American Virtual Cloud Technologies, Inc.
Q1 2008 Earnings Call Transcript

Published: 17 Apr 2008

[Operator:]

Good day everyone, and welcome to this Avocent Corporation conference call. Today’s call is being recorded. At this time I would like to turn the call over to Mr. Sam Saracino, Executive Vice President of Legal and Corporate Affairs for opening remarks and introductions. Mr. Saracino please go ahead.

[Sam Saracino:]

Thank you. Good morning everyone, welcome to Avocent Corporation’s quarterly conference call. I want to remind all participants that this call will contain forward looking statements. These include statements regarding business prospects, capital spending, and economic conditions in general. Statements about the future management and governance of the company, statements regarding Avocent’s revenue, sales, expenses, gross margins and operational earnings per share, including our expectations for the second quarter of 2008, statements regarding the integration of the operations products and technologies of the companies we have acquired, and the future revenue attributable to them, and statements about the development and introduction of new products and technologies, the size, growth and leadership of these potential markets for the products and technologies, and the timing of future revenue related to them. These forward looking statements are based on current expectations that involve a number of risks and uncertainties which could cause our actual results to differ materially. These risk factors are described in our periodic SEC filings, including our annual report on Form 10K. The information discussed today will also include certain non-GAAP financial measures. These operational measures are reconciled to the most directly related GAAP financial measures in our earning press release which was distributed yesterday. The press release is also available on our website, www. Avocent.com and was furnished to the SEC on a form 8K yesterday. AS we have previously stated, Avocent Corporation attends to comply fully with Regulation SD and we have adapted our investor relations practices and procedures to do so. Any and all guidance given to analysts and investors will be done only during this conference call, either in our prepared statements or during the question and answer session that follows. Accordingly, we encourage you to ask any questions you have concerning Avocent or our business or prospects during this call, since we will not be providing additional commentary or guidance during one-on-one conversations with analysts or investors. I would now like to introduce Ed Harper, the Chairman of Avocent Corporations Board of Directors. Ed?

[Ed Harper:]

Thanks, Dan. Good morning everyone. I am pleased to join you this morning as the interim CEO of Avocent. I am also joined this morning by some people you are more familiar with than me, those folks are Teddy Blankenship our CFO, and Everett Brooks our Vice President of Investor Relations. On the call today we will provide some financial and qualitative highlights along with other insights that you have come to expect from the management of Avocent, as well as our outlook for the second quarter of 2008. For the first quarter of 2008 we recorded increased revenue of $141.4 million, that is compared to $133.9 million in the first quarter of 2007. We experienced particular strength in International markets, in our Management Systems and LANDesk business, and in our OEM business. This was offset by ongoing softness in the U.S. particularly in the financial sector. Our LANDesk product exhibited particular strength during the first quarter of 2008. Revenue was up over 22% from the first quarter of 2007, and bookings were up over 33%, certainly boding well for future quarters. For the first quarter 2008 our earning per share were $.27 compared to $.25 for the fourth quarter of 2007. In the first quarter of 2008 earnings per share would have been $.31 excluding one-time retirement and restructuring charges. We’ve been able to maintain the strengths of our relationships with our customers and partners and create new relationships by leveraging our strong technical development capabilities. Just last week we announced the development and release of our new management software the simplifies IT administrations. We did so by introducing a new way to manage an enterprise of servers and pc’s in branch environments using the CISCO application extension platform AXP. We are pleased to have been one of the initial few partners selected for the technological development program to develop products for AXP. This is a great example of the value we derive from leveraging the technology of both our Management Systems and our LANDesk businesses, and we believe that more opportunities will follow. The combined effort needed from our Management Systems and LANDesk teams to deliver for a collaborative products further demonstrates the progress we have made in executing our integrated product roadmap strategy. We are very proud of this new development partnership and look forward to working with CISCO in the future. Along the same line, demonstrating the power of combining Management Systems and LANDesk products we recently closed a very significant deal for about half a million dollars with a large customer which included products from both Management Systems and LANDesk. We hope this to be an example of many such deals to follow. Relating to my comments on combined technology during the next two months we expect to announce new OEM relationships and to introduce a couple of significant new products as well, including one in conjunction with the upcoming N+I Show in Las Vegas. Avocent is a strong company with excellent market position, a broad customer base, and many long-standing relationships. We enjoy solid margins and strong profitability and cash flows. WE have grown dramatically over the past several years and have been able to maintain our focus on the needs of our current and future customers. We are working even to increase our customer focus through the work of Kay Kienast as Chief Marketing Officer, who is highly focused on customer input, and who will bring unity to the overall Avocent branding of customer environments. I want to take this time to update you on the progress of the search for the new CEO. Our search is well under way. Rest assured and the selection committee is working diligently to find not only the most qualified candidate but the best fit for Avocent as well. The committee is considering both internal and external candidates for the position and has interviewed several excellent candidates to date. We are committed to finding the best possible candidate for this position and are gratified by the level of interest of highly qualified individuals. Although I would not want to commit to a firm timetable, we fully expect to name a CEO in the coming months. We are pleased with this quarter’s results, especially in light of the challenging micro-economic environment in which we are currently operating, particular within the U.S. I would like to thank all Avocent employees at this time. In a period of transition and economic uncertainty each department within Avocent has remained focused on performing well, thus ultimately insuring that our customers receive the high level of service they have come to expect from Avocent. Additionally our companies have stayed on track with our prime product road map. As we mentioned on the last call I have served as a member of the board since Avocent’s creation in 2000, and have interacted with a variety of employees during that time. Having stepped into an operation role after being a board member for over seven years I am certainly impressed with the depth of talent here as well as the dedication and loyalty displayed by employees at every level. Thank you. Now Teddy will provide some additional commentary regarding the quarter’s financial results and the second quarter outlook. Teddy?

