Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Wind River Systems, Inc. (WIND)

F1Q09 Earnings Call

May 29, 2008 5:00 pm ET

Executives

Ken Klein - Chairman, President, and CEO

Ian Halifax – CFO, Senior Vice President of Finance and Administration

Anne Marie McCauley - VP, Investor Relations

Analysts

Matt Petkun - Davidson & Company

Aaron Schwartz – JP Morgan

Michael Huang – Panmure

Brendan Barnicle - Pacific Crest Securities

Brent Williams - The Benchmark Company

Kevin Buttigieg - Stanford Group Company

Richard Williams – Cross Research

Bill Farricks – Randallwood Capital

Operator

Thank you for joining the Wind River Systems Q1 FY2009 earnings conference call. (Operator Instructions) At this time, I will turn the call over to Anne Marie McCauley, Vice President of Investor Relations at Wind River Systems.

Anne Marie McCauley

Welcome to Wind River's Q1 fiscal conference call. Joining me today is Ken Klein, our Chairman, CEO, and President; and Ian Halifax, our CFO.

Before we start, I’d like to remind you that this call is being webcast. The webcast in a first quarter update presentation can be accessed on the Wind River Investor Relation’s website at www.windriver.com. A replay will also be available shortly after the conclusion of the call and will remain available for approximately one year.

The purpose of this call is to provide you information regarding Q1FY09; however, some of our comments and responses to your questions will include forward-looking statements such as statements regarding our estimated revenue, GAAP net loss or net income per share, non-GAAP net income per share, and estimated expenses, margins, and cash flows for the upcoming quarter or full fiscal year 2009.

Potential design wins, market opportunities, and expected business and market growth and development, new business models, expected new products or product features, and the benefits of new products, and the return on investments we have made in our products, sales organization, and alliances. These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties. Actual future results may vary materially. I encourage you to read the risk factors described in the company’s annual report on form 10K for the fiscal year ended January 31, 2008, as well as other reports filed with the SEC after that date, including our form 8K filed today.

I’d also like to point out that results discussed today include certain supplemental non-GAAP financial measures. We provide these non-GAAP financial measures because we believe that they provide important supplemental information about our core operating results. These non-GAAP financial measures have not been prepared under any comprehensive set of accounting rules. All non-GAAP financial measures should be read in conjunction with the comparable GAAP information.

For a description of non-GAAP financial measures and reconciliation of these non-GAAP financial measures to the most directly comparable financial measures, please see the section of Wind River’s earnings release issued today entitled “about non-GAAP financial measures” and supplemental information posted on the Wind River Investor Relation’s website at www.windriver.com.

With that, I’ll turn the call over to Ken Klein.

Ken Klein

Our first quarter performance can be summed up in strong execution and solid return on investments we made last year. The quarterly sales performance was the best the company has ever achieved in a first quarter. Revenue for the quarter was $87.9 million dollars, an increase of 13% over Q1 last year. Deferred revenue was $145.2 million dollars, an increase of 15% over Q1 last year. Q1 GAAP net income per share was .00 cents and non-GAAP earnings per diluted share were .09 cents, an increase of 125% over Q1 last year.

Last year, we invested in sales, products, and strategic alliances. Our focus this year is on investment return and strong execution. Our Q1 results clearly demonstrate we can successfully drive both. We have strong momentum going into this quarter based on our Q1 performance and a robust Q2 sales pipeline.

Let me take just a few minutes to share with you some Q1 execution highlights and key market trends that are benefiting us. We kicked off Q1 by shifting the organization into four product divisions. VxWorks, Linux, Tools and Horizontal Technologies, and Device Management. So far, the new structure has been very successful, resulting in more rapid and efficient decision making as well as deeper interactions with customers and partners.

We also fine tuned our go-to-market model at the beginning of the year. We increased our focus on named accounts to compliment our geography-based sales model. This allowed us to sell higher and more broadly into customers’ organizations and we are seeing a higher frequency of large transactions.

Shifting to the product divisions, we had a very strong VxWorks 6 performance in Q1 with bookings up 71% year-over-year. During the quarter, we had 12 customers spend over one million dollars with us tied to our VxWorks offerings and we had good results in all sales geographies.

We had another strong quarter in our aerospace and defense vertical market. Last year, we invested in our Mills product for this market. That investment had pull-through impact on business this quarter. For example, our VxWorks certified bookings were up 89% of the quarter a year ago and 653 bookings were up 55%.

