Deltek, Inc. Q1 2008 Earnings Call Transcript

| About: Deltek, Inc. (PROJ)

Deltek, Inc. (NASDAQ:PROJ)

Q1 2008 Earnings Call

May 8, 2008 5:00 pm ET


Dave Spille – Vice President, Investor Relations

Kevin T. Parker – Chairman of the Board, President & Chief Executive Officer

Jim Reagan – Chief Financial Officer, Executive Vice President & Chief Financial Officer


Bryan McGrath – Credit Suisse

Phil Rueppel – Wachovia Securities

Corey Tobin – William Blair

Brad [Phils] – Lehman Brothers


Welcome everyone to the Deltek first quarter 2008 earnings conference call. (Operator Instructions) Mr. Spille, you may begin our conference.

Dave Spille

Joining me here today are Deltek’s CEO Kevin Parker and Jim Reagan, our CFO. I want to welcome you to today's conference call announcing Deltek's financial results for our first quarter ended March 31, 2008. The Press Release we issued this afternoon containing our financial results for the quarter is available on our Web site at

This call is being recorded and will be available for replay on Deltek's Web site or by dialing the following numbers: 1-800-642-1687 or 1-706-645-9291. The access code for the replay is 43441906. The conference call replay is available through May 15, 2008.

During the course of this conference call we may make forward-looking statements that involve substantial risks and uncertainties. You can identify forward-looking statements by words such as anticipate, believe, estimate, expect, or similar words. Actual outcomes and results may differ materially from what is expressed in these forward-looking statements for many reasons.

Any forward-looking statement in this conference call speaks only on the date on which it is made. We are under take no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise except as required by law. Please refer to our earnings release for more information on forward-looking statements and for explanations on the use of non-GAAP financial information. You can also obtain more information about Deltek including reviewing our FCC filings and press releases by visiting

And with that I'll turn today's call over to Kevin.

Kevin T. Parker

Before turning it over to Jim for a detailed review of our financial results and our outlook for Q2, I want to give you an overview of our results, discuss the overall state of the markets we serve, as well as tell you what we're working on inside the company.

From a license perspective it was obviously a challenging quarter. As the quarter ended we saw an increasingly turbulent US economic environment which, while maybe not impacting many of our customers directly, certainly saw them pause to consider their options. We saw lengthening of sales cycles and delays in deal closings at the end of the quarter, particularly in the A&E and professional services markets.

The good news is that virtually all of the deals that slipped out of the quarter are still in play and many should close in the near term as customers begin to move forward with their business plans. In an uncertain economic environment like this one, many of our customers turn their attention to their internal operations as they look to successfully manage their business, lower their costs, and improve their profitability. Even in the more challenging times, the unique nature of our applications provides important capabilities for decision-makers as they work to manage their portfolio of projects more effectively and more profitably.

While we clearly saw significant challenges in the A&E and professional services markets, our total license revenue from our government contracting business exceeded our internal targets. Our Q1 government contracting business was driven by the strength we experienced in our EPM products and as customers continue to purchase our Costpoint and GCS applications.

In addition to the macroeconomic issues we also experienced some challenges internally getting the year off to a strong start. Q1 is always an extremely busy time as we realign our resources and launch programs across the company to meet the opportunities and challenges of the coming year. In a few cases we didn't complete those programs or activities as quickly as we planned or needed to and as a result lost some of the very strong momentum we had exiting Q4. I believe we've rapidly diagnosed those issues and we have the right solutions in place and they're already there, including the realignment of resources and the re-establishment of some of the upgrade incentives that expired at the end of 2007.

Looking at the numbers, on a year-over-year basis we saw our total Q1 revenues increase 11% to $69.4 million. This increase was driven by record maintenance and consulting revenues which grew 17% and 31% respectively. License revenue for the quarter was $17 million which is down 14% from the prior year period and below our expectations for the quarter. While I'm clearly disappointed with our Q1 licensed revenue results, the favorable results in our maintenance and consulting services businesses combined with our continued focus on profitability enable us to report earnings in EPS that met our guidance range that we provided on our last call.

