i2 Technologies, Inc Q2 2008 Earnings Call Transcript

i2 Technologies, Inc. (ITWO)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

Tom Ward - Investor Relations

Pallab Chatterjee - Chief Executive Officer

Michael Berry - Chief Financial Officer

Analysts

Greg McDowell - JMP Securities

Robert Becker - Argus Research Company

Brad Reback - Oppenheimer & Co.

Richard Mansouri - DCM Funds

Gregg Speicher - Moss Creek Capital

Nicholas A. Caruso Jr. - Wolverine Investments

Presentation

Operator

Welcome to the second quarter 2008 earnings release conference call. (Operator Instructions) At this time, I will turn the conference over to your host, Tom Ward.

Tom Ward

We released our second quarter 2008 results today. The release crossed the wire at 6:55 am Eastern Time. Joining me today are Pallab Chatterjee, i2's Chief Executive Officer, and Mike Berry, i2's Chief Financial Officer, who will deliver some prepared remarks, and we will then take questions afterwards. Those of you wishing to access the webcast of today's conference call may do so by going to www.i2.com/investor and clicking on the Webcast link in the center of the page.

I would like to remind that the comments we will make today are subject to the SEC's Safe Harbor provisions. During our commentary and during the question-answer session, we will make estimates and forward-looking statements that are the current beliefs and opinions of certain members of i2 management. These statements are indicated by such terms as "plans to", "preliminary", "goal", "will", "believe", "targeting", "expect", "anticipate", "intend", and "likely".

They may include statements regarding the objectives and timing of the Strategic Review Committee's actions and the company's ability to enhance stockholder value. They may also include statements regarding future revenues or expenses, earnings, operations, and cash flows as well as statements regarding demand for the company's solutions and services and the company's ability to achieve its targets, goals, and initiatives. We can give no assurances regarding the achievement of these forward-looking statements as they are only estimates and the actual outcomes may be significantly different.

Additionally, we expect that some of these forward-looking statements will change in the normal course of our business, and the company expressly disclaims any current intention to update forward-looking statements that we may make on today's call. Please refer to the forward-looking statements portion of the MD&A section and the Risk Factors section of our most recent 10-K filing and the section titled ‘i2 Cautionary Language’ in the press release attached to the form 8-K filed with the SEC today, which are available on our website.

During the call, we may make reference to certain non-GAAP financial measures. We have posted the appropriate reconciliations of our non-GAAP to GAAP financial measures on the Investor Relations page of our Web site.

I would now like to turn the call over to Pallab Chatterjee, i2's CEO.

Pallab Chatterjee

I will take just a few minutes to provide you with some highlights from the second quarter of 2008 and then give you an update of the progress of our Supply Chain Results company strategies and the initial customer feedback to our introduction of SCM 2.0.

First, we are pleased to have a reached a settlement in our patent infringement lawsuit against SAP. We believe that settlement is a strong validation of the value of our intellectual property and the settlement alone will further strengthen our balance sheet and growing net cash position.

Second, we are pleased with our bookings and cash flow performance in the second quarter. It was challenging to our match our second quarter 2007 bookings performance because it included the renewal of two our supply chain leaders' agreement. However, we recorded more than $64 million in total bookings in the second quarter of 2008 and our total bookings for the quarter exceeded our expectation.

We recorded a solid year-over-year growth in service bookings for the quarter which I believe is yet another proof of our sales execution model, Supply Chain Results company strategy and introduction of SCM 2.0 is resonating with what the market needs today.

We also sold additional multiyear manage service contract that are excluded from the reported total bookings because of certain contingencies. We continue to make strides on our strategic priorities during the second quarter and that is best seen through some of the bookings highlights in the quarter.

Some of the examples of where we are going to establish long-term customer partnerships based on supply chain innovation and delivering valuable outcomes include one of the world's top five automotive manufacturers and successful user of i2 solutions signed a combined license and service agreement to implement solutions for global visibility, capability management and sales and operations management.

The manufacturer aims to gain global visibility for vehicles anywhere in the world and manage supply and demand on a global scale. An already successful user of i2 solutions for global transformation project, a global computer manufacturer is expanding its relationship with i2 to manage and support its configured order web channel. Working closely with i2, this customer aims to increase demand and drive higher margins through its web channel.

