive Officer of Guidance Software. Victor?

Victor Limongelli - President and Chief Executive Officer

Thanks Bill and good afternoon everyone. I’m proud to say that it was another very good quarter for Guidance Software. Our revenue performance was strong. With $21.7 million in recognized revenue, we had our best first quarter ever, and the second best quarter in our history, second only to the seasonally strong fourth quarter of 2007.

In addition to the recognized revenue, deferred revenue increased by over 1.4 million during the first quarter, reaching an all-time high of 28.6 million and demonstrating that bookings were strong in Q1. Specifically, about 70% of the increase in deferred revenue in the quarter consists of deferred product revenue.

We are also pleased to report that our bottom line performance was sound. Excluding share-based compensation, we lost $0.02 per share in the first quarter as compared to a loss of $0.04 in Q1 2007. With respect to specific revenue areas, in Q1, sales of EnCase Forensic and our family of EnCase Enterprise add-on products, principally Encase eDiscovery performed well.

In addition, our services divisions outperformed all expectations both internal and external as our professional services division achieved record revenue, primarily as a result of the provision of eDiscovery Consulting Services. And our training division achieved records both in revenue and in the number of students trained. In looking at the complete picture, we are seeing overall strong bookings in revenue performance. We are executing according to our plan, and we are pleased with our achievement so far.

Traditionally, the first quarter is our seasonally slowest quarter. In that pattern, when coupled with a challenging economic environment this year makes us particularly proud of our first quarter results in 2008. In order to continue to achieve our goals, we have been working hard in research and development. Over the last nine months, we have undertaken a re-architecting and re-engineering of our products that run on EnCase Enterprise platform. As a result of this effort, in the next few months, we expect to release Version 3 of EnCase eDiscovery, which will include improved processing and greater usability, and we will also offer as an option connectors to certain content management systems.

In addition, in the same timeframe and based on a same user interface, we expect to launch a new product called EnCase Data Audit and Policy Enforcement, which will likewise run on our EnCase Enterprise platform. This product will enable customers to search for and clean-up sensitive data such as credit card numbers, social security numbers, or other personally identifiable information from their desktops, laptops and servers.

Finally, in Q3, we plan to release a new version of EnCase Information Assurance, again using the common interface of the new architecture. That product as well runs on EnCase Enterprise platform. In addition, to the soon to be released products, just last month we released another new product, EnCase Lab Edition, a product designed for government agencies and law enforcement. It enables the review of digital evidence via simple Web interface and without the necessity of prior computer forensics experience or training.

With respect to training, we are also planning to launch later this quarter, a service called EnCase On-Demand, which will enable anyone with a browser to take EnCase training at anytime. In short, we are continuing to innovate by improving the functionality and usability of our products, by introducing new products, and by making our product and services more convenient to buy and use, and we expect to continue to innovate as we move through 2008.

I would like to take a minute to highlight a recent noteworthy event for you. Last week, we held our annual Computer and Enterprise Investigations Conference, or CEIC. As a conference that focuses on users of EnCase software, CEIC is our signature event. This year we were joined by over 1,000 participants, a substantial increase from last year. We were quite pleased with the attendance levels and the enthusiasm of the participants. For those of you, who attended, thank you for participating. We hope to see many of you at next year’s conference to be held in early May in Orlando, Florida.

Finally, you've heard us talk in the past about the defensibility and reliability of EnCase software. We believe this defensibility gives us an edge in the marketplace. You may have seen the news today before yesterday in which we announced an important partnership with a very large prominent law firm, Howrey LLP, which serves as counsel in some capacity to nearly 20% of the Fortune 1000. This relationship involves opportunistic services engagements, introductions to Howrey clients who are seeking to establish an in-house eDiscovered process and co-marketing efforts. This partnership developed after key partners of Howrey saw first hand the power and effectiveness of EnCase eDiscovery in several high stakes litigation matters. We believe that it provides further validation of the defensibility and reliability of EnCase eDiscovery, which helps to differentiate us in the marketplace, and we are quite pleased that we were able to formalize this partnership.

Now, let me turn it over to Frank to discuss our financial results in detail. Frank?

Frank Sansone - Chief Financial Officer

Thank you, Victor. The financial information provided on this call will be presented on a non-GAAP basis only. Any information presented on GAAP will be noted as such. Please see our first quarter press release for reconciliation between the GAAP and non-GAAP results.