Our VxWorks space business in other vertical markets, including industrial, consumer devices, and networking grew 25% over the quarter a year ago.

The investments that we made last year to develop the industry’s most comprehensive set of multi-core technologies are pulling through measurable business for us. For example, we had significant industrial wins at NTR Financial Solutions, Bonbodea, and Leif Cowow Electric and medical design wins at Gambaro, Toshiba Medical, and Direct Radiography.

In addition, we are collaborating deeply with leading multi-core hardware companies, including Cavium, Curtiss-Wright, Emerson, Fleescale, and Intel to expand our solutions and market presence.

Now, let me change topics and update you on our Linux business. In Q1, we had another strong Linux quarter as bookings grew 143% over last year. We are well positioned to achieve sales well in excess of $50 million dollars in FY09. Last week, we made several strategic Linux-based automotive announcements. Wind River collaborating closely with Intel and several customers is developing the Wind River Linux platform for info-tainment. This platform will be application ready and optimized for the new Intel atom processor. Customers including BMW, Delphi, Bosch, and Magneti Marelli are using our solution today to create compelling new products for our customers or gaining a market advantage over their competitors.

We also announced in Q3 we’ll make available open-source specification and code from the platform between open sourced project at MobileM.org. This will provide customers a bridge between the open source world where a lot of community- based innovation happens and the commercial world where customers are ready to pay for integration, validation, support, maintenance, updates, warranties, and indemnification.

The execution of our strategy in the mobile handset and mobile inert device verticals is progressing equally well. Our unique position in the open handset alliance, i.e. Google’s Android and in Limo has significantly increased our Linux sales pipeline. For example, as part of the Limo common integration environment, we have recently entered into arrangements with two large Korean handset manufacturers to develop solutions based on the Limo specification.

To date, networking equipment has been our largest Linux market. During the quarter, we made two strategic moves to extend our market leading, carrier grade Linux platform. First, we deepened our partnership with Sun. Our carrier grade Linux platform will be the first used on Sun’s ultra spark T2 chip and will run on their carrier grade rack serves and ATCA blades.

Second, we joined and took a leadership position in the open sath foundation. Open sath is a signification open source community focused on the high end cost-based networking market. They are driving standards for key carrier grade Linux middleware like high availability or HA. Through our participation, we will create an HA reference implementation and integrated into our carrier grade Linux platform.

We are seeing customers make large purchase decisions based on the breadth of our product and service portfolio. Customers such as Magnum semi conductors selected Wind River, because of our ability to deliver both real time and Linux-based offering systems, integrated middleware, and development tools.

In addition to our VxWorks and Linux success, our device management product line delivered another strong quarter. We added 21 new customers during the quarter, including Wallway, Juniper Networks, Contron, and Nortel bringing the install base to nearly 120 customers.

Before I turn the call over to Ian, I would like to summarize. In summary, our focus this year is on strong execution and driving return on investments we made last year. We have started the year on a very strong note. Given our investments, vertical market focus and targeted strategic initiatives, we believe we are well positioned to build on Q1’s momentum going forward. Thank you very much.

Ian Halifax

I would now like to review our first quarter fiscal year 2009 financial performance, as well as review guidance for both the second quarter and fiscal year 2009.

For the first quarter fiscal year 2009, net revenues were $87.9 million dollars, reflecting an 13% increase over the first fiscal quarter of 2008.

Subscription revenue for the quarter was up 15% year-on-year to $33.1 million dollars. Pro Revenue, including project-based perpetual and term licenses as well as production licenses was $32.9 million dollars up 17% compared to $28.2 million dollars in the first fiscal quarter of 2008.

Perpetual end term licenses contributed $14 million dollars to pro revenue. This increase was driven by a large product deal and the introduction of term licenses. Going forward, we anticipate pro revenue will trend above last year’s run rate due to our shift to term licenses for large multiple element arrangements.

Services revenue, including maintenance, professional services, and training was $21.9 million dollars, up 4% compared to the same quarter a year ago.

Deferred revenue for the quarter ended at a record $145.2 million dollars, representing a 15% increase over the first quarter of fiscal year 2008, and a sequential increase of $10.7 million dollars or 8% over the fourth quarter of 2008.

At the end of the first quarter, we had services backlog of approximately $20 million dollars. This represents an increase of over 25%, compared to the same quarter a year ago. As a reminder, this metric is intended to provide a gauge of the underlying demand for our products and services. The combination of deferred revenue and services backlog this quarter is approximately $165 million dollars, representing an increase of 17% over the same quarter a year ago.