[Teddy Blankenship:]

Thanks, Ed, and good morning everyone. As in previous quarters, late yesterday we filed our commentary and our press release for the quarter on an 8K. The items included in the 8K provide a detailed account of our financial results discussed on this call. Although much information is contained within that release and related commentary, I would like to mention a few highlights. Our revenue for the quarter was $141.4 million. This was an increase in 5.6% over Q1 of 2007, which is pretty good in the uncertain economy and slow tech spending growth environment we are currently experiencing. Our operational EPS was higher than earlier anticipated at $.27 a share. This increase in EPS was a result of higher revenues offset partially by $2.4 million in one-time retirement and restructuring charges. These charges included $1.6 million related to the retirement of our prior CEO John Cooper, and $800,000 for the dissolution of our Desktop Solutions business and our R&D group. Without these charges our EPS would have been $.31 or 24% higher than Q! of 2007. Of $141.4 million in revenues, $107.7 million was provided by Management Systems, and $29.2 million was generated by LANDesk. For Management Systems this represents an increase of 2.5% from the first quarter of last year. For LANDesk this represents an increase in over 22% compared to the first quarter of 2007. LANDesk’s booking grew 33% including significant increases in new licenses, subscriptions, and maintenance across geographies and across product lines. Deferred revenue increased by more than $4 million during the first quarter. Gross profit for the quarter improved to 66.6% compared with 62.3% for the same period of last year due to the higher sales volume, improved product mix, and a lower excess and obsolete provision than that experienced in the same period on 2007. Operating expenses were higher due to the combination of the one-time retirement and restructuring charges mentioned earlier, and our investment and engineering development for new products, as well as an increase in targeted marketing activities These operating expenses were within our expectations for the quarter. Operational net income was $12.7 million compared to approximately the same amount in the same quarter last year. Excluding the restructuring and retirement charges, our operational net income would have been $14.4 million or 13% higher than the first quarter in 2007. Using existing cash plus withdrawals on our line of credit we repurchased four million shares during the quarter, reducing our actual shares outstanding to $44.8 million at the end of March. Together with the two million shares we repurchased in the fourth quarter we have bought back approximately 12% of our stock in the last six months. As was also included within our commentary, we provided some forward-looking guidance for the second quarter in 2008 with anticipated revenues in the range of approximately $150-154 million and an estimated EPS $.39.43. AT the mid-point these estimates represent a revenue growth of 7.5% and EPS growth of approximately 50% over the first quarter of this year. We expect relatively consistent operating expenses to that experienced in Q1of this year, excluding the non-recurring charges incurred in Q1 surrounding the retirement of our prior CEO and the realignment of resources. We are continuing to review the alignment of resources but we believe any additional costs to be incurred would be less significant to our second quarter results than those experienced in the first quarter. We are consolidating certain activities, such as marketing communications to gain efficiency and to better coordinate our marketing activities and our customer messaging. We are also undertaking cost-containment measures in light of the U.S. economic weakness and to offset cost increases from overseas suppliers due to the weakened U.S. dollar. We expect and effective tax rate of 22-24% and diluted weighted shares outstanding of $45-45.5 million in the second quarter excluding the impact of any future share repurchases. These estimates are based on the continuing soft economy within the U.S. and modest growth in other markets where we operate and could change if economic weakness accelerates, and tech spending declines within those markets. Now I would like to turn the discussion back over to Ed.