I’m proud to report the results of the quarter, as Guidance Software produced record first quarter revenue in what is seasonally our slowest quarter. In fact, revenue, pretax earnings per share and deferred revenue all increased as compared to Q1 2007. We continue to execute well on our plan.

For the first quarter of 2008, revenue was 21.7 million, up 4.1 million or 23% as compared to the first quarter of 2007. As Victor mentioned, deferred revenue also increased, up over 1.4 million from the end of 2007. Furthermore, of the 28.6 million in deferred revenue balance as of March 31, 2008, 26 million of that is short-term and will likely be recognized within the next 12 months.

As we mentioned in last call, we will discuss our net results on a pretax basis only for all 2008 conference calls as a result of certain tax rates that the company may be subject to. As such, our pretax loss decreased to 500,000 or $0.02 per pretax share for the first quarter of 2008 from 900,000 or $0.04 per pretax share in 2007.

On a GAAP basis, our Q1 2008 pretax loss was 2.7 million or $0.12 per pretax share as compared to 1.8 million or $0.08 per pretax share in Q1 2007. Product revenue increased from 10.1 million in Q1 2007 to 10.9 million in Q1 2008, an 8% increase.

Enterprise license revenue grew from 7.4 million in Q1 2007 to 7.6 million in Q1 2008. As you may remember, Q1 2007 was a break from our traditional seasonality in our enterprise license revenue. It was an unusual quarter in that Q1 2007 exceeded the prior year's Q4, which is not our typical experience and not one that we expected to further repeat.

Furthermore, in Q1 2008, we had nine enterprise sales that were greater than 250,000 in license revenue as compared to eight in Q1 2007. In Q1 2008, we sold 16 licenses for EnCase Enterprise add-on modules that is eDiscovery, Information Assurance and Automated Instant Response, compared to 14 in the first quarter of 2007. This is the last quarter that we will comment on Automated Instant Response as that product line is for the most part integrated into Information Assurance. Instead, we will be adding our newly released Data Audit and Policy Enforcement product to this metric.

As Victor mentioned, our services businesses really outperformed in Q1. Services and maintenance revenues increased from 7.5 million in Q1 2007 to 10.8 million in Q1 2008, a 43% increase, and 600,000 and 6% from Q4 2007. Compared to Q1 2007, we experienced growth of 50% in professional services, 30% in training, and 45% in our maintenance revenues as compared to Q1 2007. In particular, our professional services business has been active and providing eDiscovery Consulting Services to customers, which often are a precursor to Enterprise eDiscovery license revenue for us at a later date.

Our first quarter 2008 gross margin was 72.4% and our operating margin was a negative 3.7%. This was almost 1.5 point improvement in gross margin and almost 4 point improvement in operating margin in Q1 2008 as compared to Q1 2007. The improvement in gross margin is largely attributable to our services and maintenance business segments, which improved their gross margin from 42.1% in Q1 2007 to 51.7% in Q1 2008.

Operating expenses as a percentage of revenues decreased to 76.1% in Q1 2008 from 78.6% in Q1 2007, resulting in a 2.5 point improvement. Though on an absolute dollar basis, operating expenses increased 1.3 million or 9% to 16.5 million compared to Q4 2007 and were up 19% from 13.8 million in Q1 2007.

Most notably was a 6.3 point improvement in sales and marketing as a percentage of revenues, from 48% in Q1 2007 to 41.7% in Q1 2008, which was inline with our expectations that we would obtain greater efficiencies from our sales team.

Comparing absolute dollars in Q1 2008 to Q4 2007, the major change was in compensation expenses, which increased by 1.1 million as primarily the result of additional headcount. With regard to our headcount, as of March 31, our full time headcount was 399 employees, up from 351 at year-end 2007. As expected, we did the bulk of our hiring for the year in the first quarter and we added primarily to the sales and R&D areas. We expect to finish 2008 around 420 to 430 full time employees.

For the first quarter of 2008, share-based compensation was 2.1 million, up approximately 1.2 million year-over-year and up approximately 700,000 from the fourth quarter of 2007.

Cash and investments decreased 1.4 million from approximately 37.6 million at year-end to 36.2 million. Although we haven’t seen a material effect on revenue from macro economic conditions, we have noticed that certain customers are extending their payments, which has slowed cash collections a bit. For the first quarter, we were cash flow from operations negative of 1.3 million and saw our sales weighted DSOs rise slightly to 73 days in the first quarter from 71.5 days at year-end.

