Sybase, Inc. Q2 2008 Earnings Call Transcript

|
 |  About: Sybase Inc. (SY)
by: SA Transcripts

Sybase, Inc. (SY) Q2 2008 Earnings Call July 23, 2008 5:00 PM ET

Executives

John S. Chen - Chairman of the Board, President & Chief Executive Officer

Jeffrey G. Ross - Chief Financial Officer & Senior Vice President

Analysts

Steven Koenig – KeyBanc Capital Markets

Terry Tilman – Raymond James

Horatio Rowani – Jefferies & Company

Brad [Silva] – Lehman Brothers

Brent Williams – Benchmark Company

Operator

Welcome to today’s Sybase second quarter 2008 earnings conference. (Operator Instructions) Our speakers today are Chairman, Chief Executive Officer and President John Chen and Senior Vice President and Chief Financial Officer, Jeff Ross. I would now like to turn the conference over to John Chen.

John S. Chen

Welcome to our call. I’ll pass this to Jeff to provide a Safe Harbor statement.

Jeffrey G. Ross

Today certain statements we will make will be forward-looking statements including statements regarding our future growth, future operating results, potential business combinations, market opportunities and business prospects. While these forward-looking statements represent our current judgment on what the future holds they are subject to risks and uncertainties that could cause actual results to differ materially.

You are cautioned not to place undue reliance on these forward-looking statements which reflect our opinions only as of the date of this call. Also please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion we will attempt to present some important factors relating to our business that may affect our predictions. Actual results and the direction of our progress and our future growth, if any, could differ materially from statements we make or imply today for a variety of reasons.

Those reasons are described in our press release and in SEC filings including our annual report on Form 10-K for the year ended December 31, 2007 and our Form 10-Q for the quarter ended March 31, 2008. All non-GAAP amounts disclosed in this conference call have been calculated and presented in accordance with the most directly comparable generally accepted accounting principle financial measures which are posted in the earnings release section of our Investor Relations website at www.Sybase.com.

And now John will provide an overview of the 2008 second quarter results.

John S. Chen

By now you should have our press release and we are extremely pleased we have delivered yet another record quarter. These strong Q2 results demonstrate our ongoing momentum in the marketplace combined with the ability to execute in a very difficult environment today. I’m very proud to say that we have now delivered three consecutive record quarters, four consecutive quarters exceeding the Street Consensus Revenue and 16 consecutive quarters exceeding the Consensus EPS but we’re not counting, happened to know that number.

2007 was a record year and we are on track to deliver yet another record year in 2008. Sybase is currently firing on all cylinders, I’m very pleased with it due to a lot of synergies across all of the businesses and we should be able to continue to increase those synergies. For the 2008 second quarter our total revenue came in $282.7 million. This represented a 15% growth all organic. License revenue increased 17% to $90.5 million. Core database license revenue grew a robust 38% year-over-year and the messaging revenue continues on its very strong pace growing 41% year-over-year.

Total service revenue grew 8% on the strength of 10% growth in maintenance revenue. We executed well and grew across all the geographies. International now accounts for over half of our total revenue and Jeff will take you through the details later. Non-GAAP operating income grew 33% year-over-year to $63.7 million. That represents an operating margin of 23% which is up from 20% a year ago. This obviously is as a result that we continue to experience significant leverages from the box strength across our businesses and across the synergy that we outlined. Non-GAAP EPS which grows 33% year-over-year to $0.49 a share exceeding the top of our guidance range. The GAAP operating income increased 44% and EPS of GAAP grew 31% year-over-year. Last, but not least, cash flow from operations came in at $62.7 million. This is a record for Q2 in the history of our company and a solid increase of 16% year-over-year.

Our strong 38% growth in database license revenue and solid overall performance in the ITG segment was driven by mainly robust demand for both our ASE fracture database, all the options associated with it and our IQ analytics server. In the quarter we attracted a total of 234 new ASE customers as well as 48 new IQ customers. A couple of key wins in the quarter included Industrial Bank of Korea, United States Air Force, G Health Care, American Imaging Management and Asics Corporations.