While there were challenges in the quarter that impacted our license revenues, the quarter was not without some very significant successes and milestones. We're very pleased with our Q1 EPM results. In Q1 we closed a greater than million dollar sale for our WInsight application with a large aerospace and defense contractor. This significant transaction occurred with an existing Deltek customer and is driven by their company-wide standardization on our WInsight application as an integral component of their project management methodology. This existing Deltek customer needed a common database for analysis and reporting on hundreds of projects across their enterprise so they could monitor project health and identify troubled projects faster. They also needed to implement an enterprise-wide application that will significantly enhance their ability to monitor and comply with government reporting and audit requirements.

We remain very excited about the future of our government contracting business due to the many positive factors influencing this market. The government contracting business is constantly evolving with over 5,000 new organizations added to the DCAA audit list in the last two years alone and one of the areas experiencing fastest growth and greatest potential for future growth is earned value management.

Earned value management will continue to be an important driver of growth in this vertical market segment and a great complement to our cross-point and GCS products. We believe we're the market leader in this space and our comprehensive suite of EPM products and we continue to expand our capabilities. We also believe that the current environment in which our government contracting customers operate is very strong and largely unaffected by the current economic issues in the US.

In Q1 we added more than 100 new customers to the Deltek and installed base, an increase of over 11% from Q1 of the prior year and completed over 1,000 license transactions in the quarter. From our view, new customers are an important measure of our progress and our ability to consistently win new customers is a key metric. I think we've made good progress on that objective in Q1 and expect to continue that trend in the future.

Year-to-date we've added more 20 new partners to our reseller network to complement our direct sales efforts. These new additions are an important milestone under our plan to expand our reseller channel with partners that have strong reputations within their respective industries and in the size and market reach to have a meaningful impact on our revenues going forward. Each of these new partners also brings an experienced view of the software marketplace. Most of them come to us from either Microsoft or Sage's reseller network and all are excited to be adding Deltek's applications to their business plans. They're already engaged in the sales process and we expect their contributions to impact our results in the coming quarters.

In Q1 we launched the consulting edition of our Vision application suite and we're very excited about the initial reception we've gotten from prospects, customers, and industry analysts. Building on the industry-leading project focus capabilities of Vision, we've added inter-specific functionality such as enhanced resource planning and work force optimization to meet the unique needs of the consulting industry. Extending our reach into this marketplace for new project focus verticals is a key strategic objective for us and the successful introduction of consulting addition of Vision is an important milestone in reaching that goal. Our pipeline of potential customers for the Vision consulting addition is growing and I'm excited about the early traction we're getting in this new vertical. The addition of new project focus vertical markets to our customer base is a great opportunity for us and I think we're making great progress with the launch of the consulting addition of Vision.

In Q1 we also announced the additional product launches including new versions of GovWin, Time & Expense, and the latest release of Costpoint. Each of these releases brings to market exciting new functionalities specifically to meet the needs of our project oriented customers and will help them manage their costs, increase their profitability, and win new business. In the coming quarters we have a strong pipeline of new product announcements in the works including new versions of GCS Premier, Vision, and our EPM products. We're continuing to expand our functionality for vertical markets and we're targeting to build on our leadership position.

In Q1 we saw a very strong performance in both our maintenance and consulting revenues as both grew significantly from the prior year and delivered record results for the quarter. As we left Q4 we had stated an objective of improving the margins of our services businesses and saw the results of that effort in Q1 as margins increased to nearly 17% for the quarter. In addition our maintenance renewal rates remain very high and our customer satisfaction for our support services remains very strong. As we worked through the quarter we kept a very close eye on our expenses and as a result were able to maintain our operating margins at 20% and deliver EPS in line with our stated goals for the quarter.

As I look back on Q1 it's clear that the changing of the US economy impacted our ability to close some deals. At the same time we need to do a much better job internally with our programs and activities and quite frankly, we didn't do all that we needed to do to start the year. Many of the factors that are influencing our growth are largely under our control. Since the quarter ended we've spent a lot of time reviewing our results and the necessary actions to respond are already underway including our incentives to customers to upgrade to Deltek Vision and the addition of the 20 new reseller partners I mentioned. In the coming weeks we'll be hosting Insight 2008 our largest ever customer conference with nearly 3,000 attendees and we're looking forward to talking with them and sharing our vision for the future.

While our Q1 results were below our objectives, in my view it's too early to change our outlook for the full year. Certainly the economic environment is more challenging. At the same time our outlook for Q2 is strong and we see a lot of things that we consider to be positives for the business going forward.