US revenues increased to approximately 78% of our total revenue for the first quarter 2008 as compared to 76% in Q1 2007. Additionally, EMEA sales increased from 13% to 14% of the total sales, and sales in Asia increased from 5% to 6%.

We are pleased with the accomplishment today, and look forward to a strong 2008. We remain optimistic about our business, and as such we are going to maintain and reiterate our 2008 annual revenue outlook of 94 to 99 million and pretax non-GAAP EPS of a range of $0.11 to $0.24 per diluted share. However, just like everyone else, we are continuing to keep an eye on the macro economic conditions.

For 2008, we expect share-based compensation expense of 7 to 10 million, resulting in a pretax GAAP EPS estimate of negative $0.32 to negative $0.05 per share. As a reminder, in regard to our presentation of our result on a non-GAAP pretax EPS basis, we continue to set expectations on a pretax EPS basis in 2008 as a result of the expected impact by the anticipated reversal of the valuation allowance on the company’s deferred income tax assets upon continued taxable profitability and the valuations of other issues and factors. Until this valuation allowance is released, we expect varying effective income tax rates. Given the unpredictability of the timing of a potential release and effective tax rate, we believe that setting pretax expectations continues to be appropriate.

With regard to share count, as of March 31, 2008, our basic share count was 23.1 million, up only 144,000 shares from year-end. Our expectation is that this will increase approximately 100,000 to 300,000 shares per quarter throughout 2008 and thus we expect to end the year between 23.4 million and 24 million.

Finally, our expectation is that we may be slightly profitable to breakeven in Q2 and move to greater profitability in the second half of the year. Please be mindful of this as you consider your analysis of our forecasted 2008 results. We believe with our results thus far, we are making headway towards achieving our objectives and look forward to continuing to execute on our strategic plan.

Thank you for your time, and I will give you back to Bill Powell.

Bill Powell - Director of Investor Relations

Thanks Frank. Before we move into our question and answer period, I would like to share three developments with our listeners. First; we will be meeting with investors in New York next Wednesday, May 14, courtesy of Stanford Research. Second; we will be meeting with investors in Boston next Friday, May 16, courtesy of Benchmark Capital. And finally, on Wednesday, May 28, at the New York Palace Hotel, we will be presenting at Cowen & Company’s 2020 TMT conference. To arrange for meetings with us at these events, please contact Stanford Research, Benchmark Capital or Cowen & Company representatives.

With all that said, it’s time now to hear from you. We would like to take your questions. Operator, would you please tell our listeners how to register their questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go first to Josh Jabs with Roth Capital.

Josh Jabs

Hey guys, good afternoon. Nice quarter.

Victor Limongelli

Thanks Josh.

Josh Jabs

Last year, I know you kind of went through this in your prepared comments, but yet though you did have a break from normal seasonality in Q1. Can you just discuss the linearity in Q1 of this year?

Victor Limongelli

Yeah, sure. You want me to compare to last year or to just discuss this year?

Josh Jabs

Maybe versus what you normally expect in Q1?

Victor Limongelli

Yeah. We had most of our business on the Enterprise side comes in in the last month of the quarter and it was certainly true this quarter even probably more or so than normal, probably a little bit more backend loaded than in normal quarter. And of course, the other parts of our business EnCase Forensic and services pieces are more evenly spread throughout the quarter. But on the Enterprise side, we typically are seeing half of our revenue coming in on two to three weeks of the quarter and that was certainly the case this quarter.

Josh Jabs

Okay. And then, headcount expectations looked to be a little bit up from prior comments for the full year. How much of this -- you’ve got a lot rolling out on the new product side, and how much of that is really focused on R&D and for the headcount that’s not focused on R&D, what’s going on there?

Victor Limongelli

Sure, so most of our hiring for the year is completed at this point. We added positions, I think Frank mentioned, mostly in R&D and sales. On the R&D and tech services side in Q1, we added 12 positions. Half of them were developers and a couple more developers even in April. So, we’ve had some growth there. We got a lot going on on the R&D side. On the sales side, we added 19 positions. I think we talked last time about the new inside major account manager position and seven or eight of those were that position, a new position for us, and then we added about a half dozen mid market managers on the sales side.

And then, the other adds were small numbers here and there. There were four added in professional services and a couple in training. Going forward, I think we will add -- I think we added for the year probably two-thirds of the hires for the year came in Q1. So, maybe another 20 or 25, maybe on the upside 30, for the rest of the year. Again, we will be adding in the R&D side. We’ll add four or five professional service folks depending on how that business grows, couple of training folks, a few on the sales side, but not too many. We've added a few channel managers as well for international sales.

