Unify Corp. F4Q08 (Qtr End 04/30/08) Earnings Call Transcript

Jun.24.08 | About: Unify Corp. (UFYC)

Unify Corp. (UFYC) F4Q08 Earnings Call June 24, 2008 5:00 PM ET

Executives

Todd E. Wille – President and Chief Executive Officer

Steven D. Bonham - Chief Financial Officer

Analysts

Nathan Schneiderman – Roth Capital Partners

Brian Swift – Securities Research Associates

Don McKernan – Landoak Securities

Welcome to the Unify Corp. fiscal fourth quarter and 2008 year-end conference call. (Operator Instructions) I would now like to turn the conference over to Mary Magnani.

Mary Magnani

Thank you for joint Unify’s fiscal fourth quarter and year-end 2008 financial results conference call. I am Mary Magnani with the MKR Group, the investor relations firm for Unify. Presenting today are Todd Wille, President and CEO, and Steve Bonham, Chief Financial Officer.

Before we begin, I would like to add that during the call management will be making a number of forward-looking statements that involve risks and uncertainties, as well as assumptions, that if proven incorrect will cause our results to differ materially from those expressed or implied by such forward-looking statements.

All statements other than statements of historical facts could be deemed forward-looking statements, including general economic conditions in the computer and software industries, domestically and worldwide, the companies ability to keep up with technological innovations in relation to its competitors, products, effects of delays, developments in the company’s relationships with its customers, distributors and supplier, changes in price and policies of the company’s or its competitors, the company’s ability to attract and retain employees in key positions, and the risks and uncertainties associated with the acquisition and integration of significant business units.

These and other factors that can cause events or results to differ from those expressed or implied by such forward-looking statements as described in our most recent report on Form 10-K, quarterly reports on Form 10-Q, as well as other subsequent filings with the Securities and Exchange Commission. We assume no obligation and do not intend to update these forward-looking statements.

Today’s call is being recorded and will be accessible on our website at www.unify.com on the Investor Relations section of the site. A replay of the conference call will be available starting approximately two hours after the call until July 1, 2008, at 11:59 p.m. by dialing 1-800-405-2236 and entering the passcode 1115365 followed by the pound sign. The international dial in is 303-590-3000.

At this time I would like to introduce Todd Wille, President and CEO of Unify.

Todd E. Wille

I would like to start by saying how pleased we are to have completed our strongest year in recent history. This has truly been a transformational year for Unify. Our acquisition and successful integration of Gupta is the catalyst that has resulted in the tremendous growth that we have reported during the year. We are proud of our accomplishments for the year as a result of our solid execution. With our strong fiscal 2008 results, we are well positioned for growth, we expect, in 2009.

Let me provide some of the highlights for the year and fourth quarter. For fiscal 2008 our total revenue grew 77% to $19.8 million. Software license revenue was $8.5 million, an increase of 93%. Services revenues increased by 67% to $11.3 million. Included in services revenue is approximately $125,000 revenue related to our Composer business.

Adjusted EBITDA was $4.1 million, a dramatic increase over the negative EBITDA of ($279,000) recorded last year. In addition, we reported operating income of $2.7 million and net income of $1.6 million, or $0.23 per share on a point diluted basis.

Now on to the fourth quarter. Total revenue increased 28% to $5.1 million over the fourth quarter of last year. Keep in mind that we purchased the Gupta business in the third quarter of fiscal 2007 and therefore the comparative fourth quarter of 2007 included three full months of Gupta business. Software license revenue increased 26% to $2.2 million and services revenue increased 30% to $2.9 million.

After earnings adjusted for closing costs for our German subsidiary of $276,000, operating costs for the fourth quarter was $521,000 as compared to an operating loss of ($281,000) in the fourth quarter of last year. Net income also dramatically improved to $353,000 versus a net loss of ($584,000) in the fourth quarter of last year. The adjusted EBITDA came in at $785,000 for the quarter, an improvement over the negative ($44,000) we reported in the same quarter of last year.

