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Versant Corporation (NASDAQ:VSNT)

F3Q08 Earnings Call

August 26, 2008 4:30 pm ET

Executives

Jochen Witte - President, Chief Executive Officer, and Director

Jerry Wong - Chief Financial Officer, Vice President - Finance

Analysts

Fletcher Davis - Private Investor

Robert Newhoff - K. Capital

Gerard Cohen - JM Cohen and Company

George Marilla - Private Investor

Alex Waterspill - Graca Partner

Pete Castle - Graca Partner

B. Herps - Herps Management

Operator

Welcome to the Versant Corporation’s third quarter 2008 earnings conference call. (Operator Instructions) I’d now like to turn the conference over to Jochen Witte, CEO.

Jochen Witte

Welcome to our Q3 2008 earnings call. With me here today is our CFO Jerry Wong. We will commence today’s proceedings with Jerry reading the Safe Harbor provision.

Jerry Wong

During this call, we will make forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the Safe Harbor created by those statutes.

These forward-looking statements include any statements regarding Versant’s future or anticipated business, financial condition, operating results, assets, strategies, plans, prospects, such as any statements regarding briefs, predictions, forecasts, expectations with respect to any of these matters and any guidance provided with respect to Versant’s future financial performance or financial condition.

Forward-looking statements will include our statements in this call regarding our future operating results, current expectations regarding U.S. dollar at Euro exchange rate, and the economic environment in the U.S. and Europe.

You are cautioned that any forward-looking statements are not guarantees of Versant’s future performance. Forward-looking statements are based on assumption and estimates that may prove to be inaccurate and risks and uncertainties that could cause Versant’s actual result or performance to be materially different from the results or performance forecast and any forward-looking statements. These risks and uncertainties include without limitation items identified as risk factors in our periodic reports filed with the Securities and Exchange Commission such as those contained in Versant’s most recent report on form 10K for the fiscal year ended October 31, 2007. Our reports on form 10Q and our reports on form 8K. Any forward-looking statements that may only as of this date, Versant’s no obligation to publicly update or revise any forward-looking statements.

Now I’ll turn it back to Jochen.

Jochen Witte

I’d like to begin our discussion at the quarter by reading to you the major contents of today’s earnings. For the quarter, we reported revenues of $6.3 million from its continuing operation compared to $5.2 million for the comparable period last year while presenting an increase of approximately 20%. This increase was driven primarily by licensed revenues which grew by approximately 35% from $2.9 million in the third quarter of 2007 to $3.9 million in the third quarter of 2008.

Telecommunication customers contributed approximately 33% of total revenues and approximately 48% of license revenues in the third quarter of 2008.

European revenue for the quarter was approximately 69% of total revenue, which was higher than recent quarters. Due to distribution of revenue, on the increase and the value of the Euro to the dollar, compared to the same period in FY07. approximately 58% of Versant’s revenue growth in the third quarter was due to currency changes.

Net income for the quarter was $2.7 million and diluted net income per share were $0.70 compared to net income of $1.9 million and diluted net income per share of $0.52 for the third quarter of FY07.

Versant also reported an increase in cash and cash equivalents of approximately $2.1 million during the quarter resulting in a cash and cash equivalent balance of approximately $27.4 million at July 31, 2008.

We are very satisfied with the results in our third fiscal quarter, which established another record quarterly net income for the company; however, due to the strengthening of the U.S. dollar and a difficult economic environment in U.S. and Europe, achieving all future goals will become more challenging.

This concludes the reading of our press release. Let me now give you a few details on the business and then Jerry will provide some additional data on the financial.

This quarter closed with a significant increase in license revenues of 35% over the same period last year. This increase was largely created from the Toko space, most of whom are based out of Europe and each contributing an excess of $0.10 of total revenues in the third fiscal quarter.

When comparing Versant’s current revenue data with historical revenue data, the value of the dollar compared to the Euro hit an important criteria. Versant has a strong international business, which is largely dominated in Euros and accounts for approximately 50% of total revenues in a typical quarter; however, Q3 was particularly a strong quarter for a European derived revenue.

Versant’s consolidated revenue have therefore benefited from the strength of the Euro to the U.S. dollar. Versant’s net income was $2.7 mil, a new quarterly record for the company and a solid increase of 37% from the same period last year.

Now let me turn it over to Jerry, who will provide us with some more details on the financial.

Jerry Wong

Versant’s statement of operation in third quarter, a strong gross profit margin of 92%, which is consistent with recent prior quarters. Our net income achieved 42% in the quarter.

Versant’s net cash inflows for the quarter were $2.1 million. Our cash equivalent balance increased from $25.2 million at the beginning of the quarter to $27.4 million at July 31, 2008.

Our cash position at July 31, 2008 was negatively impacted by the litigation settlement payment amount of $800,000 during the quarter, which had previously been accrued for in our second fiscal quarter’s financial statement.