Another long term customer, a leading computer manufacturer is expanding its relationship with i2 to transform itself to Supply Chain 2.0 including process playbooks, total supply chain management solutions and manage inventory visibility services to its retail customers.

During the second quarter, we continue to see strong interest in our retail and transportation solution offering. These wins during the quarter are further example of the progress we made on our initiatives of solutions by outcome and service excellence. These include a large consumer package good company, expanded its relationship with i2 and we will work with this customer to improve the logistics planning and execution through the use of hosted transportation solution freight matrix.

A worldwide leader in premium sleep mattresses and a new customer for i2 also selected freight matrix to help improve service levels and decrease transportation cost. Finally, one of America's leading retailers, who has already benefited from multiple i2 solutions selected i2 to improve their lead times associated with private label business. These examples of deals signed in the second quarter validates the benefit of our solution base approach where we utilize client business manages to establish strong, long-lasting customer relationships with a focus on outcomes.

These deals also demonstrate our sales execution continues to improve. A significant percentage of our Client Business Managers' (CBM) plan business managers close deals from their focus accounts during the second quarter and we recorded more than one million in combined contract volume from 15 individual customers. Now, I would like to give you a quick update on some of the customer feedback we have received from our introduction of SCM 2.0.

We had assigned the initial customer feedback on our approach to SCM 2.0 and the momentum has gained recently. If you recall from our earnings call in May, I introduced our approach to Supply Chain Management 2.0 a new paradigm with a supply chain operations that combines domain expertise, process innovation tools and services to make business plans happen. SCM 2.0 is all about getting result and it is all about getting result spot.

The three quarter elements of SCM 2.0 are process playbook, our business content library and our supply chain wisdom network. Running other apply approach to the SCM 2.0 is our managed services business offering. Our managed service offering is an area we have seen significant interest from both existing and new customers. Since no two business environment are likely designed flexibility into our results based solutions delivery approach, working with our customers we offer a delivery approach that allows them to tap into their own internal domain expertise or to leverage i2 resources, infrastructure and expertise or use a combination of the two.

The flexibility enables the customers to effectively maximize the internal resources by achieving better quality and results more quickly. For our managed services offering, customers can outsource individual supply chain processes, all the entire supply chain bundling the services and solutions they need to meet their business requirements. Our managed services success is evident in the second quarter bookings highlight mentioned previously where we continue to see great success about freight matrix both for transportation solution.

We have and we will continue to introduce other fast software service offerings particularly focused on serving the retail industry and we look forward to sharing our success from those with you in the next few quarter. As you can see from the highlight of this quarter, our supply chain results company strategy is working and it has presented additional revenues for us to pursue. We are excited about the opportunities ahead of us and we look forward to sharing our progress with you.

With that, I would like to turn it over to Mike who will review the second quarter financial results with you.

Michael Berry

Great. Thank you, Pallab. Good morning everyone. This morning I will go over our second quarter financial results, provide high level outlook for the third quarter of 2008 and also provide a brief update on the status of the strategic review committee. Additionally, you can find the presentation of our supplemental financial results for the second quarter and the second quarter year-to-date period on the presentation's page of the Investor Relations section of our website.

Okay, let us get started.

First, let us go over some of the financial highlights for the quarter. Total bookings in the second quarter were $64.1 million which includes $8.3 million of software solutions bookings. The $64.1 million represents the contracted value of nine contingent bookings signed during the second quarter across all of our revenue category. The $64.1 million total booking in the second quarter was higher than our expectations due to better than expected services and maintenance booking. When comparing our total bookings for the second quarter of 2007, it is important to remember that we recorded approximately $13.1 million in bookings from two supply chain leader renewals in the second quarter of 2007.

Included in the $8.3 million are software solutions booking for the second quarter slightly more than half or $4.6 million is related to subscription agreement. Total revenue for the second quarter was $64.7 million. Our GAAP net income applicable to common stock holders was $80.7 million or $3.05 per share on a diluted basis. Included in our financial results for the quarter is $79.9 million related to our patent infringement settlement with SAP. This is the net amount of the $83.3 million in gross proceeds less $2 million in external patent litigation expenses and $1.4 million in income taxes recorded during the second quarter.