On the Composer front for fiscal 2008, we closed eight deals to seven new Composer customers for approximately $1.1 million in bookings. These eight deals consisted of six pilots and two full-scale migration projects. One of our pilot wins was followed by a multi-application migration project, won as a result of the successful pilots. We are optimistic the remaining completed pilots will also turn into migration projects during fiscal 2009. We are pleased with the positive momentum for this business and later on in the call I will review the Composer business in more detail.

The majority of our growth for fiscal 2008 has been in our software business, fueled by the merger with Gupta. We have worked hard to create a stressless vendor relationship with those customers who are new to Unify and we believe we have succeeded. We organically grew revenues by approximately 7% for fiscal 2008, on a pro forma basis. We energized the three seller channel and have won over 220 new customers, including 30 in the fourth quarter. This number of new customer wins is even more dramatic when compared to the less than 20 new customer wins in each of the last several fiscal years.

Revenue generated from new customers was approximately $1.3 million for the year, but $200,000 in the fourth quarter. The average initial purchase for product licenses per new customer was nearly $7,000 in the fourth quarter, with follow-on purchases expected over the next six months. These new customers purchases licenses in all of our product lines with the majority coming from SQLBase and Team Developer.

We were also pleased to see new customer wins coming from the emerging markets, specifically South American and Eastern Europe. Our new Brazilian distributor, Triad Systems, became the certified NXJ training center during the fourth quarter. This center reverses the pattern in South America and provides education and training certification on NXJ application development. A handful of new customers have already received the certification and became new NXJ customers during the year.

Our fourth quarter was a continuation of a strong performance we delivered throughout 2008. We are delivering existing and new customers the type of products they demand today and the compelling product road map they expect for tomorrow.

We have also expanded our partner channel and broadened our territories and market presence. Looking forward, we anticipate continued growth in this business, albeit at a slower pace than in 2008.

Now, let me turn the call over to Steve Bonham, our CFO, who will review the fourth quarter and year end financials results in detail. After that I will update you on the Composer business.

Steven D. Bonham

I would like to begin by sharing some of the highlights from our statement of operations. For fiscal 2008 the company reported total revenues of $19.8 million, which is up 77% as a result of organic- and acquisition-related growth, and as compared to $11.2 million for fiscal 2007. Total revenue in the fourth quarter of fiscal 2008 was $5.1 million, which is a 28% increase from the $4.0 million reported in the fourth quarter of fiscal 2007.

For the year software license revenues to $8.5 million, or 93%, over 2007. It is important to note that 80% of our business is conducted internationally and since we bill in local currencies we have benefited from the falling U.S. dollar in certain regions. So since the U. S. dollar strengthened significantly, our revenues have been negatively impacted.

For the fourth quarter software license revenue increased 26% to $2.2 million, up from $1.7 million in fiscal 2007. This increase was driven by the additional 30 new customers Todd mentioned earlier. Software license revenues were down on a sequential basis from Q3 due to a large $800,000 win from Russia recorded in our third quarter.

Services revenue was up 67% for $11.3 million, compared to $6.8 million for fiscal 2007. Services revenue was up 30% to $2.9 million, compared to $2.2 million for the same quarter of the prior year. Included in fiscal 2008 total service revenue is approximately $125,000 of revenues from our Composer business, including $90,000 recorded in the fourth quarter.

Gross margin in the fourth quarter was 89%, compared to 91% in the fourth quarter of fiscal 2007, and for the year gross margin was 92% compared to 87% for 2007. The fourth quarter gross margin was down on a sequential basis from the third quarter as we have slightly grown our Composer migrations team as a result of the fourth quarter contract wins.

Our head count today is 71 employees worldwide, compared to 63 a year ago. Total cost of sales for the quarter was $573,000, which is up from $359,000 in the fourth quarter of last year. Cost of sales for the year was $1.6 million compared to $1.4 million in 2007.

Product development cost for the fourth quarter increased slightly to $862,000, up from $804,000 a year ago. Parts development for the year increased to $3.5 million from $2.4 million because fiscal 2008 included 12 months of engineering costs from the Gupta and Active Data acquisitions, whereas fiscal 2007 only included five months of the Gupta costs.