Our codes for trade accounts receivable was a respectful 53 days at July 31, 2008. The distribution of revenues in our third quarter was as follows. European customers generated $4.3 million or approximately 69% of total revenues. U.S. customers generated $1.5 million or approximately 23% of total revenues and Asia Pacific customers generated $.5 million or approximately 8% of revenues.

As of July 31, 2008, Versant had a total of 85 employees in its continuing operation of which 15 were employed in the United States, 37 in Europe, and 33 in India.

The total non-cash base compensation expense in accordance with FAZ123R was $227,000, for three months ended July 31, 2008.

Versant recorded income tax expense of $295,000 for the three month ended July 31, 2008, 29% from $228,000 for the same period of last year, primarily triggered by a stronger net income for our European operation which can only be offset partially by a tax carried forward.

Thank you for your attention. We would now like to open this call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Fletcher Davis - Private Investor.

Fletcher Davis – Private Investor

Just want to see if you’re going to be giving any kind of forward guidance at all or talk about upcoming potential wins.

Jochen Witte

It’s been our traditional approach not to provide quarterly guidance. We do provide annual guidance at the beginning of the year obviously. So with our Q4 earnings call, we would provide guidance looking into 2009. We don’t feel we need to say anything about our existing guidance, which basically come out the beginning of the year and then was updated in the middle of the year.

Fletcher Davis – Private Investor

With the currency that you forecast in, looking at the guidance that you announced earlier, was the currency factored into that as well and was it as big an impact that you thought it may be?

Jochen Witte

We did say when we changed our guidance and upped our guidance. At the prior quarter, we did say that this was basically on the assumption that the currency exchange rate would stay and relatively stable.

Fletcher Davis – Private Investor

Most of your business obviously again coming from Europe, do you see that was it three clients the majority of the percent of revenues or profit? Do you see the diversification of that and do you expect Europe to still continue the largest bulkhead of the revenue?

Jochen Witte

Well I think this quarter was, when it comes to geographic distribution of revenue, this quarter was a bit of an anomaly and then we had very strong revenues out of Europe, but typically our revenues are more in the 50% out of Europe and 40-45% out of U.S. and the rest out of Asia. That’s our typical distribution and I think we’re going to continue to see that in the future. When it comes to the big field, it will also, I mean typically we do have one or two bigger transactions. They made up 48% of license revenue. That’s also a little bit of anomaly. Typically it wouldn’t get that high, but we do need to close one to two significant transactions in excess of $0.10 of our revenues, quarterly revenues, to really have a strong quarter.

Operator

Our next question comes from Robert Newhoff - K. Capital.

Robert Newhoff – K. Capital

I’ve only got one question this time and it’s really I think a continuation of the discussion we had the last few quarters, which is just how recession sensitive are you guys? Anybody who’s truly recession sensitive has already gotten killed and even stripping out the currency, you’re growing pretty nicely. So but you keep bringing up the macro environment is bad. What customers do you have or end use customers, what types of them do you think you have that are going to cut back?

Jochen Witte

First of all, our business model is that we work with ISVs. So the ISVs function as a sales channel for us. Very often we’re in kind of cutting edge critical applications and so I would say that even in difficult economic times, we have a chance of getting in some decent revenues from our ISV; however, and let me emphasize that up to now, up to this quarter, we have not seen negative impact from the weakening economy, but it just gives I say prudent to see that there might be negative implications coming. We sell a lot to the [inaudible] infrastructure provided there has been some warnings in the press. You know, companies like Erikson have not been releasing great numbers and you know, so they got you to a certain extent. This has not yet affected our business, but it may affect our business.

Robert Newhoff – K. Capital

Anything else you want to point out other than the Tokos?

Jochen Witte

No, not really at this point. I think the Tokos are a significant part of our revenues and there has been specifically we got in the Tokos some negative new out.

Operator

Our next question comes from Gerard Cohen - JM Cohen and Company.

Gerard Cohen - JM Cohen and Company

Have you seen any new customers come to you recently in terms of industries, in terms of wanting that development, coming to you in terms of development licenses? Customers you haven’t seen before, either new industries or anyone like that?

Jochen Witte

We’ve sold several development licenses approximately worth $100,000 dollars or so of development licenses this quarter. So new customers taking up development.

Gerard Cohen - JM Cohen and Company

Industry groups?

Jochen Witte

I think it was in our typical mix. There was no completely new type of industry that came up.

Gerard Cohen - JM Cohen and Company

In terms of license sales, it was typical mix in terms of 85-90% deployment licenses and 85% the rest in development, that type of mix?

Jochen Witte

Yeah, it was kind of I would say a little over 90% was deployment licenses and then the rest were development licenses. I mean what was unusual like I had already mentioned I think was the very strong European revenue as compared to U.S. and Asian revenue. That was maybe a little bit unusual in this quarter, but other than that I think it was a pretty typical mix.