Josh Jabs

I guess the question is you are bumping up the headcount a little bit even more than I think you sort of expected out of the end of last year. And I guess what I’m looking at is that more driven by a specific opportunity that you are seeing where you need to accelerate some of your programs this year or what’s driving that delta?

Victor Limongelli

Yeah. Well, so some of it, I think we talked about 15% range, which would have been about somewhere around 80, 70/80 adds or maybe that 60 adds and will be in 70s. So, I don’t think it's materially different, but part of it is on the R&D side. We see a lot of opportunity to improve our product and move into new product areas. So, we are continuing to focus on that. And then the growth on the service side has also lead to hires. As we’re driving more revenue there, we need people to do the work, to perform the services and that has grown I think faster than even we expected. So, we end up with some more hires there than we would have originally thought.

Josh Jabs

Okay. And then last question here just on the new product side. You mentioned the new module that’s coming out. I think that starts to move you guys a little bit into the DLP space, which I think everybody is talking about right now seems to be a big focus within the sector overall? How do you position yourself in this market given it’s a little bit of a break from the legacy, maybe the legacy customer base maybe not so much here, your technical competency, but definitely a break from the way that maybe you sold products in the past?

Victor Limongelli

Yeah, and this is the way we look at it. The existing DLP solutions for the most part focus on sniffing packets as they come across the network, to set up alerts about sensitive data transmission. Our solution we believe is complimentary today. We focus on the endpoints. You can audit your data to find and to clean up the credit card numbers, social security numbers or other sensitive data that should have been there in the first place. From our advantage point, why wait until an employee emails sensitive data out of your network to address the problem. We believe with our ability to search laptops, desktops and servers in an extremely scalable fashion and crucially to get rid of the offending files that we believe we bring a unique capability to the table.

One of the reasons we are optimistic about that new product is that we actually had a number of folks buy our eDiscovery product to perform this very function. They didn’t need to do their processing capabilities, they needed the search capabilities, the scalable search that we provide. We had customers buying our EnCase eDiscovery product to address the data audit need. So, in short, we think it’s complimentary to other DLP solutions and we think it provides a unique capability to the market.

Josh Jabs

Great. Thank you.

Victor Limongelli

Thanks Josh.

Operator

We will go next to Rajesh Ghai with ThinkPanmure.

Rajesh Ghai

Hello, congratulations.

Victor Limongelli

Thank you.

Rajesh Ghai

Yeah. I just had a question on the Howrey alliance announced a couple of days back. So what are your expectations regarding revenue from that alliance, are you expecting material pick up in revenues in 2008 or is that going to be a little far or further off?

Victor Limongelli

It’s hard to put a concrete number on it. We certainly think it helps our business. We think that the validation of our software, the sensibility of our software is very important. And having a major law firm like Howrey step out in public and increase the validation we think helps us and we believe it has a positive impact. It makes positive impression on in-house counsel. They do represents lots of large companies, so we do think it will help us on the sales cycle, but it’s been two days since we announced it, so at this point it’s hard to quantify the revenue impact. We are very excited by it, but it's hard to put a dollar figure on it.

Rajesh Ghai

Okay. And back at the Analysts’ Day, we saw Guidance mentioned on one of the slides as one of the Quickie Alliance partner. I was just wondering we haven’t heard of that in the past, so what exactly is the relationship and how do you see that evolving going forward?

Victor Limongelli

Well, we’ve been working with them in a couple of ways. First of all, they bought SafeBoot about six or eight months ago and we’ve worked with them to integrate SafeBoot with EnCase Enterprise so that people can deploy decryption across their network, but still be able to investigate and capture data that they need to for internal investigations or other purposes. In addition, just as a little segue there, in addition to SafeBoot, we have support for other encryption technologies like (inaudible) and Credence, GuardianEdge, and we are working on others as well. We think that’s an important differentiator for us.

Secondly, we were working with McAfee to ensure compatibility with their HBSS products in the Federal Space because we need to be able to interoperate with solutions like theirs. So, we have a good business development relationship with them in a couple of areas.

Rajesh Ghai

And, how exactly, how much of that has contributed to your results in the previous quarters, has that been material or that's been kind of small, I don’t know?