SG&A for Q4 increased by 10% to $3.4 million, compared to $3.1 million in Q4 last year as a result of the one-time $276,000 expense accrual for closing our German office. Excluding the German closure costs, SG&A for the fourth quarter would have been flat year-over-year. SG&A for the year was $12.0 million, compared to $8.3 million in 2007 because fiscal 2007 only included five months of the Gupta costs.

Excluding the $276,000 one-time expense accrual for closing our German office, we generated operating income of $521,000 in the fourth quarter versus a loss of ($281,000) the same period of the prior year. Net income for the quarter was $353,000, or approximately $0.04 per share as compared to a loss of ($584,000) or a ($0.10) per share in the fourth quarter a year ago.

For the year operating income was $2.7 million, versus an operating loss of ($880,000) in 2007. For fiscal 2008, net income was $1.6 million, or $0.23 of earning per fully diluted share compared to a loss of ($2.8 million) for 2007, or ($0.47) loss per share.

On a non-GAAP basis net income for fiscal 2008 was $3.1 million, or $0.43 earnings per share, as compared to a loss of ($2.2 million), or ($0.38) loss per share for fiscal 2007. Adjusted EBITDA for the fourth quarter was $785,000 and that’s compared to a negative ($44,000) for the fourth quarter of last year. For the year adjusted EBITDA was $4.1 million compared to a negative ($279,000) in the prior year.

Non-GAAP net income is calculated by taking the company’s net income and adjusting for amortization and tangibles and zip downs on notes payables, non-cash stock-based compensation and any one-time expenses such as the closure of our German office.

Adjusted EBITDA is calculated by taking the company’s operating income and adjusting for depreciation, amortization, non-cash stock-based comp, and any one-time expenses. The company believes these non-GAAP measures used in addition to, and not in lieu of, our recorded GAAP results provided useful information to investors because it’s an integral part of updated internal evaluation of operating results.

Before moving to the balance sheet, let me discuss the company’s revenue recognition policy for our Composer revenues. Currently we’re following the completed contract revenue recognition guidance, meaning that Composer revenue will be recognized at the completion of the Composer project.

The Composer project will have both the software license and a professional service revenue element and the cost of labor hours are capitalized on our balance sheet until the project is completed and then these costs are expensed in the same period as the revenue is recognized. There are additional expenses incurred in closing a deal, primarily commission, that are paid in accordance with the project billing schedule and these costs or expenses are paid regardless of the completion status of the project.

Going forward, the company will continue to evaluate our abilities to estimate projects and at the point the company concludes that these estimates are reasonably dependable, the company will transition to the percentage of completion method for the revenue recognition for Composer projects.

Now moving on to the balance sheet. Cash and cash equivalents were $2.7 million as of April 30, 2008, which is up from $2.1 million as of April 30, 2007. The increase in cash is a result of a large percentage of customers placing orders for renewal maintenance contracts during the third quarter that were collected during the fourth quarter.

Accounts receivable on April 30, 2008, was $5.1 million versus $4.2 million a year ago, as a result of the company’s increased sales. Deferred revenue on April 30, 2008, was $6.6 million compared to $5.6 million a year ago.

As further evidence of our improved financial strength, our current and total liabilities have decreased significantly, including a decrease of nearly $300,000 for accounts payable, full payment of the accrued acquisition costs of $500,000, and the decrease of nearly $400,000 for other accrued liabilities. Excluding deferred revenues, total current liabilities have decreased to $2.9 million as compared to $4.6 million a year ago, which dramatically improved our current ratio to 2.9x versus 1.5x a year ago.

In addition, our total debt outstanding is $1.4 million as of April 30, 2008, as compared to $6.9 million as of April 30, 2007, excluding the notes payable discount for warrants. The significant decrease was a combination of debt repayments of approximately $2.3 million and the conversion of debt to equity of approximately $3.2 million.