With that I'll turn it over to Jim so he can give you a detailed review of our financial results.

Jim Reagan

In Q1 we reported license revenue of $17 million a decrease of $2.8 million or 14% over a year ago and as Kevin noted several factors contributed to this decrease. First, our momentum slowed in our Vision business with the expiration of sales incentives aimed at generating license revenues from customers upgrading to our Vision product from the Legacy Deltek product. Second, we lost some sales momentum in our partner channel primarily in connection with the decline in our Vision upgrade sales.

For the quarter our indirect sales comprise 9% of license revenue compared to 4% in Q1 of last year and 14% in Q4 of last year. Our international results were also impacted by the decline in Vision upgrade sales. In Q1 our international license sales were 5% of license revenue compared with 3% in the first quarter a year ago and 8% in Q4 of 2007. Earlier Kevin described what we're doing to regain sales momentum as well as the progress we're making in signing up new reseller partners to continue gaining share in the lower end of the market. As we said earlier we're undoubtedly subject to stronger head winds now due to the state of the North American economy. However, most of our execution successes are clearly within our control and we remain firmly committed to double digit growth in 2008.

Our margin license sales increased to 90.7% from 88% a year ago. This margin typically fluctuates within the 88% to 91% range based on the level of royalties we pay on products that are resold or embedded with our own. The increase in the margin in Q1 was driven by a reduced level of third-party royalties. Our consulting services revenue reached another record in Q1 totaling $24.3 million. This growth was driven by our strong license sales in Q4 of 2007. Our consulting services gross margin increased to 16.8% in Q1 compared to 11.3% in Q4 of 2007 and 16.2% for Q1 of 2007. This increase was driven by our growth in license revenue as well as the non-recurring success fee we earned on a customer implementation and a lower level of incentive compensation expense in Q1 of 2008. Over the next couple of quarters we expect our consulting services margins to be in the mid-teens.

We're also quite pleased with our revenue results in maintenance and support services which reached $28.1 million in the quarter. Our revenue growth in this area reflects the full quarter impact of our strong Q4 license results as well as the success we have experienced in effectively managing customer retention. Our gross margin of 80% is slightly lower than Q4 and reflects the full quarter impact of hires made in Q4 which are aimed at servicing our growing customer base and maintaining our strong customer support levels for both our domestic and our new international customers. We expect that going forward our maintenance margins will continue in the low 80s.

Now I'll turn to operating expenses. Our research and development expense in Q1 2008 increased by $1.2 million to $11.4 million or 11.3% over the same period in 2007. This increase was primarily driven by a 16% increase in headcount compared to a year ago offset by a reduction to incentive compensation expense. As a percentage of total revenue R&D was 16.4% in the first quarter of both 2007 and 2008. Our R&D headcount now totals approximately 400 compared to about 340 a year ago with almost all of this increase occurring in our international locations.

Our sales and marketing costs in the quarter were up 17% over a year ago to $12.3 million driven primarily by increased salaries and related costs for our higher level of sales and marketing headcount. As a percentage of total revenue sales and marketing increased from 16.9% to 17.7% of total revenue on a year-over-year basis. Our increased sales and marketing headcount is aimed at driving higher lead generation and sales success across all of our markets but particularly in our consulting services vertical, our indirect sales channel and in the UK. On a sequential basis sales and marketing expense declined 6% from Q4 of last year primarily on lower commission costs.

Our G&A costs increased 6.2% over Q1 of 2007 to $7.6 million in the current quarter. This year-over-year increase of half a million dollars was the result of increased labor costs and professional fees offset by a reduced bad debt expense and SOX related consulting costs. As a percentage of total revenue our G&A costs have decreased from 11.4% to 10.9% of revenue year-over-year.

Our Q1 non-GAAP operating income was $14 million which was at the upper end of the guidance range we provide in our last earnings conference call. We were able to achieve the high end of our guidance range due to our strong consulting service and maintenance revenues while taking a prudent approach to managing our operating expenses. Our net interest expense is lower than both Q1 and Q4 of 2007 due to lower outstanding borrowings after our IPO as well as the impact of lower LIBOR rates on our borrowings in Q1 of the current year.