Victor Limongelli

Yeah, I won’t think -- I wouldn't classify that as material. It's important to increase the functionality and usability of the software, but it's hard to point anything in concrete.

Rajesh Ghai

Sure. And on the product revenue line, there was a sequential decrease in economics under seasonality involved, but I also noticed that the gross margin on the product line is down compared to the last three quarters. Do we need anything into that or it's -- is there anything that we should be concerned about?

Frank Sansone

No. Actually in comparison to Q1 of ’07, it’s slightly up. And it’s clearly a function of the seasonality of the revenue. Our actual cost of product revenue is fairly small most of the time it just involve those boxes and CDs, et cetera. It's very much a function of total revenue or product revenue.

Rajesh Ghai

And going forward, should we kind of assume the same kind of this fall in 2007 for the revenue line, product revenue line as far the gross margin is concerned?

Frank Sansone

Gross margins, our overall goal is to move it up 1 to 3 points in overall gross margin for the year. I think it’s a good start in doing that, but that’s obviously a long way to go for the year still.

Rajesh Ghai

And on the sales and marketing line, you said that you are going to add about 30 people in the remainder of the year. Do we keep the sales and marketing line trending upwards from where we ended in Q1 or does it go down or kind of stay flat?

Victor Limongelli

Yeah, just to be clear. The 20 to 30 adds for the remainder of the year are not all in sales and marketing by any means.

Rajesh Ghai

Okay.

Victor Limongelli

Many of those will be in R&D. Some of them will be in services as that business grows, and they are sprinkled in other areas of the company. So, we will have a few adds on the sales and marketing side, but it shouldn’t be a major difference from what is in there now.

Frank Sansone

And on an absolute dollar basis, sales and marketing will continue to rise throughout the year just as…

Rajesh Ghai

Okay.

Frank Sansone

Our sales people incentives, as they move to their quotas, their commission rates move up. So, as revenues go up, typically so does their commissions and their rates.

Rajesh Ghai

Okay, great. Thanks. That’s all I had. Congratulations again.

Victor Limongelli

Thank you.

Operator

(Operator Instructions). And we will go next to Kevin Buttigieg with Stanford Group.

Kevin Buttigieg

Thank you. Victor, a question about seasonality. Obviously, this is the second year in a round now in which you had first quarter that is as strong as or pretty fairly comparable to the seasonally strong fourth quarter. And I know that in the past you've talked about seeing business slower in the first half of the year compared to the second half of the year because of the buying cycles of your customers. But, I just want to get a handle on whether you think this change in seasonality is something that is reflective of a change in your business and therefore something that might happen on a more secular basis and I'm just trying to get an idea about how we should view seasonality for the rest of the year from a customer bookings perspective?

Victor Limongelli

Yeah, I think Kevin, so for us we definitely -- we had a little bit of dip in revenue from Q4, but we thought we had a strong Q1 particularly when you look at the deferred revenue component as well as the recognized revenue.

Kevin Buttigieg

Right, that’s what I’m really referring to. It looks like you are combining the two, your billings were pretty comparable in the first quarter to what they were in the fourth quarter, which is just unusual given the seasonal strength in the fourth quarter?

Victor Limongelli

Yeah. And so, we certainly believe that Q1 will be our worst quarter of the year. It always has been in the history of the company and we feel like we are moving along pretty well. We remain optimistic about our business as we sit here part of the way through Q2. The overall seasonality should be pretty similar I think with respect to what we’ve experienced in the past, but we do see a lot to be optimistic about, particularly with these new products coming out over the next few months.

Kevin Buttigieg

Okay.

Victor Limongelli

I don’t know if that -- does that answer the question?

Kevin Buttigieg

Yes.

Victor Limongelli

Okay.

Kevin Buttigieg

Yeah. And then the -- so, most of the new products should be available then for sale in the third quarter. I know they are to be released then, but do you think that you have -- they will start having impact on the third quarter or more or so to the fourth quarter?

Victor Limongelli

Well, certainly there is a sales cycle, sales process where you have to build the pipeline and what not. We will start marketing them say over the last month of this quarter and be ready to sell in the beginning of Q3; that’s the plan. So, we are hopeful to get some sales out of them in Q3, but I think you are right in that Q4 will be more or likely have a larger impact in Q4.