Additionally, the debt holder has requested the suspension of principal payments until June of 2009, which includes all of fiscal 2009, and we’ve reduced the interest rate on this long-term debt from 11.25% to 5.0% for the remainder of the term. Stockholder equity increased dramatically to $5.4 million as of April 30, 2008, from $469,000 as of April 30, 2007.

We’ve applied for listing on the NASDAQ market and to meet the listing requirements we must provide an SEC-filed balance sheet reporting stockholder equity of over $5.0 million. This will be accomplished as soon as we file our form 10-K, which we anticipate in the next two weeks. We remain focused on pursuing the NASDAQ listing and will publicly disclose any progress we make with this endeavor.

I will now turn the call back over to Todd to review our Composer business.

Todd E. Wille

In 2008 we started to gain momentum with our Composer migration business. To recap, we closed eight deals for fiscal 2008, for bookings of $1.1 million, and as I said earlier, the eight deals were six pilots and two full-scale migration projects. One of those pilot wins did result in a multi-application project win, which was won as the result of a successful pilot and we are optimistic the remaining completed pilots will also turn into migration projects during fiscal 2009.

We have a total of eleven Composer customers to date and we are pleased with the positive trends we are experiencing in this business. Composer customers are leading companies within the financial services, oil and gas, and travel industries. These are Fortune 500 companies with Lotus Notes applications proliferated throughout the organizations.

Every one of these customers had the requirements to standardize and consolidate their IT systems and rapidly adopt a newer, modern platform. Every customer also analyzed the benefits, the business benefits, and costs of rewriting versus migrating their applications and they all chose the more cost-effective alternative of migration.

Of the six pilot projects we announced during the fourth quarter, five have been completed and delivered to the customer for final testing and installation. The remaining pilot is schedule to be delivered later this week.

Today we have eleven final proposals out to customers and of those six are pilots. In addition, the number of prospects in our pipeline has increased by over 40% from the third quarter. This business is progressing as we expected, however, the number of applications that we are asked to migrate has expanded beyond the complex custom applications to all custom applications. Therefore, our practice models have evolved to an aggregate project cost versus the per-application practicing that we started with last year when we initially announced and launched the Microsoft edition of Composer for Lotus Notes.

Another interesting trend we are seeing is that new Microsoft customers are beginning to focus on migrating Notes applications before e-mail, which is a dramatic shift in priorities, but of course good for us.

We are beginning to hear enterprise customers say that Composer if a key component of their decision to move from Lotus Notes to Microsoft technology platforms. As an example, one of our pilot customers has decided to not migrate to Exchange or SharePoint but still attempt to migrate their Lotus Notes applications using Composer.

Our partnerships with Microsoft and EMC continue to be strong. Out of the six pilot deals we’ve won since January 1, Microsoft has paid for three of them. This underscores the importance of the Composer solution to Microsoft in their efforts to migrate large enterprise-class customers from Lotus Notes to Microsoft technology platforms.

The Notes-compete initiative continues to be one of the top three corporate initiatives for Microsoft. We believe the Microsoft partnership will continue to be a strong source of lead generation for Composer and we are working now to develop the next Notes-transition framework seminar series to be launched in Europe later this summer.

Our first win this year with EMC was for a small pilot that was successfully completed in the fourth quarter and now the customer is evaluating the EMC proposal for a complete transition to a Microsoft platform, including the migration of multiple Lotus Notes applications.

We look forward to accelerating our existing partnerships with Microsoft and EMC in fiscal 2009, now that we have invested the time to educate both their sales forces on the value proposition of Composer. Over time we expect to generate many more customer wins with both partners. We also expect to cement more sales partnerships, including [H.P. Pervesses] and Alanod, which we believe will lead to further growth in this business. We look forward to updating you once those relationships have been formalized.

With growing demand for our solutions, strong momentum, and the backing by top-tier partners, we believe we are well positioned to significantly grow our Composer business in fiscal 2009.

Looking on to guidance for fiscal 2009. Based on the current conditions, we expect total revenue to grow by at least 10% and non-GAAP net income to grow by at least 15%. Although we are delighted our software business grew during fiscal 2008 for the first time in many years, we are unable to predict the growth rate for fiscal 2009 until we have further visibility.