I will discuss in more detail in a few minutes. Our second quarter 2008 non GAAP net income applicable to common stock holder which is GAAP net income applicable to common stock holders excluding $81.9 million from the SAP settlement and $2 million in stock option expense was $784,000 or $0.03 per share on a diluted basis. We generated cash from operating activities in the second quarter of $11.5 million. This was higher than our expectations due mainly to stronger than expected cash collection. Importantly, this is the fifth quarter in a row that we have reported positive cash flow from operations and on a trailing four-quarter basis; we have generated nearly $32 million in cash flow from operations.

Finally, we ended the second quarter of 2008 with total cash balance of a $149.7 million which include $6.7 million of restrictive cash. Okay, before I go into the income statement, I would like to address the effect of the SAP settlement on our financial results for the second quarter 2008. We recorded the SAP settlement proceed, net of the external expanses related to the litigation as a credit to operating expenses and listed it as a separate line item on the incomes statement. For the second quarter of 2008, operating costs and expenses was $60.7 million.

The gross amount of the settlement was $83.3 million and we spent approximately $2 million in our patent litigation activities during the quarter. So, the net credit of the settlement to operating expenses in the second quarter was $81.3 million. So, adding the $81.3 million net credit to the $60.7 million in operating cost and expenses yields a net expense benefit of $20.6 million for the second quarter of 2008.

Now, as far as income taxes related to the settlement, under the rules governing Alternative Minimum Tax or AMT, regular taxable income maybe offset a maximum of 90% fine net operating losses. Therefore, a portion of our taxable income resulting from the settlement is subject to AMT. So, even though we were able to utilize our net operating loss carry forward in other book effect attributes to reduce the tax effect of the settlement, we then incurred a tax expense of $1.4 million related to AMT as well as other state taxes.

We have included the settlement net of taxes as a non GAAP adjusting item for the quarter. We did not include the external patent litigation expenses related to the lawsuit as an adjusting item as we incurred similar expenses in prior periods and we do not non GAAP those out at that time. I would discuss this further during our discussion of the non GAAP result but please see the non GAAP schedule included with our press release from this morning or in the Investor Relations section of our website for a detailed reconciliation of the GAAP to non GAAP amount.

Finally with regard to the settlement, we did receive the cash payment on July 28. Okay, now let us go with into the income statement in more detail. As I mentioned previously, total revenue for the second quarter of 2008 was $64.7 million which was $255,000 or 0.04% lower than total revenue in the second quarter of 2007. Software solutions' revenue was $12.6 million in the second quarter of 2008 versus $11.4 million in the second quarter of 2007, an increase of $1.2 million or 10% year-over-year which again was better than our expectations for the quarter.

The year-over-year increase in the second quarter is due primarily to the recognition of software solutions projects from our backlog as a result of the strong bookings we have recorded over the last several quarters. In the second quarter of 2008, we recorded approximately $5.5 million in revenue from prior period bookings compared only $3.4 million in the second quarter of 2007. As I mentioned in my opening remarks, more than half of our software solutions bookings in the second quarter of 2008 were from subscription transactions where the related revenue from those deals is generally recognized over a multiyear period.

Now, let us go to services revenue. Services revenue was $30.5 million in the second quarter of 2008, down $1 million or 3% compared to the second quarter of 2007. The year-over-year drop in services revenue was primarily due to a mix shift in the type of services we outperformed during the second quarter of 2008. However, services revenue was slightly ahead of our expectations for the quarter and increase $1.7 million or 6% sequentially from Q1.

Maintenance revenue finish at $21.7 million for the second quarter of 2008, a decrease of $400,000 or less than 2% compared to the second quarter of 2007. Maintenance revenue was below our expectations for the quarter primarily due to a few renewals that push into the third quarter. While we are disciplined in maintenance revenue decline on year-over-year basis in the second quarter, we remain encouraged with the trends we are seeing in maintenance revenue.

On a year-to-date basis, maintenance revenue has increased 2%. In over the trailing four quarter period, maintenance revenue has decreased by less than 2%. Okay, let us move on to the total costs and expenses. As I mentioned earlier, we recorded the SAP settlement as a credit to operating expenses net of the related external litigation expenses incurred in the second quarter so our total cost and expenses for the period were a benefit of $20.6 million. As a result of the benefit in the period, let us go through total costs and expenses excluding the settlement.