Gerard Cohen - JM Cohen and Company

From an expense point of view, how much did you spend in terms of 101 expense, that type of thing?

Jerry Wong

Expense, the total is going to be a three digit number. Of course this is our first year, our first year that was subject. We’re about probably 50% along the way as far as Versox audit. We anticipate that we’ll probably be about 80 or 85% of the way toward completion at fiscal year end and the difference of 15 or 20% will be completed subsequent to our fiscal year end and those dollars, Gerard, will follow accordingly.

Gerard Cohen - JM Cohen and Company

Any thought to [community] cash, what you might want to do with it or just sit tight for now?

Jochen Witte

Well we sit tight for now. You never really know if economic situations get worse or continue to be difficult, there may be opportunities for us that arise from that. In the corporate development arena, but that remains to be seen.

Operator

Our next question comes from George Marilla - Private Investor.

George Marilla - Private Investor

Have you hired any new sales staff in the last quarter?

Jochen Witte

Yes. Actually we have hired one new sales engineer and one new marketing person.

George Marilla - Private Investor

Are they geared toward any certain verticals?

Jochen Witte

The sales engineer is geared toward online gaming.

George Marilla - Private Investor

Just to kind of step back and take more of a longer term view here, the entire database market, which is billions and billions of dollars, in object database is somewhere in the I guess $75 million dollar or $100 million dollar sort of range I guess what we know. How much of the overall database market do you think it would be better addressed or addressable by object database.

Jochen Witte

That is a very good but also really difficult question. I mean I can only answer this out of the gut feeling of having been around in this market for quite awhile, but it’s nevertheless a gut feeling. I mean I would say that approximately 5% of the applications out there would be maybe 10, somewhere in that neck of the woods, would be better off and by better off I mean they would save expenses. They would be able to get better through-put with basically lower hardware and lower maintenance in using our technology. So that I think the theoretical market you could get to. It is a theoretical number.

George Marilla - Private Investor

So right now today we’re approximately one half of 1% there I guess.

Jochen Witte

We still have a way to go.

George Marilla - Private Investor

A long way to go potentially and you plan on attacking that just the way you have been, through vertical markets and partnering and, etc.?

Jochen Witte

Yes.

Operator

Our next question comes from Alex Waterspill - Graca Partner.

Alex Waterspill - Graca Partner

My question I guess on a potential gaming vertical. How are you guys approaching that geographically or are the sales engineer just covering the entire space or do you have people, folks on Asia, folks on North America?

Jochen Witte

Well we basically don’t have a geographic set up for that. We have people who specialize in this market. They go to basically all the tradeshows. It doesn’t matter if the tradeshow is in Asia or in the U.S. or in Europe. I think basically the expertise in the market and the familiarity with the market is to us more important than the geography at that point. A lot of these people, I mean because they’re used to doing stuff over the Internet and lots by email and they don’t want to be unnecessarily bothered by sales people knocking on their doors. So I think that’s the way we approach it. We have a launched a special website and for that target audience and we’re delivering very specific marketing messages and marketing materials for that audience.

Alex Waterspill - Graca Partner

Have you sold any development kits in that space yet?

Jochen Witte

Not yet.

Alex Waterspill - Graca Partner

What is that website?

Jochen Witte

It’s a separate website. It’s called mmohospital.org.

Pete Castle

Hey guys, this is Dick Castle. I’m here with Alex. What’s the profile of the sales guy you hired. Is he a gaming guy or a software guy? What kind of space does he come from?

Jochen Witte

He is a software guy and we have to educate him, I mean he has to educate himself to a certain extent in the beginning stage. We have not hired a gamer. It was more important to us to have a software engineer and who has a certain liking to the sector and who will focus on that sector.

Pete Castle

Did you need him more extended coverage or just to support some of the guys that are there now?

Jochen Witte

Well it’s basically a lot of the sales cycle and when you show the database, the evaluation. I mean download the database and work with it and then all kinds of questions that come up. How you use the database, how you integrate it with other tools the customer has, how you can fine tune it, how you can get the best performance and scalability out of it, and it is the job of a sales engineer to guide the customer through that process and at that point, to guide the prospects through that process.

Pete Castle

Has the stocks grown or is NASDAQ listing?

Jochen Witte

Not really.

Operator

Our next question is a follow-up question from Fletcher Davis – Private Investor

Fletcher Davis - Private Investor

Can you tell me approximately what if any percent of your revenues comes from a recurring basis?