[Ed Harper:]

Thanks, Teddy. As our usual process, Stacie if we could respond to questions from the participants I would appreciate it.

[Operator:]

(Operator Instructions) We’ll go first to Mark Kelleher with Canaccord Adams.

[Mark Kelleher- Cannacord Adams:]

Hi Guys. Very nice quarter. A couple of numbers questions. What was the cash flow from operations in the quarter?

[Teddy Blankenship:]

It was about $5 million, Mark.

[Mark Kelleher- Cannacord Adams:]

Now that seems pretty low, historically. What were you spending cash on?

[Teddy Blankenship:]

Well there are a combination of factors in the first quarter. The first big impact is we had a settlement with the IRS over several prior year tax returns. That was about $6.5million that we paid in the first quarter, and that was fully accrued, so it had no impact on the income statement, but it did have a cash flow impact as we paid that out during the quarter. Then we had our typical payout of prior year annual bonuses for the general employee group that we pay every first quarter, about the beginning of March, and then from a comparative standpoint we had higher collections receivables in the first quarter of 2007, as you recall we had a lot of past-due receivables at LANDesk coming in to 2007 that we worked diligently to collect over the course of 2007. So the receivables were in good shape coming in to the first quarter of this year so we didn’t have so much of an extraordinary impact from collecting additional receivables this time.

[Mark Kelleher- Cannacord Adams:]

Ok, that’s very helpful. Well thank you, and on the balance sheet, the Notes Payable moved up. Is that a reflection of the buy-back?

[Teddy Blankenship:]

Yes that’s right. We spent about $64million buying back 4 million shares of stock this quarter and the line of credit went up by $45million, as part of that $64million.

[Mark Kelleher-Cannacord Adams:]

So can you remind us what that line of credit is and what your thoughts are on continuing the buy-back?

[Teddy Blankenship:]

Sure. Total lines for $250million, and it’s a five year unsecured revolving line of credit so we traditionally pay down and borrow back on it as we see fit. This year buy-back is still open. We have 2.3 million shares remaining available to repurchase under that program as approved by the board currently. We will consider whether and win to buy back shares as the quarter progresses.

[Mark Kelleher-Cannacord Adams:]

Ok. And then, just comparing the December and the March quarters. I know you were taking some steps to convince your channel partners to perhaps not Stock-Opt in December and maybe do more in March. How much effect did that have on the difficulties you had in December and the ability to beat the March quarter?

[Teddy Blankenship:]

Well, our channel inventories were relatively flat in the first quarter. We were fairly successful we believe in levelizing that and achieved the goal we wanted to, but the first quarter was not overly impacted by channel inventories as it had been in a couple of prior years. It had some impact on the decline in revenues year over year for the fourth quarter but it really had no impact on our expectations for the fourth quarter since we had built that in the guidance that we had given for the fourth quarter. The impact on the fourth quarter was really more from the weakness we were seeing in the North American markets, particularly in our enterprise customer base, and we did see some of that weakness continuing into the first quarter and still continuing and that is factored into the guidance we gave, particularly in financial institutions in North America, but it is really enterprise-wide.

[Ed Harper:]

We think that the level of the inventory we have at this moment seems about right for the economic conditions we are seeing in the industry. So we don’t anticipate further need to adjust them unless the conditions change.