Given our new organizational structure, we will now be reporting revenue by product division. VxWorks revenue for the first quarter of FY09 was $66.6 million dollars, an increase of 12% compared to the first quarter of FY08.

Linux revenue this quarter was $8 million dollars, an increase of 41% compared to the same quarter a year ago.

Other revenue, including revenue from the tools and device management divisions for the first quarter of FY09 was $13.3 million dollars, an increase of 2% compared to the first quarter of FY08.

In terms of geographers, the America is representing 50% of total revenue for the first quarter. EMEA contributed 25% and Asia Pacific, including Japan, also contributed 25%.

In terms of bookings, some of the top customers in the quarter included Alcatel Lucent, Boeing, General Electric, Quaway, Konica Minolta, Bell 3 Communications, Mitsubishi, Rafeon, Samsung, and Sun Micro Systems. We had more than 146 deals, greater than $100,000 dollars during the quarter.

Our bookings profile by end market for the quarter was as follows: Network Infrastructure accounted for 34%. Aerospace and Defense, 23%. Industrial and Automotive, 18%, and Digital Consumer, 25%.

Gross margin on a non-GAAP basis for the first fiscal quarter of 2009 was 76%, the same as the first quarter a year ago. As anticipated, non-GAAP operating expenses increased in Q1 from Q4 levels. The sequential increase was $2.8 million or 5%, due to personnel expenses including commissions and other incentives as well as annual Q1 sales and marketing events. This was substantially lower than the sequential increase we saw in the same quarter a year ago.

Non-GAAP operating income in the first quarter was $5.5 million dollars compared to $1.9 million dollars in the same quarter a year ago. This translates into first quarter non-GAAP operating margins of 6%.

Interest and other income on a non-GAAP basis was $2.9 million dollars for the quarter. The impacts of phase 123 are expensing of stock brace compensation in the quarter was $4.3 million dollars. We incurred a restructuring charge of $2.9 million dollars related to the reorganization we announced and begun implementing the beginning of Q1.

We incurred impairment expense of $1.4 million dollars related to a small component of our investment portfolio.

Net income on a GAAP basis in the first fiscal quarter of 2009 was $9.3 million dollars, compared to net loss of $4.6 million dollars in the same quarter a year ago.

Non-GAAP net income in the first fiscal quarter of 2009 was $7.6 million dollars, compared to $3.1 million dollars in the same quarter a year ago, an increase of 144%.

Based on our diluted share base of 85.5 million shares, GAAP net income per share in the first quarter was .00 cents or break even. Based on a diluted share base of 86.3 million shares, non-GAAP earnings per share in the first quarter were .09 cents, an increase of 125% when compared to the same quarter a year ago.

Q1 of FY09 ended with $206.5 million dollars in cash, cash equivalents, and investments. Cash flow from operations were $29.7 million dollars for the quarter, an increase of 141% over the same quarter a year ago.

During the first quarter of 2009, we purchased 8.7 million shares for a total amount of $66.6 million dollars. To date in Q2, we have spent a further $18.6 million dollars to purchase an additional 2.2 million shares. As a result, we currently have a balance of $50 million dollars available on the $50 million dollar repurchase program initiated on April 8.

The account receivable balance as of April 30, 2008 was $71.4 million dollars. Day sales outstanding was 74 days, down from 92 days last quarter.

Depreciation in the first quarter was $2.3 million dollars. Capital expenditures were $1.2 million dollars, including approximately $9.5 million dollars for internal use software projects.

At the end of April, our total headcount was 1,456, including sales headcount of 405. We had roughly 165 sales personnel at the end of Q1.

I would now like to review the financial outlook we included in today’s earnings press release. We are providing guidance for Q2 for the first time and are raising our earnings per share projections for the full fiscal year 2009. As a brief reminder, guidance for the upcoming quarter and for the year is set with a focus on sales forecast and pipelines, the conversion of orders into revenue, and our ability to carefully not expend. A key challenge is projecting the quarter in which large deals will close and convert to revenue. In Q1, we saw a number of large perpetual and term licenses close sooner than originally anticipated. Hence, for fiscal year 2009, we continue to forecast revenues in the range of $365 to $375 million dollars with strong growth anticipated in the second half of the year.