One exciting new customer win I’d like to highlight for IQ in the quarter was Hana Bank which happens to be the largest retail bank in Korea where we were selected for a very large enterprise data warehouse project. We beat Teradata in this deal in part because of our ability to manage very large data volumes through a feature called Local Stores. We believe IQ is increasing viewed as the leading analytic server in the Korean financial vertical and beyond by the way. I think we’ve got good traction around the world. In Korea today IQ is used by eight out of the top 10 banks. All the top four credit card companies and the top three insurance companies for analytics, risk management and enterprise data warehousing. The Hana Bank win is yet another example of our increasingly dominant position in this market in Korea. Our intention is to further expand the IQ leadership across the Asia Pacific region.

We also start seeing some projects come in under the green IT initiative driving more opportunities for IQ mostly due to the fact that the data compression features are excellent and market leading and the ability to reduce the data center carbon footprint.

Moving on to the mobility side iAnywhere license revenue grew 6% year-over-year and 20% sequentially. Our iAnywhere platform continues to garner accolades for its market leadership from the likes of Gardner and IBC. Currently Sybase is the only vendor to be rated as the leader in free enterprise mobility categories, the multi SS gateway which is mobile middleware, enterprise mobile email and mobile device management and security. We have also been a long time leader in the mobile and embedded database and many of you know that. These three technologies, the ones that I just spoke about, the middleware, the email device management and the security are brought together in our new Mobile Office Suite which was launched in Q2.

It is an integrator server based suite aimed at mobilizing business practices. We’re seeing a lot of strong interest in this. A few examples of how this lightweight mobile application is used includes the automated functions like providing purchase orders and expense reports, providing service tickets for the fuel force and executive dashports applications. A few key wins in the quarter including US Air Force, Telefonica Solutions, the County Yellow Pages as well as the County Post. During the quarter we added a total of 707 new mobility customers.

The accelerating message volume and expanded use of messaging by the enterprise mainly is the reason why it drove strong demand for our messaging services. In mobile banking tier one banks are increasingly using messaging for mobile banking services and tier two banks are deploying the full platform that is SMS, WAP and [thick] client. Since the launch of our end banking sales efforts and initiatives at the start of this year 17 institutions have selected our mobile banking solution or our messaging services to reach their customer directly. Banks and other enterprise users are driving very robust demand for our application messaging services, we call it AM and the AM revenue has grown 57% year-over-year in the second quarter.

Based on the Q4 07 worldwide messaging volume Sybase now ranks as the largest non-telco processor of messaging volume and the fifth largest among all network operators, just behind China Mobile, Philippine Smart, Verizon and AT&T.

Now I’d like to spend a minute on key initiatives that we expect to drive short and long term revenue growth for Sybase. First and foremost during Q2 we launched a RAP the trading editions at the New York Stock Exchange. RAP stands for risk analytics platform, it’s built on IQ, the IQ technology for again risk, trading and in compliance analytics. We were fortunate to have former Federal Reserve Chairman Alan Greenspan present to support our launch. Additionally we also feature a panel of very prominent of Wall Street CIOs who address the importance of leveraging IT to managing risk.

Thus far we have signed up to six RAP customers. They included Bank of America as well as ITG. ITG is a provider of globally electronic trading services and a European based market group a financial and data services provider to the global banking community. Our RAP pipeline is doing very nicely which will further enhance and advance our momentum with IQ. We are also offering Complex Event Processing or CEP as an option to this rep platform. Three leading CEP platform providers are now certified on IQ. They are Aleri, Coral8 and Streambase. We have also secured agreements to resell Aleri and Coral8 solutions on a worldwide basis.