Therefore, we expect Composer to be the primary growth driver for the year as we currently have approximately $1 million in Composer contracts backlogged. While we are excited about both our businesses and believe there is upside, our guidance is limited by the predictability of the Composer business and, as this predictability improves we will update our guidance. While we did not provide quarterly guidance, I would like to point out that our first quarter is seasonably weak due to the extended summer holiday season in Europe.

In summary, we are very pleased with the financial results we reported to you today for fiscal 2008 and believe our hard work to transform the company has positioned us to grow our business in 2009. We look forward to sharing more news about our Composer business as we continue to sign new deals and partnerships. On the investor front, I will be presenting to investors at both the Collins Stewart Conference on July 9 and the Conklin Brothers Conference, also in New York, on September 4.

This concludes our prepared remarks. I will be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nathan Schneiderman - Roth Capital Partners

Nathan Schneiderman – Roth Capital Partners

You ended head counts for the year, I believe you said 71 employees. What are you looking at for 2009 hiring and where do you think that ends up?

Todd E. Wille

I think we’re adding four or five individuals, all in the Composer sales and technical area. So we’ll end up with about 77 or 78 would be my guess.

Nathan Schneiderman – Roth Capital Partners

And then, other than that do you see any significant changes to the cost structure in 2009 versus 2008?

Todd E. Wille

No, we don’t, except for potentially in the execution of the Composer migration projects. We believe that there are going to be some head count adds and we may be supplementing with additional contractors assistants with the QA testing of the Composer projects, depending on how often they come, the timing of the, how much they are lumped together. So there could be some additional contractor costs as well. But not significantly different, no.

Nathan Schneiderman – Roth Capital Partners

On the Lotus Notes, I didn’t quite catch it, you said something about a 40% sequential increase. I was hoping you could clarify what specifically increased 40%.

Todd E. Wille

The number of prospects in the pipeline. So the number of opportunities we are pursuing increased by 40% since the end of the third quarter. We’re obviously very delighted with that. That business is continuing to find opportunities and start working them through the sales cycle.

Nathan Schneiderman – Roth Capital Partners

If I recall right you may have given us the number of prospects you had in Q3. Do you have those numbers?

Todd E. Wille

I don’t remember what I said. I don’t have that pipeline report with me today. I don’t recall. I think it was 70 maybe.

Nathan Schneiderman – Roth Capital Partners

So you’re getting close to 100 prospects?

Todd E. Wille

Yes, that’s an accurate statement.

Nathan Schneiderman – Roth Capital Partners

You did a great job on the EBITDA front this year, coming in with margins that were just over 20%. What are your thoughts for EBITDA margins for fiscal 2009?

Todd E. Wille

We certainly believe those margins are going to continue, something similar to what we did in 2008 we will continue to do in 2009. There’s really no real deterioration of that. It’s just from a guidance perspective we want to now transition people to now thinking about non-GAAP net income, which is very similar to EBITDA, it’s just back to non-cash amortizations and stock options and so forth. So now we have our interest expense reduced because of the conversion of the debt, we felt like that would be an appropriate metric for us to be talking about for fiscal 2009.

Nathan Schneiderman – Roth Capital Partners

You had a great year for new customers last year. Do you think you will continue to rack up new customer wins in fiscal 2009?

Todd E. Wille

We do expect to continue to win new customers. I’m not sure if I expect 220 customer wins again, but we certainly expect to win many new customers through 2009 and expect that to be a big part of our continued health of that business.

Operator

Your next question comes from Brian Swift - Securities Research Associates.

Brian Swift – Securities Research Associates

When you mentioned the people in the pipeline, you mentioned 70 customers from the low 30s. If your memory was correct. Can you comment on what your domestic to international sales is and then secondly, gross margins in Q4 versus the total year, what was influenced there and maybe a little guidance going forward.