Costs and expenses subtotal for the second quarter of 2008 were $60.7 million compared to total costs and expenses of $61.7 million in the prior year period, a decrease of $1 million or approximately 2%. Cost of services was $23.6 million in the second quarter of 2008, a decrease of $800,000 or 3% year-over-year compared to the second quarter of 2007. The year-over-year decrease was due primarily to the movement of certain services associates in the first quarter of 2008 whose job responsibility has changed and were move to the sales organization.

Our services gross margin for the second quarter of 2008 was 22.6% flat year-over-year and up 50 basis points compared to the first quarter of 2008. Cost of maintenance was $2.7 million in the second quarter of 2008. Our maintenance margin in the second quarter of 2008 was 87.7%, up 60 basis points in the first quarter of 2008 and consistence with the maintenance margin for the full year 2007. Our next expense category is sales and marketing expense. As a reminder, our sales and marketing expense is typically higher in the second quarter compared to other quarters in the year because of the expense associated with our annual i2 planner conference.

For the second quarter of 2008 sales and marketing expense includes approximately $1.5 million relate to Plan-It [ph] which was relatively consistent to what was incurred in 2007. Research and development expenses decline $1.2 million or 14% year-over-year in the second quarter. This decrease was primarily due to a reduction in contractor cost in the second quarter of 2008 compared to the second quarter of 2007 and lower overall payroll related expenses.

Our general and administrative expense for the second quarter increase $400,000 year over year or 4%. This is primarily due to $1.8 million in unplanned expense related to the resolution of certain litigation activities which dates back to 2005. One of the litigation items was an arbitrator's ruling for approximately $1 million which we accrued during the second quarter. However, we respectfully disagree with the ruling and have appealed. The $1.8 million was partially offset by lower payroll and employee related expenses and lower stock compensation expense in the second quarter of 2008 compared to the second quarter of 2007.

We have $1.1 million of non operating expense in the second quarter of 2008 which reflects the net amount of interest income, interest expense, bank fees, foreign exchange gains or losses and other miscellaneous income and expenses. We experienced lower interest income in the second quarter of 2008 due primarily to lower rates on our invested balances. Our income tax provision was $2.7 million from the second quarter of 2008 and was comprised primarily of two main areas. First, we estimated domestic AMT and other state taxes related to the SAP settlement of $1.4 million and second, our ongoing taxes related to our foreign operations and withholding taxes for payments made to the US.

After subtracting out the preferred stock dividend and accretion of discount, net income applicable to common stockholders finish at $80.7 million and diluted earnings per share applicable to common stockholders for the quarter was $3.05. For those of you joining us today who use non GAAP measures to evaluate our performance for the second quarter of 2008 non GAAP diluted EPS was $0.03 per share compared to non GAAP diluted EPS of $0.17 per share in the second quarter of 2007.

As I mentioned previously, in addition to the stock option expense, we included the impact of the SAP settlement, net of applicable income taxes only as a non GAAP adjusting item for the quarter. I would like to remind you that we have a full reconciliation of our GAAP to non GAAP amounts on our website under the investor relation section. The reconciliations posted are consistent with items and definitions we have discussed today and all historical amounts have been previously disclosed in company's filing.

Okay, let us move on to the balance sheet. I will provide comparisons of the second quarter 2008 balance sheet versus the balance sheet as of the end of the first quarter of 2008. Total assets increased $91.9 million from the end of the first quarter 2008 primarily due to an increase in other current assets of $81.1 million and an increase in cash and equivalent including restricted cash of $10.9 million. The increase in other current assets was due mainly to the specific receivable associated with the SAP settlement and the increase in cash and equivalent was due mainly to the strong cash generated from operations during the quarter.

Current liabilities increase $8.1 million primarily due to increases in accrued compensation of $4.9 million and an increase in our net preferred revenue of $3.4 million. At the end of the second quarter of 2008, our total cash and equivalents balance including restricted cash of $6.7 million was a $149.7 million. We ended the quarter with approximately $63 million more cash than the face value of our total debt of $86.3 million. Finally, as I mentioned earlier, we receive the full $83.3 million from the SAP settlement on July 28, the list will be reflected in our third quarter ending cash balances.