Kevin Buttigieg

Okay. And then given the big ramp that you've seen on the services side, which is really all three components of professional services, the training as well as the maintenance piece of it, but you’ve got the new products coming out this year. What should we think in terms of the product services mix? Obviously, it’s been tilting a bit more towards the services side with that growth. But with the new products coming out, does it tilt a little bit more towards that side?

Victor Limongelli

Yeah, and I think our product side has been doing pretty well and the services side really just outperformed, maybe on the professional services side due to an increase in litigation. We are not sure, we’ve certainly been doing well on the eDiscovery services side. But, we think it probably tilts back towards more product revenue as we move through the year. We will have more products available to sale. It's hard to keep those clips out. We grew 50% in professional services while improving margins.

Kevin Buttigieg

Right.

Victor Limongelli

In professional services. That’s hard to maintain on our services business and I think there is more room for upside on product side.

Kevin Buttigieg

Okay. And then, looking at Neutrino, just wondering how that product did and when you expect that to have Blackberry support?

Victor Limongelli

Well, the product is still not a material contributor to our business yet. We are looking at not just Blackberry but other smart phone support. I don’t want to give you a specific date on it, but we are working on it and it won’t be too long.

Kevin Buttigieg

Okay. Thanks very much.

Operator

We will hear now hear from Priya Parasuraman with Wachovia.

Philip Rueppel

Thanks, this is Philip Rueppel. Just going back to the licenses and services, so you didn’t mentioned that you were still continuing upside on the product license side. So I was wondering, you don’t expect the mix to change substantially through the year because of what we’ve seen in Q1, right? Is that a fair statement?

Victor Limongelli

Well, no. I think what I was trying to say was that I think the mix probably kills more towards product. As we go through the year, we get a big push on product in the Federal year ended, which is September 30, and the corporate year end in Q4. So, we end up getting big pushes in product revenue. In addition, there is some seasonality in our services business, which we maybe don’t talk as much about, but July and August are very slow times for training courses as well as professional services. So, moving through the rest of the year, I would expect the tilt to be a little bit more towards product than it was in Q1.

Philip Rueppel

Great. And then on the economy, you didn’t mention that you are seeing lengthening in your cash. And so I was just wondering, are you seeing the impact in any other way? I mean, in terms of say expansion of sales cycle or customers taking longer to sign contracts. I was just wondering how your pipeline looks like?

Victor Limongelli

Yes, on the lengthening of payments, our sales weighted DSOs went up about a day-and-a-half. So, it wasn’t a major increase, but we did see a little bit of an increase there. In terms of the economy overall, we certainly have some anecdotal evidence of some customers slowing down purchases, but at the same time we have about the same number of instances, the same amount of anecdotal evidence. On the other side, customers were facing litigation and are looking for services or software to address it. Personally I went on about a dozen sales calls on site last month and we had our CEIC conference at the end of the month, where we had a thousand purchases and spent a lot of time with customers and prospects. And, the general sense was not negative, it is not negative, it’s not doom in gloom out there. So we haven’t seen a major impact, negative impact given the macro economic news that you see in the newspaper.

Philip Rueppel

Okay, great. And just in addition to that, how about competition, are you still seeing good run rates?

Victor Limongelli

Yes. I mean there is definitely a lot of competition, people marketing around things like eDiscovery, but we feel like we are doing pretty well. We’ve got very good technology. We get very good ratings from the analysts like Gartner. And if we can get in front of the customer, we will do well and have been well.

Philip Rueppel

Okay. And just one last one for me. Who are you generally seeing in bidding situations?

Victor Limongelli

Well, we see a variety of folks, because there are content management vendors that are out there pitching their wares as a solution for eDiscovery. There are small forensic companies that are out there trying to pitch their forensic technologies. It’s just a mix. There are companies like Autonomy that are out there as well. So, it depends on the account, it depends on the industry to some extent. We see a mix of all of those.

Philip Rueppel

Thank you.

Operator

(Operator Instructions). We will take a followup from Josh Jabs.

Josh Jabs

Hey, just going back to the agreement that you made with Howrey, it’s a bit of a break I think in at least on a large scale partnership with how you've sold some of your eDiscovery stuff in the past. How are they -- are they using it to compete on price with some of their -- with their competitors kind of reducing their own billable hours there? How does that partnership came about?