Todd E. Wille

The first one was the split to international/domestic. International is 75%-80%, non-U.S., with the balance, obviously, U.S. And that’s been fairly consistent since the Gupta acquisition. Perhaps that’s been a consistent split.

On the gross margin part, the fourth quarter was the result of bringing on a new head count and a new contractor to assist with the Composer projects that we had won during the fourth quarter. And there was also an accounting credit that you receive as part of the acquisition, which was in existence during Q1, Q2, and the majority of Q3 for the cost of doing those contracts you assume as part of the acquisition. That credit went away between the third quarter and the fourth quarter so the increase in total expenses for the fourth quarter is up because that credit is now gone and two additional head count resources.

So on going forward basis from a guidance perspective, we have consistently said we believe our gross margins will stay in the 85%-90%, we think the upper end of that range as we go forward. And a lot of that is going to be dependent on the number of outside resources we need to use for Composer migration projects versus internal resources that we believe we can have a better margin with. So it’s going to depend on the rapines of the larger projects, when they have migrations sequential and spread over the year it’s going to be easier to have a higher margin than if they all show up in one particular month or quarter. I believe the margins will stay in the upper 80%s for all of fiscal 2009.

Brian Swift – Securities Research Associates

And you mentioned that in Q4 you had some Composer revenues, they were in the services line, but you also mentioned that going forward revenues would be split between licensing and services. Can you elaborate a little bit about at a typical project how that would break out?

Todd E. Wille

The revenue for the fourth quarter was all for pilots and for pilots we have pretty much have just not done a split between the service elements and the license element, because traditionally they’re smaller numbers.

For the project, for the two that are in the process now and will be recognized on a completed contract method, there is going to be a service element and a license element and our belief right now, depending on the pricing and so forth, but the service license element is going to be 60% to 65%, 30% to 35% service element.

Based on the hours expended on the project. And of course, that’s going to vary a little bit based on the complexity of the multiple applications that are in the project. There’s not an absolute number but it is our belief that on average it will be 2/3 licenses, 1/3 services. On an average.

Brian Swift – Securities Research Associates

And your contemplated switch to percentage of completion accounting, when do you estimate that that transition should take place? Sometime this year or are you talking about beyond?

Todd E. Wille

We’re hopeful that it’s this year. We have set up our process, we’ve got our revenue recognition policy in place. It’s something that Steve and our audit committee are going to review on a quarterly basis and the literature clearly states that as soon as your ability to project estimates are reasonably dependable that you should use the percentage completion method. My hope is that it happens during this fiscal year. We will have to see how that all plays out. So it depends on how we perform against our estimates to date.

Brian Swift – Securities Research Associates

I know you said you have varying degrees of complexity in the projects that you have gotten and expect to get in Composer. How long should you reasonably take to complete a project? Time line you’re talking about, a quarter or two?

Todd E. Wille

Absolutely, I would say some smaller, simpler projects could be multiple applications, if they’re not really complex, a month and a half to two months, to maybe five and a half to six months on the outside. I expect the majority to be two to three to fourth month kind of things.

And that’s not two to three months of five people working on a project kind of thing. There’s a bunch of dependencies with customers and so it’s certainly not, if you lapse time, concurrent time, if you will. But that’s what, from a completed contract perspective, our belief and the way we built our budget this year, was start with between two to three to four months for a project, depending on its size and complexity. Between signature and completion.

And it also depends on the distance of time between the date of signature and when the project initiates. Some customers are in a hurry and want to get started in a week and sometimes it’s five weeks before we can even have the first initial discussion. So there’s already a month down the road before we even begin the process. So, again, there are some pretty significant customer dependencies but we believe two to four is a good average.

Brian Swift – Securities Research Associates

And also on Composer, you were speaking a little fast when you were taking about a new product or new version coming our sometime this year and some different issues relative to Microsoft’s participation that you thought would be advantageous. Could you elaborate a little more on that?

Todd E. Wille

I probably was referring to when we came out with this product last year. I apologize for talking too fast. Some of us, including myself, are wishing that the business was moving faster and part of that is really around the fact that the business really has only been, we launched the product in July so it’s basically nine months to April 30, and the challenge has been with Microsoft figuring out (a) who to talk to, how to get them educated, how to get their time, have them understand the value prop of Composer, when to use it and so forth.