Moving on to the cash flow statement, as I mentioned earlier we generated cash from operating activities of $11.5 million in the second quarter of 2008. The $11.5 million in the second quarter 2008 was better than our expectations due to higher than expected cash collection. Cash provided by investing activities was $200,000 in the second quarter and was primarily provided by restrictions release on our restricted cash. We are very pleased that we have now recorded our fifth quarter in a row of positive cash flow from operation.

Over the last four quarters, we have generated approximately $32 million in cash flow from operation. We will continue to focus on this important metric going forward. Okay, now I want to discuss our current outlook. We currently expect third quarter 2008 financial results to be reasonably comparable to the third quarter of 2007. While we do not expect to have any material expense related to patent litigation in the third quarter, we currently expect cost related to the company's strategic review process to be between $2 million and $2.5 million in the third quarter.

We expect stock option expense to be approximately $2 million in the third quarter of 2008. Finally, we expect cash flow operations to be greater than $80 million in the third quarter of 2008 primarily due to the cash from the patent settlement offset slightly by the cash payments associated with the external patent litigation cost, estimated tax payments and SRC- related expenses. Before we get to the Q&A, I would like to give you a quick update on the status of the strategic revenue committee's process.

The SRC is continuing its discussions in review of transactions that it believes would deliver value to i2 stakeholders. The SRC expects to provide an update on the project within the next two weeks. There can be no assurance that the ongoing exploration of the strategic options will result in any new or different course of action. We will do that one more time if I could. The SRC is continuing its discussions in review of transactions that it believes would deliver value to i2 stakeholders.

The SRC expects to provide an update on the process within the next two weeks. There can be no assurance that the ongoing exploration of strategic options will result in any new or different course of action. Though we know that many of you have a lot of questions regarding the SRC process and potential outcomes, please understand that because we cannot address those questions during this call, we would ask that you please limit your questions to those focused on our solution strategy and financial result.

With that, this concludes my prepared remarks.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Greg McDowell - JMP Securities.

Greg McDowell - JMP Securities

I know given what you have just said about the SRC, you may not be able to answer this question but I am going to ask it anyway. Does the SAP settlement, does that settlement change the thinking of the SRC and might it expect or essentially expedite a strategic takeout?

Michael Berry

Greg, I do not know if that changes what the SRC is thinking. I think the SRC clearly has understood or certainly got into the equation the value of our Intellectual Property. It certainly takes one more uncertainty out of the picture either way but I would not say that it makes anyone alternative anymore likely because of that settlement.

Greg McDowell - JMP Securities

Okay great and then my second question has to do with the slight decline in maintenance. You mentioned that some of the renewals had pushed into the third quarter. I guess if you could provide some more color on why the renewals pushed. I mean are these renewals that where the maintenance contract is already expired and the customers are using the i2 software and are not up-to-date on maintenance? Can you just give us a sense of those renewals that pushed?

Michael Berry

Greg there is typically a couple of things that cause the volatility on maintenance revenue on a quarterly basis. One relates to a pair of deals that were push in the quarter. The other things will be if we have customers where we do not recognize the revenue until we actually get cash in the door. So, it was a mix of those. Those customers are active i2 customers out of maintenance since they got caught up in some of the renegotiations and discussions on a lot of things that those customers are doing.

Again, they are active customers. We certainly expect them to be renewed in Q3 but we cannot take the revenue if it does not get signed in the quarter.

Pallab Chatterjee

Just to make sure that you understand the overall from bulk of our customers that are very pleased with the customer business managers strategy has resulted in most of our big customers renewing without any difficult.

Michael Berry

And I think that is a great point Pallab brings up. If you take a look at the contracts that we made in Q2, the renewal rate measured by revenue was in the upper 90%. I think the field in the CBM is doing a great job on the maintenance renewal and that the other thing Greg is we set a multiple times. Please look at the maintenance revenue on a trailing four quarter because that is going to bump around a little bit on a quarterly basis.

Greg McDowell - JMP Securities

Great, thanks and then one quick final question, thinking about cash flow operations, I know for Q3 it would be greater than $80 million but how should we think about cash flow operations maybe in Q4 and our modeling into 2009? Thanks.