GAAP net income is projected at .10 to .12 cents and non-GAAP income per share is projected at .48 to .50 cents.

As stated on prior earnings calls, it’s important to emphasize that revenues, operating margins, and non-GAAP earnings per share are expected to ramp strongly in the second half of the year and that revenue growth will drive operating leverage.

Operating cash flow for FY09 is now anticipated to exceed $60 million dollar. For the second fiscal quarter of 2009, we anticipate revenues in the $86 to $88 million dollar range. GAAP net loss per share of .01 to .02 cents and non-GAAP net income per share of .07 to .08 cents.

Wind River has started FY09 on a strong note. Given our investments, organization structure, vertical market focus, and target strategic initiatives, we believe we are positioned to build on this momentum. Continued and consistent execution will be key in translating our business opportunities into revenues and earnings per share in FY09.

At this point, Ken, I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Matt Petkum - Davidson & Company.

Matt Petkum - Davidson & Company

Just looking at the perpetual and term deals that you guys were able to get signed this quarter, could you give us a sense what percentage was perpetual versus what was term?

Ian Halifax

We haven’t broken that out. There was one large perpetual and a number of somewhat smaller term deals, but I can’t be more specific than that.

Matt Petkum - Davidson & Company

And are the term deals generally three year terms?

Ian Halifax

The combination of two, three, and sometimes possibly five year deal.

Matt Petkum - Davidson & Company

Along with that, I noted a very strong pickups in the maintenance portion and service portion of the long-term deferred. Are those deferred revenues associated with those large deals?

Ian Halifax

That’s correct. Yes.

Matt Petkum - Davidson & Company

Can you characterize the types of customers that are electing this model versus the subscription model?

Ian Halifax

It’s really across the board. Some that we’ve launched in the last quarter or so and has seen very strong stock. We’re very pleased with that.

Matt Petkum - Davidson & Company

You still had nice growth in the subscription revenues year-over-year, is that something that can continue or do you think we’re going to plateau in the kind of low to mid 30’s on a quarterly basis for subscriptions?

Ian Halifax

I think that should continue near term. It is tough to forecast a mix between subscription and the perpetual and term deals, as I said in my prepared remarks.

Matt Petkum - Davidson & Company

But it’s not that you’re trying to sell one model versus the other?

Ian Halifax

No. We have a very, very flexible approach to customers and we try and fit what we sell to what the customer needed.

Matt Petkum - Davidson & Company

Did I hear you say that you bought back stock in Q2 as well as in Q1?

Ian Halifax

That’s correct. Yes.

Operator

Our next question is from Aaron Schwartz - JPMorgan.

Aaron Schwartz - JPMorgan

A follow-up question on the term and perpetual deals. I know you don’t want to get into trying to guide to when those may close, but can you talk about what is in the pipeline this quarter relative to what you had. Did you actually see a bunch of deals close that now where you don’t have as many large deals in the pipeline or is the pipeline still comprised of a number of large transactions you’re just unsure of the timing around those?

Ken Klein

We clearly were successful at closing some business earlier than anticipated. Obviously I’m very proud of our organization in terms of the fact we were able to do this in the face of a reorganization, in terms of business units, and a tuning relative to a named account model in sales. Having said that, we see a very strong robust pipeline in Q2 as well. So the pipeline has been building again based upon our strategic initiatives and across all verticals, geographies, and product lines.

Aaron Schwartz - JPMorgan

Would you say maybe the stronger than expected close rates are a function of the focus on your top accounts that you made in the sales organization?

Ken Klein

I think that certainly contributed to it, but I think we clearly have a sales force that’s come on line. In addition to that, there was a lot of management focus on some of these top transactions where management was a para-bonded with some of the key transactions. That was helpful, but I think sort of fundamentally, it’s really a punctuation mark to the fact that we have the right strategy and the investments we made last year in alliances and our sales force and our products are bearing fruit.

Aaron Schwartz - JPMorgan

A question for Ian. I know you pointed out last quarter a number of expenses that maybe were specific to Q1, but it does look like in your guidance, OpEx should increase sequentially into Q2 and I’m just wondering what was specific to Q1 and why wouldn’t that come out of the model. It seems like historically you’ve seen maybe a step down in OpEx from Q1 to Q2.