And that’s just because of the size and the multiple groups and then their geography has a different legal entity, if you will, as to different sales groups and getting them all coordinated. So, I think part of what I was trying to say was that the progression with Microsoft has been a tough nine months. We now think we’re going to start seeing some results and some positive benefit of all that work as they know more about us and as we become better at working together on how to engage with the customers. I think that was what I was trying to allude to.

Brian Swift – Securities Research Associates

How about new version of the product?

Todd E. Wille

No, we’re continuing evolving the product but there’s nothing new dramatically planned at this point. The product almost reinvents itself every couple of months. It’s really amazing what we’ve been able to accomplish. But nothing new and separate coming.

Operator

Your next question comes from Don McKernan - Landoak Securities

Don McKernan – Landoak Securities

As you’ve gone from the Composer area, from the pilot conversion to hopefully get revenue on a per application basis, I think you said it’s now switched to this multi-application migration package, so you might have simple and complex together. What is the average revenue per project, if you will? Is there any numbers out there that we can look for?

Todd E. Wille

Yea. That continuously evolves based on what we have in the pipeline, what we have in final proposals waiting for execution in the street, and we’re feeling now that the average multi-application project, not a pilot but an actual project, is going to be anywhere from $250,000 to high end, who knows, but it could certainly be $750,000 easily. It could even be into the seven figures.

There’s going to be a pretty wide range because it really is dependent on the customer’s perspective of how many of their applications they want to migrate. There’s always some that are going to be re-written but there’s a larger percentage that are going to be migrated and so it depends on the number of complex customers versus the simpler customers.

So if there’s more simple customers it’s going to be lower than that range, if there’s many more complex, it’s going to be at the higher end of that range. The things we have out right now are in that range.

Don McKernan – Landoak Securities

When you talk about 100 prospects are you talking about multi-application situations across the board there or is that hard to quantify?

Todd E. Wille

Yes, some of them are fairly new to the pipeline so we don’t have exact clarity but certainly the majority of those hundred prospects, if you use Brian’s map there, is multi-application opportunities. Absolutely, there’s no such thing as a small Notes application customer. They all have many, many applications.

Don McKernan – Landoak Securities

So $100,000 to $150,000 a piece, you’re looking at a potential $25 million on up the ladder, which is a rather significant number for your company, I would gather.

Todd E. Wille

It is. And that’s why we’re looking at units versus dollars. Because those numbers get big fast. But we are certainly excited about that, to say the least.

Don McKernan – Landoak Securities

And then in your prepared comments you said that Microsoft designated this Notes issues as one of their top three priorities or something like that. Can you clarify what you mean by that?

Todd E. Wille

Well, just what it means is that over the last year, and continuing this upcoming fiscal year, they’ve got two, three or four key initiatives that really the whole company focuses on in addition to their normal goal setting. And one of those key initiatives is this whole Lotus Notes initiatives because SharePoint and Exchange and a lot of their products that are all on a collaborative environment, (a) and (b) IBM identified as one of their major competitors, those two reasons have led this to be one of the key initiatives for them as a company last year and this going forward year.

So, obviously, the point to us is that it’s great news for us to have that exposure. And it goes all the way to the top of Microsoft and all the way down, is that this initiative is important and it’s funded and that bodes well for us.

Don McKernan – Landoak Securities

You’re the only answer for them, basically, on the complex end.

Todd E. Wille

That’s correct.

Don McKernan – Landoak Securities

Can you tell us about some full-scale applications? You have some that have been completely converted and they’re delivered to the customer and they’re working day-in-day-out without any glitches or anything. Would that be correct?

Todd E. Wille

That is correct. We’ve just got our first set of applications into production and they are being worked and are being used and so far the customer is very delighted. It’s very early but the initial prognosis is very, very good.

Don McKernan – Landoak Securities

And you mentioned in the press release about acquisitions. Are you thinking about acquiring product lines or companies or something like that? Can you elaborate on that?