Michael Berry

So, if you take a look at the trailing twelve months number, it is about $32 million. It is hard to get your arms around Q3 a little bit just because some of those movements with the patent litigation. Last year, I believe were about positive three in Q3 and positive six in Q4. Last year in Q3, keep in mind Greg, we had a big cash flow fit from the restructuring which is why we wanted to make sure and call up the SRC related expenses in Q2.

So, what I would tell you is if you take a look at the last, the trailing twelve months, there have not been really any changes in the cash flow dynamics of the business. So, unless something changes, I do not know if I would expect to see something different in the next two quarters of course depending the SRC activity.

Operator

Your next question comes from Robert Becker - Argus Research.

Robert Becker - Argus Research

I would like to ask what do you plan to do with the cash proceeds from the SAP settlement. Will you be investing back into business, high renew sales people, developing new products, etc?

Michael Berry

Bob, I think there is two parts to that one. One is what are we going to do in terms of the operations and then to the extent that we have a significant amount of cash. Are we going to try to use that for any external activities? Bob, it is certainly laid out as the plans to grow the business. We had a significant cash balance anyway so we are not worried about the cash flow and impact for those.

So, we are going to continue down the path we are on, hiring new sales people, bringing services books on in an effort only to grow the business. As it relates to if you take Q2 ending cash balance of $149.7 million and the $83.3 million meaning you get the $230 million whether the Board wants to use that to grow the business through not organic means is we are still taking a look at that. The other thing certainly is we feel very good about the settlement with SAP and the other issue as we are taking a hard look at what we do for next steps around the patent litigation activity.

Operator

Your next question comes from Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer & Co.

So, when you look at this quarter, you talked about, I guess on the booking side subscription representing about half of software bookings and the impact that that has in the P&L going forward as you recognize that revenue overtime, how high of a percentage do you see that getting two years from now.

Pallab Chatterjee

Let me give you an overall trend, I do not know if we can actually speculate on the percentage. What we are seeing in the market is that there is a significant more trend for people that actually want to do subscription base intellectual property transactions of large upfront perpetual licenses. So, we will continue to see the subscription part of the software solutions that we will continue to increase overtime and more and more customers are demanding that.

Brad Reback - Oppenheimer & Co.

Okay and the $2.5 million that was spent on the strategic review in the quarter you expect to spend in 3Q on that, are those just lawyer and banker fees? Trying to figure out what you are getting through your money there.

Michael Berry

Yes, those are external advisor fees; lawyers, bankers, consultants. Yes, at least right now, we are thinking $2 million and $2.5 million. It is certainly not a cheap endeavor to go through the process that we have done.

Brad Reback - Oppenheimer & Co.

And final question, you talked about this arbitration ruling for a million dollars, could you give us a sense are there many other pending meaningful litigations out there against the company or that you are involved in or arbitrations? Any color would be great.

Michael Berry

Well, like every company, we certainly have litigation that is filed against us. I do want to note that these are not customer items. These were other items that the company works through. I would say that other than the ongoing items that we have disclose previously, there are not any one as big as this that are sitting there and certainly nothing in that active arbitration related to any other employees or other event.

Brad Reback - Oppenheimer & Co.

And should we read this as this was with a former a employee of the company, not shareholders?

Michael Berry

You should read this as it goes back to 2005 and then it had nothing to do with any shareholder.

Operator

Your next question comes from Richard Mansouri - DCM Funds.

Richard Mansouri - DCM Funds

Just a question, about the cash position which is obviously very healthy to you ended with close to $150 million and now with another $80 million, you are going to be at about $230 million. So, even net of debt, I mean approximately you guys are going to have a $150 or so million in cash. Have you guys given any thought to pursuing a stock buyback either in the open market or via Dutch tender as one way of returning some of that capital to shareholders?

Michael Berry

I think it is fair to say Richard that the Board has taken a look at it and is considering multiple options for that cash balance. It is important to note that because of the capital structure in our preferred stock, Series B preferred stock. We do have restrictions on buying back stock related to that so it is something that we cannot do right now if we wanted to without a waiver from the Series B.