[Operator:]

Thank you, we will go ahead with Scott Zeller with Needham and Company.

[Scott Zeller- Needham and Company:]

Thank you. Wanted to get some color on DSView3 for virtualization and the quarterly performance of that product, and also if you could tell us amongst your competitors in the core management systems business who you believe is the best competitor right now?

[Ed Harper:]

DSView3 and the virtualization marketplace, the partnership with VMWare to be a good one. Our DSView addresses both physical and virtual servers. On the application virtualization part we already had a relationship with [Phinsdall] before they were purchase by VMWare. So we continue to have the ability to address the virtualization market with applications. An interesting new development, our LANDesk server manager, version 8.8 integrates with DSView and provides more management of BM Weir and Virtual Server. So we are pleased with the developments we see there and see even more opportunity open up as we go forward.

[Teddy Blankenship:]

And Scott I wouldn’t want to steal any thunder from our product guy but we do have a product announcement coming up in a couple of weeks at the N + I show surrounding DSView that will address some additional features that we are adding.

[Scott Zeller- Needham and Company:]

Teddy, any metrics around the performance of the product for the quarter?

[Teddy Blankenship:]

On the virtualization manager? Yes, we continue to add seats there as expected, I don’t recall the exact number. We don’t really focus on the number of seats per se of that particular module because it’s really helping us to sell the overall solution, the overall digital solution, including all of DSView and its appliances. It’s a key enabler that allows people to see how they can manage virtual instances going forward like they’ve managed physical instances and really frees them up from any worries they may have had about changes in their environment.

[Scott Zeller- Needham and Company:]

Ok, then if you could on the last question, Amongst your competitors in the management systems business who you believe is the best competitor right now?

[Teddy Blankenship:]

Well, again there is a variety of competitors that we see in various parts of our business. [Rareton], a private company has traditionally been our strongest competitor in more of the enterprise space. And we haven’t seen any real changes with them lately, they continue to be a nice competitor. In the older technologies, analog technologies that tend to be sold more into small office, single location businesses where they don’t need the remote access that digital provides, there is a variety of competitors including some low-cost Asian companies that have been around. There is probably not any one that stands out particularly. It is a competitive environment and we continue to see that. We continue to have to focus on cost reduction and managing that product line and supply chain wisely.

[Scott Zeller- Needham and Company:]

Thank you.

[Operator:]

We go next to Aaron Schwartz with JP Morgan

[Aaron Schwartz- JP Morgan:]

Good morning. Congratulations on the work in the quarter. I just had a question regarding some comments you made at your analyst day. You talked about your sales outlook being a combination of cross-sell opportunities, new product introductions and stable IT spending and I know you commented on the IT spending in the filings, but I wonder if you could update progress on the cross-sell initiatives and then you did touch out some new product releases, but just the timing there to see that kind of come in to the ,model, Just to get an update on those?

[Ed Harper:]

Thanks for the question. We continue to invest in our sales forces. We are investing not only with more people but in terms of training that they receive, and the way we are looking at the accounts So, yes m to a very large company having to do with products from both companies. So we’ve made progress and we believe that there is a lot more progress to be made as we continue to invest in those sales forces and the training opportunities.

[Aaron Schwartz- JP Morgan:]

Ok, and just to follow up on that specifically in the LANDesk division I know you have been investing in the sales side there. Would you say the strength in bookings last quarter was more a function of the investments there or have you started to see some synergies from the cress-sell activities?

[Ed Harper:]

Actually both, Aaron. We certainly have put incentives in place to make sure that people do recognize the opportunity that is presented from having products from both companies. We are working on additionally managing the accounts that are held by the people and those opportunities have resulted in some very nice things and we expect a lot more in the future from that effort.

[Aaron Schwarz- JP Morgan:]

Ok, Switching gears to the OEM side of the business. You did have some commentary in the filings last night, but I am wondering if the weakness there was purely a function of server volumes or if something had changed with pricing or just something else that wasn’t apparent in the filings. I am wondering if you could provide some commentary on that.