In Q1 we experienced a higher than expected tax rate of 44.5%. This was because our revenues in the UK were lower than expected resulting in a loss for tax purposes that we cannot offset against our US taxable income. While this results in future loss carry-overs that can be applied to future UK taxable income, we cannot currently recognize those benefits. We expect that with higher profitability in the UK we will experience a reduction in our tax rate later in the year. At this point we expect that our full year tax rate will be about 42%.

Non-GAAP income for the quarter was $6.1 million or $0.14 per diluted share. Although we reported non-GAAP operating income at the high end of our range our non-GAAP EPS was at the low end of our guidance range primarily due to our higher tax rate. On a GAAP basis our net income was $4 million or $0.09 per diluted share which was also at the low end of our guidance range.

Now I'll turn to a review of our cash flow and balance sheet. Over the quarter our cash position has grown substantially to $35.4 million on March 31. Net cash provided by operating activities for the quarter was $20.2 million compared to $7.4 million for the comparable quarter last year and $19.1 million for all of 2007. Our net cash provided by operations was strong in the quarter primarily due to aggressive collection of receivables in Q1 and to a lesser extent, advanced payments of $2.9 million in user conference registration fees. Our collections on receivables drove a reduction in our net accounts receivable by $8.3 million reducing our DSO from 65 days at December 31 to 61 days at March 31.

Purchases of capital equipment and lease improvements were $2.1 million in the quarter to support the expansion of our IT capabilities and network and our facilities in the Philippines. The build-out of our Philippines facility is now complete. We've previously said that we expect full year cap ex to be in the $6 million to $8 million range for the full year and we remain comfortable with that estimate. Our DSO in Q1 declined to 61 from 65 days at the end of Q4 and in our last call I mentioned that in early Q1 we had already seen significant collections in January and this certainly carried out through the quarter. Our improvement resulted from increased focus on the collections process and assigning clear accountability for the DSO of each of our revenue streams.

In summary, Q1 was a challenging quarter. But while our license revenue results were disappointing we delivered strong cash flows from operations, record services, and maintenance revenues, and improved consulting services margins.

Now let me take a minute to discuss our outlook for the coming quarter. While our customers continue to express confidence in their outlook for their own businesses in 2008, some of our professional services customers have adopted a more cautious stance when it comes to making capital commitments thus lengthening sales cycles.

In Q2 we've taken several measures to realign our cost structure and protect our profit margins without sacrificing the ongoing spending we need to make in sales and marketing to continue lead generation and sales growth. In Q2 we're expecting to spend more on sales and marketing programs to ensure that we capture the significant marketing opportunity that exists within the government contracting and professional services markets. This cost realignment means that we will right size other areas of our business in order to maintain certain levels of profitability. Therefore, in Q2 we will be taking a restructuring charge of approximately $1.4 million related to severance costs and other related charges in connection with this action.

Now let's turn our attention to the details of our guidance for Q2. In Q2 we expect to report license revenue of between $19 and $21 million and total revenue between $75.5 million and $77.5 million. Our total revenue guidance includes approximately $4.5 million of revenue for Insight, our annual user conference held in the second quarter each year. We expect our non-GAAP operating income to be in the range of $14 to $16 million. This figure excludes the impact of approximately $2.5 million of stock-based compensation expense, approximately $1 million of intangible amortization expense and approximately $1.4 million in restructuring charges.

Our Q2 GAAP earnings per share is expected to be in the range of $0.09 to $0.10 per diluted share. On a non-GAAP basis we expect our diluted earnings per share to be in the range of $0.15 to $0.16 per share. Our Q2 GAAP and non-GAAP earnings per diluted share expectations assume a weighted average share count of approximately 45 million shares and an effective tax rate of approximately 43%.

In thinking about our outlook for the full year we continue to see a strong sales pipeline ahead for the foreseeable future and while the drum beat of adverse economic news has muted the urgency of some customers to upgrade their financial and project management infrastructure, we believe that these impacts are temporary and that our outlook remains strong. This early into the second quarter, however, we consider it premature to revise our full year guidance but plan on revisiting our full year guidance after the completion of the second quarter. At that point we'll have a much clearer view of purchasing momentum across all of our verticals in geographies.

Now I'll turn it over to the Operator for questions and after the Q&A session Kevin and I will have a couple of closing remarks.

Question-and-Answer Session


(Operator Instructions) The first question comes from Bryan McGrath – Credit Suisse.