Another exciting IQ initiative is Analytics Appliance which we announced in May in conjunction with IBM and MicroStrategy and is set go GA in Q3. The Analytics Appliance market is growing very nice, about 35% to 40% annually and estimated to be about a $3 billion market over the next four years by IEC. Currently we have 20 customers testing our Appliances in the early adoptive programs. We already have one customer set to go into production add on network a Web 2.0 company focused on contractual and behavioral advertising solutions. The IQ Appliances offer customers an attractive value proposition of roughly about a third of the cost of competitive offerings from Teradata as well as [NetTeaser] and can be implemented in as soon or as fast as one week.. We had five IBM business partners sign up for distribution including [AmLogic] and MainLine. For those of you know MainLine has been a long IBM number one reseller in North America.

We are also very pleased with the early adoption of our ASE cluster addition within our install base. Since our release in Q1 we have signed up over a dozen enterprise customers with many more evaluating the technology. Today currently roughly about 50% of our ASE install base has upgraded to the version 15. This leaves ample runway to up sell options such as encryption, partition and data clustering.

Within iAnywhere we are excited about our product pipelines as well as the potential to leverage new markets and channel opportunities with other enterprise mobility platform leaders. Let me give you a few examples. To that end we recently announced Lotus Notes support for the Apple iPhone 3G through our Mobile Office Suite Lotus Notes addresses 30% of the copper email market and our support for this platform fills a very important gap for the iPhone that Microsoft [Active Swing] technology does not address. This product is now available on the Apple iPhone at stores as well as obviously you are welcome to buy it directly from us.

On the new product front in addition to Mobile Office we are targeting a Q3 GA release of the SQL Anywhere 11. This major new release delivers more than 200 new features and enhancements including embedded futex indexing, parallel, query and dot net support. Sequel Anywhere 11 beta was announced in April and has generated a lot of strong interest in new market areas such as business application on the Rim Blackberry and offline web for the mySQL applications.

We are very excited about our progress and future opportunities growth on iPhone, Blackberry and other leading enterprise mobility platforms such as the Google Android, Microsoft Symbian and Palm. Stay tuned for more on that throughout the years and we got a lot of great plans lined up and we’re working with many of the partners.

I’d like to shift gears to the messaging side. Recently we entered into an exclusive three year agreement with cable and wireless to operate and sell mobile data roaming on the GRX surfaces worldwide. This is a very exciting and strategic transaction for Sybase and is at the core of our end wire enterprise strategy. Importantly it provides us with IMS, it stands for IT multimedia systems. This capability allows the delivery of Internet content and applications through a mobile network. As the mobile eco-system migration to IMS we have the exclusive rights to sell next generation mobile surfaces across the largest GRX network in the world today. These mobile surfaces include voice over IP, video sharing and other forms of graphically intense multimedia applications. With 73 direct operator customers such as O2 and Hutchinson and also existing Sybase 365 customers trying to mobile Sybase is now the world’s largest provider of GRX services with a global reach that extends to roughly 500 mobile operators.

This agreement also involves the acquisition of cable and wireless international MMF hub. Sybase now becomes the world’s largest international MMF interoperability provider with reach to over 300 mobile operators. Combined with our existing Sybase 365 global network enterprise could offer their customer all types of information and applications any time anywhere through a single platform offered by us.

In summary, we have a record Q2 and a very strong 2008 first half. As our strategy continues to gain traction and resonated in the market.

Now I’d like to turn the call over to Jeff. Jeff will provide a more detailed financial overview.

Jeffrey G. Ross

I’d like to spend a few minutes going through some of the numbers for the second quarter. Our total revenue as John mentioned increased by 15% to $282.7 million. All classifications increased meaningfully with license revenue growing 17% to $90.5 million, services revenue growing 8% to $146.6 million and messaging revenue increasing 41% to $45.6 million. All of our geographies executed well and grew year-over-year. Total revenue for North America which represents 40% of our total Q4 revenue grew 5% to $135.5 million. Europe which came in at $103.4 million had a year-over-year increase of 32% and represents 37% of our overall revenue. Lastly our Intercon Middle region which includes Asia Pacific and Latin America grew 19% to $43.7 million and represented 15% of our total revenue.