Ian Halifax

That’s a very fair question. In Q1, we typically have our sales rallies. Our sales kick-off the year on a couple of large trade shows also. That tends to spike our Q1 OpEx. At the same time, we have been doing some hiring to invest in certain key areas that we want to invest aggressively in Linux, like VxWorks, Mills, and so on. So those heads which came on line in Q1 will fully impact our Q2 OpEx. Also, we may see in Q2 a slight shift in the revenue mix, which could see a slightly lower growth margin. So when we combine those two things, more service in revenue stream perhaps in Q2 on more heads. That essentially leads to total cost and expenses being pretty similar to what they were in Q1 and Q2.

Aaron Schwartz - JPMorgan

Do you have an approximate share count we should think about for Q2?

Ian Halifax

For Q2, I would think of something in the low 80’s.

Operator

Our next question is from Michael Huang - Panmure.

Michael Huang - Panmure

I know sales cycles have always been relatively lengthy in the via sale marketplace and I know you’re selling some larger deals, but any sense that sales cycles are shortening, especially as reference ability is building and products are maturing?

Ken Klein

I think that sales cycles seem to be pretty consistent if I were to compare Q4 to Q1. Clearly the larger transactions tend to take a bit longer than the smaller transactions, but since we have a blend of large, medium, and smaller deals driven by inside sales. In certainly in the aggregate, I would say that sale cycles are rough code one.

Michael Huang - Panmure

In terms of large view activity, so obviously you saw competitive close rates in Q1, so it’s fair to say that Q2 guidance is more conservative moral and large deal close rates.

Ken Klein

Not really, as Ian mentioned, you have Q2 guidance is really about what we see in the pipeline. Our ability to close those transactions and importantly how those will actually roll off in terms or convert from bookings to revenue. I’d also mention historically, there has been seasonality in Q2. It’s typically a more challenging quarter for the company, but offsetting that is the momentum that we’re going into the quarter with and a very robust pipeline.

Michael Huang - Panmure

When you look out a few years from now, which vertical or which segment could be the bigger contributor to the model? Do you think an automotive or a mobile device could be the bigger contributor?

Ken Klein

I have to make long term projections like that. Clearly the investments in automotive that we’ve made are paying dividends very much like the investments we’ve made in the networking equipment market and I’m very confident based on our investments in the handset market and I’m confident those investments will also pay dividends to the company.

Operator

Our next question is from Brendan Barnicle - Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Follow up on this product revenue piece. Is it right for us to assume as we think about Q2 that we see flat, sequentially down product revenue with sequential increase offsetting that in subscription services?

Ian Halifax

That’s a good question we typically haven’t talked about guidance. I think in prior public forums we’ve talked conceptually about the relative growth rates of different parts of the stream. I would say that, again, consistent with prior remarks, I would expect product revenues on subscriptions to grow more strongly than we have seen in the past. Subscription growth to slightly come down in strong growth and services.

Brendan Barnicle - Pacific Crest Securities

Ken, on the last call when you asked about the macro environment, you were anticipating sort of the idea of working with Wind River as opposed to roll your own in a more challenging environment would be advantageous. Was that part of what was a factor for the performance of last quarter?

Ken Klein

I believe so. I think there are several things that are contributing to our success. Clearly I’d say top of the list is our execution. We’ve just gotten a whole lot better at getting things done in a timely manner and producing results, but from a market perspective clearly complexity is driving our business. Just the sheer amount of devices and the amount of software that’s going into those devices and the fact that it’s effectively flattish in terms of the number of developers that are available to do the work and then the disruption that we’ve alluded to before in terms of the supply chain. All of these really are becoming forcing functions to drive this movement to buy commercially versus build internally and we have many examples of customers even this quarter that were doing things in-house that elected to move off that and buy commercially. So I would say clearly that’s part of the success that we’re achieving.

Brendan Barnicle - Pacific Crest Securities

The handset industry, auto, obviously a heavy consumer component and so there’s been a lot of deterrent. It doesn’t’ seem like any of that has come through at all. Are companies trying to do what you guys, a cost setting mechanism or is there still potentially secondary reverberation that goes through as consumers start to slow some of their spend?

Ken Klein

Well first of all, we’re pretty early days in a lot of these initiatives that we’re driving in areas like consumer end in Telematix. Clearly cost savings is part of it. The other part of this is getting time to market and creating differentiating products. A number of these companies we deal with are actually taking advantage of the hiatus that they may be seeing in demand to really begin to do more revolutionary changes versus evolutionary changes with their product line. For example, moving to Linux, which is a tremendous opportunity for the company that we’re helping them exploit.