Bryan McGrath – Credit Suisse

I've got a question about this architectural billing index that came out here in April. As I'm sure you guys know the AVIs looked at us as a leading indicator for domestic non-residential activity in the architecture and construction industries. Since about half of your sales go into these industries it should stand to reason that there should be some correlation between movements in the index and longer-term demand for your products. My question is, in your experience have you found this to be a good predictor of future demand and is it something that you guys use on an ongoing basis as a tool for forecasting activities?

Kevin T. Parker

It is not Bryan and we look at that just to get a general sense of sentiment from the sample size. What we see too in that index is not all that different from what we see in our installed basic customers, that there's a lack of uniformity across the industry and in a cross sector. Some sectors continue to do very well, some geographies tend to do very well, some are not as well, and we probably see that in, I think we've got probably 7,000 customers or 8,000 customers in our installed base in the architectural and engineering professional services market of almost every stripe and color and very few in the residential side, but it's sort of a good cross section.

It was interesting in some of the dialogue we've seen around that survey is that some people are seeing very positive results and we're hearing that as well from our customers. So it's an interesting data point and we certainly look it but it actually confirms what we see in the market too and then there are people that are seeing their businesses grow that are winning new accounts and winning new things and they tend to be perhaps more on the institutional side and a variety of things like that but they seem to be doing pretty well. That's not uniform but they seem to be doing pretty well in some pretty good segments and just some different geographies.

Bryan McGrath – Credit Suisse

In the past, at a kind of a high level we've talked about your comfort level on guidance is around one and a half to two times the backlog coverage ratio, and given the kind of commentary you talked about some of the deals slipping but still in the channel, is it fair to say you've kind of ratcheted it up to your comfort level so we're talking toward the high end or maybe above the high end of that range?

Kevin T. Parker

Maybe I'll rephrase the question so I make sure I understand it. Are we being a little more conservative in our close rates going forward as a result of Q1?

Bryan McGrath – Credit Suisse

Yes. I think in the past we'd used the term coverage ratio.

Kevin T. Parker

We still focus on that a great deal and we make sure that we've got pipeline in place for the segments that that's really a good predictor of things so we're very focused on that and we think we're building the right kind of pipeline. Some areas that we see very big coverage is, for example, the Costpoint new business; I think we're seeing that business building. Probably one of the things that's hardest to look at pipeline is customers expanding their use because that's not something that we generate that's something they generate internally and that's a more challenging thing to predict and that's really more of a sentiment of what's going on with their business and how they see it and we saw a decline on that on a quarter-over-quarter basis. That's where we see the economy starting to affect some of those customers a little bit at least in their plans going forward. That's probably the best way for us to think about it.


Our next question comes from Phil Rueppel – Wachovia Securities.

Phil Rueppel – Wachovia Securities

Along those lines could you give us a little more color? You mentioned most of the deals that slipped are still in play. Were the customers kind of hitting the pause button for a brief period of time or some of them in the pipeline for the second quarter, have you closed any already or for most of them is it a deeper issue where budget cuts are happening at the customer level and the deals haven't gone away but you just don't know when to predict they will hit again?

Kevin T. Parker

Sure. For most of them I think it's and to the extent that I talked to some of the customers personally it was not a budget cutting issue. It isn't that the CFO suddenly said we've got to tighten our belts and we're going to lay off 10 people or something like that. They wanted to sort of pause and see how the drum beat of economic news was going to affect their businesses and what they should be thinking about going forward. Some of the deals have closed, a lot of them have not and that's just the nature of the software business. Some of them are closed.

I don't think any of them are on hold indefinitely and I don't recall any customer saying that they were going to push this into a subsequent year but really more they just wanted to take their time and the sense of urgency wasn't there. The other thing that we see a little bit in some customers is the approval cycles are getting a little longer. "My CEO said he wanted to take this to the Board," kind of thing and normally they wouldn't do that but they're being very cautious with their own internal governance processes as well, so that impacted us.

Phil Rueppel – Wachovia Securities

Could you also expand a little bit about sort of the execution issues? You talked about some of the incentives for upgrades but you also had mentioned something about reallocating resources. Was Q1, was there a greater alignment of sales territories and adjustments of quotas and movements of sales people then you’ve seen in past years and was that part of the issue?