Non-GAAP operating income for the second quarter increased 33% to $63.7 million. This represented a 23% operating margin compared to a 20% operating margin in the second quarter of 2007. Non-GAAP net income for the quarter was $43 million with non-GAAP fully diluted EPS of $0.49 or 33% year-over-year increase. On a GAAP basis operating income increased 44% year-over-year to $51.1 million representing an operating margin of 18%. GAAP based net income increased $32.4 million or $0.37 per diluted share. We continue to generate strong cash flows. Operating cash flow for the quarters were $62.7 million a 16% year-over-year increase. We provide a more detailed description of the reconciliation between GAAP and non-GAAP numbers in the press release distributed after market this afternoon.

Additional financial details are as follows, at June 30, 2008 our cash balance was $606.4 million including restricted cash of $3.7 million. Our GAAP results include a $3 million non-cash write down taken to other income associated with auction rate securities. We now have $22.7 million recorded for auction rate securities. This is classified as a long term investment. Capital expenditures in the second quarter were $9.7 million, depreciation for the quarter was $7.3 million. Internally capitalized software for the quarter was $12.9 million with amortization of capitalized software at $10.1 million. DSO for the quarter was 75 days on a consolidated basis which is consistent with recent levels.

Deferred revenue was $230.7 million which was a 5% year-over-year increase. This reflects strong maintenance renewals as well as our growth in license revenue. Yields over $1 million represented 13% of Q2 license revenue compared with 20% in the second quarter of 2007. We ended the quarter with a headcount of 4,033 employees. As we accounted on our Q1 earnings call we successfully repurchased 300 million of our stock through a Dutch tender completed on April 15th. The remaining authorization under our stock repurchase program is $82.9 million and we will be opportunistic with the use of these funds.

Now I’d like to turn the call back over to John.

John S. Chen

Before we move into the guidance discussion I’d like to share a few thoughts with you all regarding our assumptions for the third quarter and full year. First our guidance assumes that there will be no improvement in the macro environment. Therefore we are modeling conservative growth rates, more balanced results between Q3 and Q4 and no year-end budget thrush. We believe it is prudent to remain conservative in this environment.

That said our business pipeline remains very healthy and we are confident in our team’s ability to execute in this environment. As a result we expect Q3 revenue to come in about current street consensus and EPS to come in at or above the consensus. For Q3 we anticipate total revenue in the range of $270 million to $275 million. We expect the non-GAAP fully diluted EPS in the range of $0.48 to $0.50 per share and the GAAP EPS in the range of $0.38 to $0.40. Due to our stronger than expected Q2 performance we are once again raising our full year 2008 guidance on revenue, earnings and cash flow. We now anticipate total revenue approximately $1.11 billion, the non-GAAP EPS in the range of $1.98 to $2.00 and a GAAP EPS in the range of $1.53 to $1.55.

Now achieving these targets will result in record revenue and EPS. We also anticipate a cash flow from operations of approximately $250 million which is way above what we said last quarter. In the guidance section of our press release you will find a table reconciling our prior full year EPS guidance given in April and our most recent guidance I just talked about.

Operator, we are now ready for Q&A.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven Koenig – KeyBanc Capital Markets.

Steven Koenig – KeyBanc Capital Markets

I want to start with a financial question, can you help us out, we have the EPS and revenue guidance and we have that handy table on the reconciliation and dilution from the convert, can you help us a little bit with either share count assumptions and/or your operating margin for the year, what we should be expecting?

Jeffrey G. Ross

We’re still saying 100 basis point improvement, it’ll probably be a little bit more than that, probably 120, 130, 140 to make the model work given our over performance in the first half of the year. We’re assuming off of results a modest increase in stock price so in Q3 share count will come down a tad bit because of the full quarter impact of the Dutch Tender but there will be some additional expect dilution because of increased stock price.