Brendan Barnicle - Pacific Crest Securities

Ian, you’ve given us service backlog in the past. I thought in the past quarters it had been around $20 million. Can you just refresh on what those numbers were the last couple quarters?

Ian Halifax

I believe in Q3, Q4 of last year the numbers were slightly below $20 million dollars and at $20 million dollars in Q1.

Operator

Our next question is from Brent Williams - Benchmark Company.

Brent Williams - The Benchmark Company

First off, any early comments on the feedback for Android, particularly with the Google developer conference going on with San Francisco yesterday and today where they showed off Android extensively. Do you have any thoughts on lead flow coming in to monetize the contribution you’ve made to the platform there?

Ken Klein

First, we do have Android based opportunities in our pipeline for Q2 and beyond. Second of all, the Android is having, if you will, sort of effect on Limo. Limo has accelerated, demand for Limo has accelerated, and I think that was manifested into design wins with two handset manufacturers in Korea that I alluded to.

Brent Williams - The Benchmark Company

That $.4 million dollar impairment was that for auction rate securities and if so, can you give us a sense of the face value of those?

Ian Halifax

No, it was a relatively low volume item.

Brent Williams - The Benchmark Company

You also talked at the analyst day and talked previously about deployment unit based revenue for Linux. Was any of that included in a term license number or is it still premature to be looking for any of that?

Ken Klein

It’s still pretty early days to see per unit fees on Linux as we talked about during our analyst day. Having said that, we have achieved per unit deal structures for Linux based designs and networking equipment and in automotive and the business that we have work in progress for handsets also includes that feature and so far so good in terms of our ability to convince customer that that’s goodness in terms of an approach to doing business with us.

Brent Williams - The Benchmark Company

Ian, in the past you’ve given verbally on the call the breakdown between the $21.9 million between maintenance on the perpetual licenses and professional services. Do you have that?

Ian Halifax

Let me just walk you through each revenue. Subscription revenue for the quarter was $33.1 million dollars. Product was $14, Product Licenses $18.9, Maintenance $7.9, Professional Services $12.8, and Training $1.2.

Operator

Our next question is from Kevin Buttigieg - Stanford Group.

Kevin Buttigieg - Stanford Group Company

Just back to the large deals. You mentioned 12 deals that were greater than a million dollars. Could you put a little bit of context around that? What had that number been in some prior quarters and did you have any mega deals this quarter? Three, four million dollar size transactions?

Ken Klein

What I said in my remarks was 12 customers that had provided us upwards of a million dollars for VxWorks products. It’s typical for us to have approximately a dozen transactions in one million or above range and some of those are multiple millions and some of those are closer to one million. There’s quite a bit of variation quarter to quarter in that business.

Kevin Buttigieg - Stanford Group Company

You mentioned the large perpetual deal you did this quarter. Could you provide a little bit of flavor around that? It looks like it might have taken place within the consumer sector I would guess just based on the revenue breakdown that you provided. Can you talk a little bit about that? Multiple products? Was it mostly VxWorks 6? Any flavor for the size or length of that transaction?

Ian Halifax

Unfortunately we can’t disclose the customer name or the size of the deal due to confidentiality and obligations. It was a large deal in the multiple millions. It spread across various parts of our product line and I would say also across several different political markets also. It was an arrangement with a very large broad based technology company.

Kevin Buttigieg - Stanford Group Company

Looks like the reduction in employees was about 50 quarter-over-quarter and you talked previously about a plant I believe of around 80 to 90? Has that restructuring largely taken place and those are some new additions that you’ve done during the quarter or what’s the progress on the restructuring front?

Ken Klein

There are two numbers there, they’re being co-mingled. One was the actual restructuring which was around between 5 and 6% of our headcount and then we hired back some numbers. So the net Delta between Q1 ending headcount and Q4 ending headcount was 34 employees.

Kevin Buttigieg - Stanford Group Company

Then those hires, was that sort of the hires in China and India that you previously talked about?

Ken Klein

Predominantly we hired back in lower cost geographies in China in our CDC or China Development Center in Bejing and also in Romania and then there were a number of hires in addition to that that we needed to bring on board to fund some of our strategic initiatives, areas where we have chosen to invest.

Kevin Buttigieg - Stanford Group Company

Finally, the services led strategy that you started last year; do you think that’s one of the reasons why you are seeing the acceleration in product revenues this year? Can you tie transactions this quarter for example to services engagements from last year?