[Teddy Blankenship:]

Sure Aaron, We do believe that the weakness in North America with our OEM was primarily server-driven,. They did have growth overseas so that really lines up with expectations. We have heard from them and from industry analysts as to sever-growth trends for the first half of this year. We did mention that we have been working to expand our OEM presence. We have a couple of nice OEM wins we expect to be able to announce in the relatively near future which are new applications which will broaden our presence with OEMs.

[Aaron Schwartz- JP Morgan:]

OK, and the last question I have. If I just look at the total expenses around the LANDesk division it looks like it was about $28.5 million. Can you give us some guidance as to how that cost will grow throughout the year and obviously just trying to back into where margins are essentially going to go for that unit.

[Teddy Blankenship:]

Sure. As we have mentioned before, our goal is to get LANDesk at an operating margin of 12% for this year, and we are well on track there. The idea that we are working with mainly is to keep increasing revenues but to hold expense increases to a much more modest level. We are continuing to invest in new products on the R&D front but we expect the R&D dollars to stay relatively flat as we are rebalancing sources between products lines and moving some development activities to China where it is a little bit more of a low-cost environment. WE are also able to get more leverage from our re-seller network. LANDesk has some very specific programs this year to improve leverage in the model, and to get more of the cross-selling benefits with the Management Systems sales group that Ed mentioned. That will add benefits as well.

[Aaron Schwartz- JP Morgan:]

Ok, so is it fair to say that you are sort of through the heavy lifting for the sales hiring for LANDesk?”

[Teddy Blankenship:]

At the moment, yes.

[Aaron Schwartz- JP Morgan:]

Ok, understood. Thanks for taking my questions.

[Operator:]

And we go next to Manny Recarey with Kaufman Brothers.

[Manny Recarey- Kaufman Brothers:]

Thanks. My question was on LANDesk, but looking at the revenue increase sequentially I would have expected a greater increase in the first quarter in Operating Profit. Can you explain a little bit what was going on in the first quarter with LANDesk?

[Teddy Blankenship:]

With LANDesk?

[Manny Recarey- Kaufman Brothers:]

The profit in that division was below the fourth quarter if I have my numbers correct.

[Teddy Blankenship:]

Yes, that’s right, but it was only lower revenue. The revenue was higher in the first quarter. WE did have additional investments in the first quarter and in some of the sales hiring that we had talked about that is complete now, but we still had some sales hiring going on during the quarter and those people will be much more productive in the first quarter. We had some marketing activities in the first quarter as well, and some of the cost-saving activities that we talked about will show more benefit in the second quarter and going forward than they did in the first quarter.

[Manny Recarey- Kaufman Brothers:]

Ok, Thanks.

[Operator:]

And we will go next to Harsh Kumar with Morgan Keegan,

[Harsh Kumar- Morgan Keegan:]

Hey guys. First of all congratulations, very good numbers. Thanks for giving us some more time on Q&A this time around. Had a couple of question. Branded Business was up pretty nicely. Can you give us an idea of what actually worked for you? Everybody I think in general was surprised by strength in March and to some extent June. What’s working for you?

[Ed Harper:]

I’ll take that one Harsh, if you will. I think the thing that worked the best for us is an increased focus earlier in the quarter on Branded Sales. We started looking at that and paying very close attention to the trends during the quarter earlier than we typically do, so that’s one of the key contributors to the success in that business.

[Harsh Kumar- Morgan Keegan:]

Thanks, Ed. And I know there was a plan to move some of the revenues, or move is maybe not the right word, but defer some revenues from December to March. Did that work for you? Or did that play into it at all?

[Ed Harper:]

The levels of inventory in the channel as I talked about earlier are what we consider to be right for the economic conditions that exist today. So we didn’t make any attempt during the first quarter to do any more of that, but on the other hand we did not put any more inventory into the channel. We are working with the distribution folks to determine the right amount, and they are very interested in working with us to keep those levels correct.

[Harsh Kumar- Morgan Keegan:]

Got it, thank you. That’s also helpful. Kind of a two-part question. LANDesk’s operating margin is at 2%, I know that you are probably not too happy with that number, and probably will work to improve it, and I also know that you are looking for a new CEO. Can you give us a sense of what would be the top two or three priorities for this new person, or an internal guy coming in?