Steven Koenig – KeyBanc Capital Markets

If we think about a million shares to the year or maybe a little bit higher than that we’re probably in the right range then?

Jeffrey G. Ross

You are very much in the right range.

Steven Koenig – KeyBanc Capital Markets

Then if I can just follow up with one additional question on the cable and wireless acquisition, first of all are you assuming any meaningful revenue this year from the marketing agreement that you have and also in terms of the effective rate of your guidance in the back half, what sorts of assumptions are you making about the contribution from the acquisition? How much should we think of that going up organically I guess is my question.

John S. Chen

You should assume that my guidance is focused on organic growth. It’s very, very immaterial in terms of the revenue for this year from cable and wireless of the acquisition we made or the surface agreement we made.

Steven Koenig – KeyBanc Capital Markets

Lastly, on the implied Q4 revenues, I understand you’re being conservative with respect to close rates and the economy.

John S. Chen

Different from other companies, there are people who think that they haven’t seen anything different.

Steven Koenig – KeyBanc Capital Markets

Yes, we are mindful of the economic slowdown but we’re not seeing it yet. I hear that. In terms of your assumptions if actual results were to differ from what you forecast which I think looks like flattish year-on-year in Q4 maybe even down a tad, is it more likely to be up from your assumptions than down and what deviations for large deals could there be?

John S. Chen

I think you would assume that when I say it was prudent to be conservative you assume that there’ll be more upside than downside.

Operator

Your next question comes from Terry Tilman – Raymond James.

Terry Tilman – Raymond James

In terms of the database business I keep seeing these new logos, new customers each quarter for business that was allegedly dead and I’m just wondering how is one supposed to start thinking about this? Is it just that you’ve stabilized the business? Could one be as bold as saying maybe you’ve actually taken some share of others? How does one characterize what’s going on with ASE?

John S. Chen

You look at our database business between ASE and IQ, when we’re growing license 30 some percent year-over-year I have to safely assume that we’re taking shares from others, right? I’ve been watching our competitors who actually doesn’t provide a breakdown of the number but I don’t see them anywhere close to our range. In terms of percentage growth, yes we are taking shares, we know we are competitive. I think you should stop thinking about this to be a growth engine, the question is how big is the growth engine and we’re not going to grow 38% year-over-year but it is a growing part of the business, it’s more than just stabilizing.

Terry Tilman – Raymond James

If the database business is revitalized and we’ve seen it for a number of quarters are you seeing anything from your field sales force in terms of competitiveness on the pricing front? Maybe others are starting to view you as a nuisance.

John S. Chen

I really have not seen a lot of pricing deviations. We have a system set up that if the discount rate goes beyond certain amounts it actually has to come through the management structures and I’m the last person holding the line and if I see a lot of those that means that my pricing better be re-looked at or the market has a pricing change. No, the answer to your question is pricing seems to be okay. I feel that the customers are more focused on a few things. One is the features, basically technology and what does it do and then they focus on the maintenance pricing a lot. Those are the two major things when they make a purchase decision. We seem to have an easier time in winning views now a days.

Terry Tilman – Raymond James

In terms of the iAnywhere business when I think of your iAnywhere business I think of a larger less predictable to determine closing type OEM deals and then the enterprise business with selling directly to enterprises. Do you see anything between the two businesses, one being more elastic or more impacted by the economic situation or are they both similar in terms of the spending trends?

John S. Chen

I haven’t really seen anything that profound but one could expect the iAnywhere business since it’s a little bit lumpy because of the OEM deals those have a lengthier time to close in an environment like today. Selling directly to the end users, if you could articulate things like we talked about in analytic server and so forth you could articulate why this is a good thing for them and how they could get it up and running very quickly and gain benefits from it. It seems to have a much easier time to win deals. I think it’s really more of stronger needs on the enterprise side even given today’s market environment where it seems like they like to take a little bit longer time to decide on the mobility side.