Ken Klein

Absolutely. If you look through the mix of our business by vertical segment, what you’ll see is that networking equipment was extraordinarily strong. That was in large part driven by transactions that were product deals as a result of services led engagements that we had done earlier on. Some of the Telematix wins, our automotive wins that we alluded to at Bosch and Magneti Marelli and others. The result of some of the work that we’ve done with BMW and Intel and so it’s clear to us that that strategy is the right strategy and it’s working.

Operator

Our next question is from Richard Williams - Cross Research.

Richard Williams – Cross Research

Could you give me some color on the services revenue line? It seems that the growth rate is slowing a bit there and I’m not sure what to make of that.

Ian Halifax

I would say over the course of several quarters, I think services revenue can be lumpy, depending on how certain transactions have been structured, whether revenues recognize potential completion basis or get deferred until the final is being shipped. So I think our services pipeline going forward is extremely strong. We expect to see strong growth in services over the course of the rest of the year.

Richard Williams – Cross Research

Second question is on the handsets, the two Korean handset makers. Were those the Smart phones or just regular cell phone?

Ken Klein

Unfortunately, due to the sensitivity of the marketplace and these particular customers, we really aren’t at liberty to discuss the details there. They’re Linux based is what I can say.

Operator

Our next question is from Bill Farricks - Randallwood Capital.

Bill Farricks – Randallwood Capital

My question is buying stock during Q2, is that a departure from your historical practice?

Ian Halifax

No, we put in place a program that allows us to buy stock on a plum sale program through a blackout period.

Bill Farricks – Randallwood Capital

When did the 10B5 program go into effect?

Ian Halifax

It would have gone into effect probably in June I believe from memory.

Bill Farricks – Randallwood Capital

June of last year?

Ian Halifax

I’m sorry, no. We announced and put it in place in mid-April, I’m sorry.

Operator

Our next question is from Matt Petkum - Davidson & Company.

Matt Petkum - Davidson & Company

The guidance you provided for this year in terms of non-GAAP earnings per share, what’s the tax rate you’re assuming for the year? I missed that and then also the sim share account for the year?

Ian Halifax

I would assume a tax rate probably in the 15 percentish sort of range on non-GAAP basis, on a share count around $80 million shares.

Operator

You have a question from Kevin Buttigieg - Stanford Group.

Kevin Buttigieg - Stanford Group Company

On the term licenses, this quarter being the first quarter that you’ve offered and they’ve obviously been pretty successful for you. Absent you offering those term licenses, do you think those transactions would have been perpetual licenses or would they have been subscription licenses?

Ken Klein

They would have been subscription licenses and generally we structure term arrangements when we have what we call multi element deals, which are subscription with services and other products and the reason they are structured like this is to offer some of the same features as a subscription, but enable us to be able to recognize them more readily and so that’s really the reason why we’re driving term in lieu of subscription on these large multi element deals.

Kevin Buttigieg - Stanford Group Company

Okay, so from a customer standpoint, is there any difference from their standpoint? I assume it’s still paid for in the same way, for example.

Ken Klein

It’s pretty similar and that’s why I think we’ve seen the uptake being pretty rapid relative to our sales source being able to sell them effectively.

Ian Halifax

The only difference is that we are pricing maintenance separately. We were essentially unbundling maintenance, which subscription is combined with the license.

Kevin Buttigieg - Stanford Group Company

I’m just trying to get a sense if a customer had committed to a longer time frame under a term license than they would under a subscription license, because a large majority of your subscriptions are less than a year and with the big increase in maintenance that you’ve shown this quarter, I’m just kind of wondering if under term licenses it’s a longer tenure than customers otherwise might enter into.

Ken Klein

Right, that’s a good question. So term deals by definition need to be a minimum of two years. So generally they’re two years. They could be two, they could be three, but generally it’s a couple of years and customers are usually pretty happy with that, because they want to lock in pricing, etc.

Kevin Buttigieg - Stanford Group Company

And that’s the advantage and the incentive for them.

Ken Klein

That’s one incentive, certainly.

Operator

There appear to be no further questions at this time.

Anne Marie McCauley

Thank you very much for joining us on the call today. We appreciate your time.

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: transcripts@seekingalpha.com. Thank you!

Source: Wind River Systems, Inc. F1Q09 (Qtr End 4/30/08) Earnings Call Transcript
This Transcript
All Transcripts