Jochen Witte

First of all, that’s relatively simple as a maintenance revenues. We have a very high renewal rate of about 90% or slightly above and so maintenance revenues are basically recurring revenues. I think in this quarter they were about $2.3 million. Then we get typically royalty reports. I mean they do ship their product and they report to us mostly on a quarterly basis, but there are certain fluctuations in that. Sometimes royalty reports don’t get in on time. Sometimes royalty reports, just they fall off a cliff. You know, one customer has a bad quarter and then for whatever reason they’re working on a new release and they stop shipping. I mean there can be quite a few hiccups in the royalty report and so it gives you some visibility, but to a certain extent you get visibility from those royalty reports, but it’s very difficult to put the number on it and there have been quarters where you have like say 10 to 20% of your revenues came in and then some quarters where you had very strong royalty report and even maybe some backlog didn’t come in in the prior quarter and then it got to 30%, maybe even slightly above that.

Fletcher Davis - Private Investor

In regards to your licensing fees and in particular the deployment fees. Is that something that’s recurring as well. Do the companies renew that annually or is there one-time fee?

Jochen Witte

Well the license as such is a one-time fee. So if you purchase the license you have it and if you want to operate it and you want support for it obviously then you could be on support maintenance contract, but the license as such is perpetual license.

Fletcher Davis - Private Investor

Have you noticed losing any business to any other competitors? Do you keep most of your existing clients you have licensing fees with?

Jochen Witte

Yes. We have not seen significant increase in competitive pressure.

Fletcher Davis - Private Investor

A percentage of somewhat of not a renewal, but is there a percentage of win versus losses that you track and record?

Jochen Witte

The gut number that we use and that varies is that when we’re in a situation where there’s a true evaluation and that true evaluation I mean they have a budget. They really want to do something and they have management approval for it and we’re in the right spot, then we would have at least a 50% chance of winning.

Fletcher Davis - Private Investor

When it comes to the royalty report, how many of those companies typically drop off per year? Are you losing any off the backend there or an approximate percentage that you’re trying to retain or keep?

Jochen Witte

We lose very, very few. I mean I couldn’t give you a number. I think our order size dates back to ’93 and so it’s 15 years and growing. It can be a very, very long relationship.

Fletcher Davis - Private Investor

You keep up on the latest trends and fashions out there?

Jochen Witte

We think we can.

Fletcher Davis - Private Investor

Gentlemen, your stock is undervalued, so I think you probably not shares outstanding, not enough analyst coverage, but definitely seems to be a very good value. So keep up the great work.

Operator

Our next question comes from Barsal Herps - Herps Management.

Barsal Herps - Herps Management

You have allocated a very good amount of capital to R&D. Can you talk a little bit about strategy going forward? For example, what are you focusing on in your product development and what are some of the markets that can become significant for you in the future?

Jochen Witte

A lot of the stuff that we do in R&D is really not yet toward specific markets. I mean most of the markets that we address are basically share the same kind of requirements, otherwise we wouldn’t be going off to them. I mean it’s basically very complex data and high scalability, environments, large number of uses. You have that here in the Toko space. You have that in the defense and simulation space. You have it in the logistic space. We don’t really need to go I think after completely new verticals. There’s enough business in our existing verticals and the R&D that we do is give toward sort of expanding on our strengths and working on our strengths and getting the database. It can always get faster and more scalable and you want to have better tool support. We started this business, products, and we’re going to add further components to that. We actually had some good revenue from that this quarter. So that’s the type of R&D work we do. Further develop our core database technology and additional tools surrounding.

Barsal Herps - Herps Management

Now speaking of the verticals that you do have, it seems there’s a sustainable trend of becoming more and more complex. How is that affecting the size of your addressable markets?

Jochen Witte

Well in theory, to grow. I mean the trend is clearly there’s more data. There’s more complex data and the data is also more connected and that should long-term be in our favor. I can’t put numbers on that. I do think it is a trend and it is a favorable trend.

Barsal Herps - Herps Management

Have you added the new I [inaudible] quarter?

Jochen Witte

We’ve sold new development licenses, but off the top of our head, I’m not quite sure. I mean there must have been ISV under that, but we typically only count it as a new ISV once we’ve signed the agreement and I’m not sure if that was the case.

Operator

Our next question comes from Alex Waterspill - Graca Partners.

Alex Waterspill - Graca Partners

I asked if you’d sold any development kits in the organic space. I just want to know if you’ve given any way into that space?

Jochen Witte

Well, we give some away. Yes. I mean when someone basically wants to do a new, then we have to give him an SDK, right? And then so that we have done.

Alex Waterspill - Graca Partners

Do you know how many you’ve given away?

Jochen Witte

I mean we typically have I would say maybe a handful of active [evolves] going on. I’m really updating myself on a day-to-day basis, but it’s typically a handful of prospects looking at it.

Operator

Thank you. We have no further questions at this time.

Jochen Witte

Thank you very much for attending this conference. Thank you for your continued interest and support in Versant and looking forward to meeting all of you again in about a month. Thank you.

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