Terry Tilman – Raymond James

Last question Jeff relates to the gross margin for S365 and messaging, I’m on the road so I hope I calculated this right, I’m at about 42.4% gross margin so it is a little bit down sequentially. Not a lot but it’s down a little bit. How do we think in the back half of the year and then just longer term? Any thought or change in terms of how we should think about the gross margin?

Jeffrey G. Ross

No real change to that, we still continue to see margin improvement. There were a few one-time charges and as you’ll note operating margins even despite that increase so we still believe we are on track for continuing improvement. There was also a little bit of mix change that contributed to some higher fees from a termination charge and took up that number a little bit. But, expect to see continued improvement there.

John S. Chen

I don’t really believe that you should look at the gross margin as much as the operating margin because that actually is the full measure of how we manage the business overall because there’s so many views in there and as Jeff pointed out, depending on the geography and the mix and what routes they go through, it will bounce around a little bit but the true measure that I looked out is you guys making meaningful progress in the operating margin, you’re making more money for Sybase.

Operator

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

Brad [Silva] – Lehman Brothers

Just a question on the messaging business, you mentioned strong growth in application messaging that’s great. Can you just provide maybe a little more color, is it really mostly mobile banking that’s driving that or are there other applications that you’re seeing or services that you’re seeing contribute to that?

John S. Chen

Enterprise, the biggest driver is the AM business which is the enterprise using messaging and mobile banking is a new initiative. As I stated there are 17 new institutions signed up. That is not only to tell you it’s not the most meaningful growth but to tell you that it is starting to tell you that it something that significantly we can take a look at and measure. So, for your analysis of prospective, you should be just focused on overall enterprise using messaging was the main number one driver, not just the banks.

Brad [Silva] – Lehman Brothers

Then I think in the past you had mentioned your expectation for modest contribution this year maybe towards the second half of the year from the share [declustering] option. Based on reception to date are you revising that at all in terms of just directionally your view on how that might impact the second half of the year?

John S. Chen

Conservatively I’m just still modeling modest but it seems like the few are doing a better job than I guess I modestly expect. So, it will be a growth factor and we’ll benefit from it.

Operator

Your next question comes from Brent Williams – Benchmark Company.

Brent Williams – Benchmark Company

As required by any Sybase conference call, I have to ask about IQ so let’s look at qualitatively with this blowout 37% license growth number in databases, let’s look at the relative size or maybe relative momentum between ASC, IQ and the growth of the cluster addition and/or other options and give me some qualitative sense as to where those stack up.

John S. Chen

Okay, I never broke out the two numbers from that but I’ll give you an in between here. If you look at the – IQ probably is right now probably 30% to 40% of the business, would you say maybe?

Jeffrey G. Ross

Probably a little bit below that.

John S. Chen

So let’s say one third of that, let’s just say that’s about right. And, it’s growing roughly about?

Jeffrey G. Ross

Very comfortably in the double digits.

John S. Chen

Yes, very comfortably in the double digits, about I would say, 50% plus. So, you could do all the math, I think I gave you enough.

Brent Williams – Benchmark Company

Well, I was an English major in school so you may need to give me more.

John S. Chen

That’s okay there are enough people on the call that they could probably blog it at this point.

Brent Williams – Benchmark Company

The next part of this is any competition changes in terms of the battlefield out there for IQ? Maybe particularly looking at Teradata, any messages that seem to have maybe picked up effectiveness in the last quarter? And also, particularly with the price increase that somebody or other, I forget who it was, announced in June this big juicy price increase particularly on their high end systems. Is there any change in your go to market around that?