Kevin T. Parker

It certainly was and I think as we look back on it I think we were pretty ambitious in some of the sales organizations that we were trying to put in place. I think a lot of that has settled down. We’ve actually changed some of it based on the experience in Q1 so we certainly did some of those things and I think that impacted us negatively. And, we’ve got a lot of that, in fact we’ve got all of that behind us at this point and I think we’ve got the right people in the right locations. In terms of some of the incentive things, I wouldn’t dignify it but just not a very well thought through process on our part.

The ability for customers to upgrade is something that they continue to do and we had some incentives in place and they tend to be very coin operated and it looked like to them that the price went up on January 1. So, shame on us for not thinking that through. We’ve now got those back in place and we’re already seeing leads built on that and I think we’re going to see that return to its normal steady state business.


Your next question comes from Corey Tobin – William Blair.

Corey Tobin – William Blair

Last quarter you mentioned if the slowdown did occur that you would of course adjust your course of action. The question is, what sort of change have you put here in to place to sort of address the challenges you’re seeing with the lengthening sales cycle and what not.

Kevin T. Parker

A couple of things, as we’ve looked at it we’ve made some changes in our headcount structure that Jim alluded to, our headcount is coming down by a modest amount, something like 50 people. But, we’re realigning those resources and taking some things out of the organization that quite frankly weren’t being as productive as we wanted to. And, we’re monitoring our expenses very carefully to make sure that we continue to protect the bottom line.

On the sales side we’re doing some very detailed account by account, rep-by-rep reviews of what’s in the pipeline and we’ve got our sales leadership personally engaged in a lot of the accounts in a very proactive way to make sure we’ve got the right execution model in place. We’ve changed some of the quota assignments and some of the territory assignments to put some of our best people on the biggest issues that we’ve got and we feel very good about that. There’s no one magic bullet to all of it but I think we’re just managing the company very, very focused on the execution issues and making sure that we have a very strong Q2 and that’s really what our objective is.

Corey Tobin – William Blair

Along those notes with respect to Q2, in the past, this comes back to an earlier question, you had mentioned sort of this 1.5 to 2 times backlog coverage ratio and I understand some of the color you put around it but just to be clear, as you look in the second quarter, are you tracking within that band of 1.5 to 2 times with respect to backlog coverage to near term revenue?

Kevin T. Parker

We largely are. In some cases we’re above and in a few cases we’re below and putting some effort around that. But, we largely are.

Corey Tobin – William Blair

And you mean cases, you mean by product line?

Kevin T. Parker

Product line and geography. For sake of example, product X and geography Y doesn’t have the coverage we’re looking for. What are we going to do about that and how do we do the demand creation around that to track that. We’ve got a pretty metric oriented cycle all the way from impressions generated all the way through to leads and close rates that we monitor on a bi-weekly basis as an organization that breaks down by product, by customer type, by geography. We do a lot of analytical review around it.

Corey Tobin – William Blair

Two more if I could very quickly, is it safe to say that these trends that you’re commenting on are consistent up through today, they’re not necessarily just for the first quarter?

Kevin T. Parker

Well, it’s so early in the quarter, it’s very difficult to tell. We’re closing business, we’re building pipeline, we’re generating leads. All those things through today’s date are very positive but as you know, it’s a very back end loaded business and the issues tend to materialize, if they’re out there in a way that’s disproportionate in the last month of the quarter. So, we think we’re doing the right things, we think the business is moving in the right direction but we’ll certainly know a lot more as June comes to a close.

Corey Tobin – William Blair

You mentioned that the UK revenue was a little bit lower than expected, did I hear that correct? Any commentary on that particularly given that it seems, if memory serves me, a recent push to build out the international channel?

Kevin T. Parker

We were disappointed with our UK results, I think that’s a manifestation of some of the other issues that we talked about. We had a very strong revenue quarter in the UK in Q4, it was our first million plus quarter out there. We had two very significant deals in the UK pushed to presumably Q2 so that impacted us as well. So, I think we’re on the longer term basis throughout the rest of the year, I think we’re doing very well in the UK and we just didn’t do as well as we needed to in Q1 and we’ve got a lot of management effort going in to making sure that we’ve got it solved for Q2.


Your next question comes from Brad [Phils] – Lehman Brothers.