Todd E. Wille

Yes. Our focus really is to look for technology companies that either have a solution, a product, that is used for modernizing a large customer base and/or has a Gupta-like infrastructure. Perhaps one that has good, solid trend technology, a very large solve base that maybe is struggling for other reasons, distribution, management, whatever it might be. So it will be something along those lines.

It would have to be a technology-oriented and not service-oriented. It needs to be a product company, not a professional services company. And we’ve got some things that we’ve identified and we’re looking at and just figure out some very prudent ways to continue to grow the company.

Don McKernan – Landoak Securities

On the customers you have now and the prospects, the 100 or so in the pipeline. Can you give us an idea of the split between domestic and international?

Todd E. Wille

I don’t have an exact split but the majority are U.S.-based. We are getting some European interest but the majority is still the U.S. where is certainly where we have the best sales coverage and capability.

Don McKernan – Landoak Securities

And can you give us a number on the range of simple applications per prospect, from low to high end as well as on the complex side. Are there one or two complex or do they go as high as 20 complex or 100 complex?

Todd E. Wille

I’m sure that detail is somewhere in the pipeline but I don’t have it off the top of my head. We matriculate that based on the potential project size, which gives us some rough feel of the number of complex versus simple. But it literally is all over the board. I don’t know if it would be useful if I had the exact number for you.

Don McKernan – Landoak Securities

You’ve got the capacity to do most of this in-house, for the near term at least? Or do you have plans to off-load some of that if you need to?

Todd E. Wille

Both, we do believe we have the capacity in-house for the foreseeable future and we have capacity partners lined up, both here locally and on a larger, longer-term view that’s an offshore capability, which obviously has a much better cost profile for the QA efforts that we believe we’ll need. So we’ve got both line up but at this point we believe we’ve got the resources to handle the business that we’ve got to date and some more capacity for going forward.

Don McKernan – Landoak Securities

And to clarify, the gross margin on the Composer side will be in the 85%-90% range?

Todd E. Wille

What I was referring to there was Brian’s question about the overall gross margin for the business staying in the upper 80%s. On per business line, the software business will be way over 90%, 95% to 97%. Composer business will be lower than that, bringing the whole average down to the 88%. We think Composer will start sug-75%. We think that over time we will be able to get it up to 75%, and maybe even into the 80%s.

But with all the unknowns and all the capacity and all the training that we need to do and the off-shoring will have to get up to speed and effective, for this year we fully expect margins could be under 75% for the year and then we’ll just improve on that as we go forward.

Operator

Your next question is a follow-up from Brian Swift - Securities Research Associates.

Brian Swift – Securities Research Associates

On the Composer, what has been your experience so far with pilots and your project on the time line, in terms of how long it took you, the sale cycle anyway, when you’re talking with them and when you actually got them?

Todd E. Wille

Again, unfortunately the answer is all over the board so I don’t know how useful it will be. We’ve had a couple as short as 75 days, 2 ½ months, or a couple of others were over 5 months. And some that we worked back in December are still alive and well and we think we will eventually close and those are now over 6 or 7 months. So, it’s not clear, we don’t have enough data. But we’re certainly trying to accelerate that as much as we can to going forward.

The other time line we’re working on is trying to go from a pilot to a full-blown project and trying to accelerate the elapsed time between the completion of a pilot and the signing of a large project, trying to draw those two end points closer together to accelerate the time we get to that project.

So we’ve got things we’re working on, we’ve got some incentives that we’re offering, and certainly that’s a significant focus of the sales team.

Brian Swift – Securities Research Associates

Relative to the 100 different customers you have in the pipeline, you’ve got a good six-month sales cycle. It seems like you have quite an opportunity in terms of closure this year.

Todd E. Wille

We certainly believe so, yes.

Operator

This does conclude the Q&A session.

Todd E. Wille

Thank you and for all of you on the call and listening to the call, thank you so much for your time and we very much appreciate your continued support of Unify Corporation in the past and going forward. Have a great day.

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