John S. Chen

Right, that’s a good question. Two different questions. We have been competing with Teradata and we are winning our fair share partly because we are not a hardware, we’re intensive solutions. We literally are running about a tenth of the cost in some cases. Like, I saw one benchmark, now on average we think we’re about one third overall of what Teradata could provide on an apple-to-apple comparison. We are very effective in terms of competing especially in economy like this. People like to just get the job done and data warehousing and business intelligence is a big market, analytics is a big market, everybody wants it around the word. We seem to have equal success international and domestic and in fact, I’ve been asked to talk about IQ in a lot of places when I go see customers.

I think the competitive landscape is favoring us today partly because of the technology and the price and partly because of economic is a big driver or economy is a big driver on that. And, I talk about the carbon footprint, this wasn’t just tie a system around a tree and call ourselves green, this is really a situation where people actually have less power requirements, it’s much better for them. It all comes down to both cost and if people like to go one level higher with environment but the cost is the major driver there and we seem to be able to resonate that with the customer base or the prospect base. We are very pleased with where we are and other players that provide software, they are much smaller than us and therefore doesn’t have the global reach or huge account footprint reach.

Those are the general things. I’m very bullish on IQ. In addition to that, by adding things like RAP, it’s really more a solution approach rather just sell you a raw engine. That is very much the number one ticket in town and Wall Street and you can obviously check that being close to Wall Street and the customers are, they like that because they need to do something with it quickly and that is our foot in the door and given that the partners that we sign up on complex event and processing or the CEP, that is their next generation. All the IT consultants will tell you that so I think we’re lining ourselves up pretty good both from a platform, environment, competitiveness, neat solution basis as well as the next generation stuff. We’re putting a lot of effort in to it.

Brent Williams – Benchmark Company

Anything on large deals, any breakdowns that you’ve given in the past?

Jeffrey G. Ross

We did, in the script you’ll see that we gave 13% of license revenue compared to 20% last quarter. 20% is probably more of a normal range so that does speak well to the volume in our pipeline and the overall quality of our business.

John S. Chen

The business is very good. Our volumes are very, very high.

Operator

Your next question comes from Steve Koenig – KeyBanc Capital Markets.

Steve Koenig – KeyBanc Capital Markets

I wanted to ask you two separate but related questions about 365. The first question is the impact of this news that came out that the European Commission is recommending putting a cap on the price for sending text messages across European borders. How do you see that affect you? And, then another related question is how should we think about 365 revenue growth sequentially here going forward? And, as your prior guidance of 25% year-on-year growth looks like its no longer valid, you’re going to shoot past that so how do you think about that now?

John S. Chen

Steve, I’ll answer both questions. First of all, the EU situation, we actually think on a net-net basis is positive to us because it will drive the text messages per text message down in terms of price and more people will use it. This is one of those supply and demand elasticity things. Then, in addition to that, in our businesses we are very much focusing on home subscribers either sending messages to a foreign country being the most usage or the volume of the business not so much as roaming out to a different country and sending it back. Although we do carry those messages but on the comparison basis, size wise the first one which is the home messaging guy, like if you’re in China or EU, let’s pick a different one, you’re in UK you’re a [inaudible] subscriber, our number one business is that particular subscriber sending from home base in UK to people in France, in Spain and so on. So, that’s not a factor as much as by this EU ruling.

This EU ruling is focused more on the roaming side of the equation. So, for a short term or short and medium term, if this happened which our guys who are very familiar with these situations over in Europe, give a very little percentage of chances that it will happen given how EU, the process of EU setting up laws. But even notwithstanding that, let’s suppose it happens we don’t believe this is going to affect us really negatively and on the medium turn it probably affects us positively so that’s one.

Now, that said, over time messaging margins obviously is going to go down around the world as the volume continues to uptick. This is the reason why we need to continue to invest in the business, this is the whole reason why we went to cable and wireless and get the next generation network on the GRX because we believe the IMS is going to be the future and it has a lot of different features. The minimum of that is the voice-over-IP and the GPS based stuff. There are a lot of good apps that could run on IMS and that’s going to be the next generation and as long as we stay ahead of where the market is going and be able to provide those I think our margins should go up rather than down over time and that’s at least our business model.