Operator

Your next question comes from Gregg Speicher - Moss Creek.

Gregg Speicher - Moss Creek Capital

I would just like to ask one quick question here that the last sentence of the guidance in the press release just that look assume no changes to management or operations. I thought we pretty much always assume that. Is that in there for a reason.

Michael Berry

It has been in there for the last three earnings release…

Gregg Speicher - Moss Creek Capital

Okay, I am sorry. I did not check that.

Michael Berry

As always, we are just trying to make sure that we are careful in where we disclose.

Gregg Speicher - Moss Creek Capital

Okay, no problem then and when you are talking about subscription base revenue, can you clarify for how much of that is that the hosted type revenue versus are they doing subscription to behind the firewall-type licenses as well?

Pallab Chatterjee

That involves subscriptions to hosted revenue, hosted transportation as part of that. We have had subscriptions to the people who are actually buying the right to use any of intellectual property over a certain period of time. So, it is a combination of both.

Gregg Speicher - Moss Creek Capital

Okay and is it fair to say that transportation is growing as a percentage of the backlog here?

Pallab Chatterjee

Transportation is very hard field right now, yes.

Gregg Speicher - Moss Creek Capital

Okay, good to hear and then early in the call, you talked about a couple of new managed services contract. Did you say renewals or new?

Pallab Chatterjee

There are couples of new ones also.

Gregg Speicher - Moss Creek Capital

New ones and are those reflected in the bookings for the quarter? Or balance sheet kind of thing.

Michael Berry

Most of it is reflected in the bookings there. There is some amount of contact value that because of certain contingencies is not reflected. So, there is some in bookings and then there is some that setting out there as the contingencies are listed, we will bring those in the bookings.

Operator

Your next question comes from Nick Caruso - Wolverine Investments.

Nicholas A. Caruso Jr. - Wolverine Investments

One thing, with this approximately $150 million of net cash, is it possible that the company may in fact issue a special dividend to shareholders?

Michael Berry

Once again, the Board is looking at all options for that but once again keep in mind that because of the existing capital structure, we do have limitations on the ability to do any kind of special dividend stock buyback or any recap associated with the common shareholders.

Nicholas A. Caruso Jr. - Wolverine Investments

If would one think that the distribution of a special dividend would in fact weaken i2's takeout potential from a would-be-suiter? In other words, would management believe by keeping cash on the balance sheet, it would be a much better asset on the balance sheet than distribute it to shareholders?

Michael Berry

I would ask you to not tie together with our cash balance as it relates to any potential suiters. We are taking a look at that cash in terms of what we think is best for winning the business. I would rather not speculate as to what at someone else may think the value that is.

Operator

Your last question is a follow-up from Gregg Speicher - Moss Creek.

Gregg Speicher - Moss Creek

I meant to ask, do you think clearing up the SAP litigation helps you close more deals in the quarter or is that too much of a stretch.

Pallab Chatterjee

I do not think the SAP litigation has stopping us from closing deals in the quarter. I mean what it does it is actually endorses the value of our IP, but I do not think that has too much of an impact on closing these deals in the quarter.

Gregg Speicher - Moss Creek

Okay, how about the macro? How is that holding together for you?

Pallab Chatterjee

The macroeconomics? Yes, so one thing we are seeing is that given the strategy that I describe with respect to getting speed of results, the significant amount of urgency for people to do things in the transportation area, most of the retailers are transitioning from opening stores to efficiency of what they embark to that sorts of giving us a significant amount of list and people which are product life cycles are turning to us for this way of actually managing very quick changes in product life cycles is the manufacturing area. So, those are the three things that are driving us, continue to drive us overall in this area.

Now, given the overall recession, I am going to be continuously be a little bit cautious about the total amount we spend that is coming in the way because overall, that will have some impact but at this point of time, these three effects will be actually be in very good place.

Gregg Speicher - Moss Creek

And last question, so are you saying there is still plenty of new deals coming in to the early side of the pipeline?

Gregg Speicher - Moss Creek

Yes, sir.

Operator

Thank you and at this time, there are no additional questions in the queue.

Pallab Chatterjee

Okay, thank you very much for your time and we look forward to talking with you in the end of the third quarter. Thank you very much.

Michael Berry

Thank you everyone.

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