Victor Limongelli

It came about really from EnCase eDiscovery. They saw it work from high stakes litigation matters and saw work for their customers. For them, it’s a couple -- there are a couple advantage. One; they can be seen as an innovator as a law firm that’s bringing value to their customers, to the clients and as well as standardizing their process on a defensible reliable piece of software. They have a subsidiary that does some eDiscovery processing themselves. So, there is twin benefits from their standpoint. I do think it’s a bit of break not just in what we’ve done Josh, but in general you don’t typically see law firms endorsing technologies or endorsing technological approaches, particularly prominent law firms like Howrey. So, we think it lends a lot of credibility to us, adds to the credibility that we already have in the court system and in the marketplace.

Josh Jabs

Okay. And then we’ve discussed over a couple of quarters some of the challenges in working between IT and legal and IT usually having the capital budgets, but legal maybe being more of a driver of spending. You put together a couple of different sales models for those customers that are kind of challenged there. What are you seeing as far as most common adoption, the most common way that customers are finding funding for your software?

Victor Limongelli

Yeah. Well, it's definitely a challenge and sometimes it happens that they don’t have capital budget but they will hire our services organization for instance. We saw strong growth there in Q1 and be able to lease the software at their operating budgets. We’re definitely keeping an eye on that and we are definitely experimenting with new ways to make it easier to buy. I mentioned very briefly the EnCase On-Demand training program. That’s just another example of an attempt by us to make it easier to buy and use our products and we are going to continue those efforts as we head into the second half of the year.

Josh Jabs

Okay. And then last question here maybe back on the finances a little bit. Deferred ticked up in the quarter. How do you expect deferred to trend throughout the year? What’s the typical for you guys?

Victor Limongelli

Typically deferred revenue has been increasing and we would expect overall deferred revenue to continue to increase. There is just one offsetting factor there as we push through into the end of the year and that's in our EnCase Forensic product line as our recognition of that description level accelerates. So, we will start to eat into the deferred revenue of that balance a little bit towards, more or towards back half of the year where we will still have growth expectations within all of our other enterprise term licenses, our training deferrals or service deferrals and most particularly our maintenance deferrals. So, at the end of the year, our expectation that we will still be higher in deferred revenue.

Josh Jabs

Okay. And then maybe last question. Do you have any metrics right now for conversion out of professional services into enterprise licenses?

Victor Limongelli

We don’t have specific metrics to give you Josh. We certainly have anecdotal evidence. We certainly can internally know of many examples where we have converted from a services engagement and the customer has seen the software running on their network, seen the cost savings and decided to buy it. But we don’t have X percent of Professional services engagements lead to an Enterprise software sale?

Josh Jabs

Okay, great. Thanks.

Operator

(Operator Instructions). We will go next to Vick Churamani with Lehman Brothers.

Vick Churamani

Hi. Just curious to get your thoughts, most of my questions have been answered. HP buying power, what does that say about the industry in terms of more validation, or how do you expect the landscape to change, or do you even see them competing with you guys? And then lastly, you might have addressed this, but is it fair to say for your guidance going forward, do you expect the pricing environment to stay consistent?

Victor Limongelli

Sorry. You broke up at the last.

Vick Churamani

The pricing; do you expect pricing to be consistent, stable going forward, is that assumed in your guidance?

Frank Sansone

I will go ahead and answer the back part of that and I’ll let Victor get the HP discussion. Yeah, our pricing overall, we have no expectations of really making any changes. In fact, at the end of last year, we made some significant pricing increases within our eDiscovery and Information Assurance product line. So, we expect to carry those through the rest of this year. Vic, over to you.

Victor Limongelli

Sure, with respect to the HP acquisition, we have really seen them in our deals or our services engagements, but I think that acquisition just highlights or reiterates that it's an interesting market, a growing market and there are lots of folks pursuing it or planning to pursue it, and it’s not just HP. There’s been a lots of acquisitions that have been made over the last year or so in companies even like Seagate and Iron Mountain making acquisitions. And then a lot of the hardware/software vendors starting to market solutions that were developed for something else, but starting to market it towards eDiscovery. I think it reiterates or reaffirms that it’s an appealing market we are going after.

Vick Churamani

Thank you.

Victor Limongelli

Thanks Vick.

Operator

And at this time, I will turn the conference back over to Bill Powell, Director of Investor Relations.

Bill Powell - Director of Investor Relations

Very good. Thank you very much, operator. I would like to thank everybody for calling in and asking questions today. Of course, as always, if you have follow-up questions, you can reach me here at Guidance Software. Thanks again for calling and we look forward to speaking with you again next quarter. Have a good day.

Operator

That concludes today’s conference call. Have a pleasant day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!