That’s EU SMS discussion. We have upped our sell a little bit modestly. We now believe the growth rate year-over-year should be about 30% instead of 25% on 365, at least that’s where our model stands right now.

Steve Koenig – KeyBanc Capital Markets

Then since you mentioned it, on the IMS network do you see a chance you could run in to somebody like ORACLE who’s clearly putting a lot of effort in to that area? Who will your competitors be there as you look to make use of that marketing agreement.

John S. Chen

Well, ORACLE will be the last company I would expect. There are a lot of telco players like Syniverse and other people that one way or the other they will get in to the picture. [Inaudible] we both compete as well as having a period arrangement [Bellvacon] does have a GRS network themselves and then there is a company in China that has it.

Steve Koenig – KeyBanc Capital Markets

It’s mostly carriers though as opposed to enterprise software companies or something like that?

John S. Chen

Not enterprise software companies, it’s the interop carrier, not carrier like China Mobile or Netcom, its carriers, it’s like Syniverse, those people.

Operator

Your next question comes from Horatio Rowani – Jefferies & Company.

Horatio Rowani – Jefferies & Company

If I look at the European performance for the second quarter here it looks very strong even on a constant currency basis, it looks like it’s up – I have it around 16%, 15%. Going in to next quarter that was on an easier compare, next quarter is a little tougher. Maybe you can give us some color on what you’re seeing in Europe and how you think your pipeline looks for dealing with this tougher quarter coming up here.

John S. Chen

The pipeline around the world all looks good. We did factor in the fact that the normal Euro Q3 is always tougher. That said, now part of our European business based on the messaging, that should not be overly affected. Now, there is one other fact that other people have not pointed out, it’s in China in August that’s bad too because the Beijing Olympics, most people aren’t even going to work or are not allowed to, one or the other. So, we expect the China business in August or in Q3 to be somewhat affected although they will come back in Q4. Those are the two factors we factored in to our guidance already.

Horatio Rowani – Jefferies & Company

Maybe you can give some color on financial services. I don’t know if your verticals business into that segment is growing or what it’s looking like. Are you seeing larger deals fall off? And particularly, what are the sub segments like insurance, and commercial banks, maybe you can give some more color on what you’re seeing there?

John S. Chen

We have not seen a true impact from the financial verticals yet. I use the word yet because I don’t think we are so bullish to think that we will never see it. It will come. Again, I think with the strength of our products whether we’re in the mobile banking side of the world for the bank, whether in the analytic side of the world for the investment bankers to manage risk, those seem to be still have good resonation with the customer base and people are buying. So, we have not seen it yet. In the financial vertical, I still see most of the business coming from banks and some from investment bankers, less so on insurance companies.

Jeffrey G. Ross

Yes, less so. Typically, that’s been our pattern. The other comment I’d make on that is internationally the business is very strong. We really don’t see even from our expectations that to be materially impacted but we do read the headlines on the US banks and realize the budgets may be impacted at some point.

John S. Chen

That’s a good point. Jeff brought up a good point, the international business is very, very robust even pretty much across the financial institutions.

Horatio Rowani – Jefferies & Company

One last one, you mentioned the maintenance growth is running at 10%. I guess if you strip out currency movement, what would that look like organically on a [inaudible] basis?

Jeffrey G. Ross

Four to five.

Horatio Rowani – Jefferies & Company

Four to five?

Jeffrey G. Ross

Yes, if you look at our modeling going forward we’re probably somewhere around three to four.

Operator

We have no further questions at this time.

John S. Chen

As a reminder we’re holding our TechWave the week of August 4, I think it’s the week after or something at the Mandalay Bay Resort in Las Vegas. We expect to feature many new key products and partnerships supporting our strategy in the enterprise. We hope to see many of you there and if we do I’d like to spend some time with you all. Thank you for joining us this afternoon. I’m sure you are going to call us. Take care.

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!