Brad [Phils] – Lehman Brothers

Just a question really on Costpoint versus GCS, how the relative performance of those two were in the contracting vertical, maybe some commentary on deal size? Obviously, with Costpoint going more after the higher end of the market, did you notice anything there with differences of demand?

Kevin T. Parker

I’ll ask Jim to talk about the ASPs but Costpoint always outsells GCS by the factor of two to one, three to one, four to one, Jim?

Jim Reagan


Kevin T. Parker

Easily four to one in dollars. So, I think we’re seeing strong demand across both. We had pretty good quarters from a new customer perspective with both if I recall Jim and I think it’s a very broad based market trend. Remember, GCS only scales to a certain level with customers so it’s more of an entry level product.

Jim Reagan

And to pile on to that Brad, one of the things you’re going to see, and you’re going to get the details in the Q but the Costpoint business was very, very strong with a few very large deals in Q1 a year ago so on a comparable basis you’ll see that number down. However, the Costpoint business and our [inaudible] overall certainly met management expectations for the quarter. In terms of answering your questions on ASPs, the Costpoint ASP which we look at on a sequential basis actually has come up a bit since Q4 of 07. The GCS ASP has been flat quarter-to-quarter and we expect that to be a trend that pretty much sticks with us for coming quarters.

Kevin T. Parker

One maybe final comment about that, that we didn’t address is as we look at the business, we didn’t do any crazy discounting in the quarter. I think we were pretty responsible about things, we didn’t do anything extraordinary in terms of offering customers big discounts to get deals closed as the quarter came to an end. On the margins, that actually wouldn’t have influenced things very much but that has not been part of our business practice and we certainly didn’t start that in Q1.

Brad [Phils] – Lehman Brothers

Just on the consulting margin, obviously a big improvement from last quarter and I know last quarter there were some issues with low utilization on some new consultants particularly in the UK, do you feel like utilizations are kind of back to where you would want them to be in the UK and just more broadly?

Kevin T. Parker

There’s still room for improvement, particularly in the UK. This is, particularly at the startup days, we’ve hired in advance of demand, we’ve got a number of big implementations underway there but we’ve hired in advance of demand because that’s often a blocking issue with customers, you don’t have local resources. So, we’re doing some things to make sure that they’re active and they’re productive and we’ll see their utilization improve. And, on the margins, that’s not that influential in terms of the gross margin improvement that we saw. It was really, as Jim described, some one-time things and some good cost management within the overall organization.

Jim Reagan

One thing, just to add on to that, Brad we did do in the quarter was we had a number of ex-patriot resources that were pretty costly in the UK to get the services business off the ground and we’ve been adding local people to the payroll in the UK so we can significantly ratchet down that level of costs and that effort is largely finished now.

With that, I think that we’ve wrapped up our Q&A. Kevin and I had a couple of announcements that we wanted to make as we wrap up the call. What I wanted to do and then I’ll turn it over to Kevin, I wanted to take a moment to announce that at the end of next week, I’ll be stepping down as the CFO of Deltek. I will continue with the company for a period of time however to ensure a smooth transition to my successor.

When I look back on the last two and a half years, we've accomplished a great deal. We've nearly doubled the size of the company, we've broadened the product base through a series of strategic acquisitions, we've formed a top-notch finance team that has transformed the financial infrastructure of the company from that of a great family-owned software company to that of a strong public company. As I transition I will leave behind a very strong team that's led us through incredible change leading up to our IPO and I'm confident that they will continue to build upon the hard work of the past couple of years, and help the entire Deltek team build upon our legacy of success.

Kevin T. Parker

Jim, we're grateful for your efforts and many contributions to Deltek and your time, and we couldn't have completed the IPO without your commitment and energy. We're a much better company as the result of your leadership and you've built a strong team that will carry us forward for many years to come.

With Jim's departure I'm very pleased to announce that Mark Wabschall will be joining us as our CFO. Mark brings to Deltek over 30 years of experience leading global finance organizations, most recently as CFO of webMethods. Mark's experience also includes senior finance and operating positions at Innovative Technology, Baan, and International Drilling Fluids in London, as well as an audit partner at Arthur Andersen. Mark will be joining us next week and formally assume the CFO role after the completion of our 10Q on May 15. Jim and Mark will be working together to ensure a seamless transition of the CFO responsibilities.

That concludes our Q1 earnings call and I look forward to reporting our results at the end of Q2.

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 All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!