[Ed Harper:]

Sure. Certainly the operating profit and the margins at LANDesk would be one of those. However, we were very gratified with the growth in the LANDesk business. And the new guy coming in whether he be internal or external, the attributes that we are looking for are a guy with market vision. In other words we are trying to focus the company overall more on being market-driven rather than technology driven. And the opportunity to do so would be affected largely by a guy coming in with market vision, being a fellow with charismatic leadership and the ability to understand the details of marketing into this marketplace.

[Harsh Kumar- Morgan Keegan:]

That’s fair enough. And just another question; If I could ask you, Ed or Teddy, in the area of orders. There’s a lot of stuff going on obviously, U.S. weakness and this and that, but are your orders actually picking up as you are going into the quarter, or maybe any kind of color you want to give us would be helpful- month- by- month, week- by -week, however you want to do it.

[Teddy Blankenship:]

Sure, Harsh. The first quarter for us is always more back-end loaded than most since a lot of companies, particularly the bigger enterprises around the world are firming up their tech budgets for the year in the month of January. So they tend not to buy much in January or early February. So we tend to have a lot of activity in February and March. And we had that again this year. That was typical as in prior year. And we were very encouraged by the order flow the last couple of weeks of March and coming into April.

[Operator:]

Thank you. Next is Tom Curlin with RBC.

[Tom Curlin- RBC Capital Markets:]

Hey, Good morning. Can we start with Forex? I am trying to recall how you do Forex on the International business. Was there a Forex benefit in the quarter, or not?

[Teddy Blankenship:]

Yes, there was Tom. Our approach with foreign currencies- it varies by market and by segment. For instance, our OEM business world-wide is typically done in US Dollars. Our Branded Business is a mix, but it tends to be much more based in local currencies as the resellers and the end-users want to focus on. We did have a benefit in Europe from the stronger Europe. It was a portion of our revenue growth in Europe between $1 and 1.5 million of the revenue growth in Europe was attributed to the higher Euro.

[Tom Curlin- RBC Capital Markets:]

And that’s just on the Branded Business so the OEM based and Asia business that’s on a dollar basis?

[Teddy Blankenship:]

Yes.

[Tom Curlin- RBC Capital Markets:]

OK, and on the use of cash on share re-purchases, you are I believe down again to a negative net cash position, so how do we interpret that in terms of strategic flexibility. Are you guys essentially electing to forego strategic type considerations this year and buy-back stock and focus on integration or are you willing to take on more debt if necessary to do strategic actions?

[Teddy Blankenship:]

Well, fortunately Tom we benefit from usually strong cash flows. We’ve had good balance sheet management in the past with our inventory and receivables. We do expect the cash flow in the second quarter in the second quarter and throughout the year to return more to the $20-25million per quarter level. It was a bit higher than that actually last year as we were going though some inventory clean-up and catching up on past-due receivables. So we’ve had a history of good cash flow and we expect that to continue. And that gives us a reasonable amount of flexibility looking forward knowing we should have that cash coming in and also working with the bank that we are working with- they see the cash flow and the flexibility that gives us as well. Ed can certainly comment more in a second but I see we have a lot of opportunities within the company from the integration activities and the product activities that we have planned over the coming year to give us a lot of strategic opportunities using resources and tools and technologies that we already have.

[Ed Harper:]

Tom, in addition to that let me just comment. You had talked about strategically we may not be looking at other opportunities. And I’d like to make sure that you understand that we certainly are looking at other opportunities whether they be organic or inorganic, that is through acquisition.

[Tom Curlin- RBC Capital Markets:]

OK. Coming back to the integration thing, where do you think you are in the process of enabling or arming your traditional KVM channel to sell LANDesk capabilities or the full package or the full playbook that you have now. How would you characterize where you are now, where do you think you will be by year-end?

[Ed Harper:]

My characterization of that would be that we’re just scratching the surface. We’ve started that effort as you know, we’ve held LANDesk as a wholly owned subsidiary, and the opportunity for us to do more cross-selling is evidenced by the references that I made to early successes in that effort. We are taking it slow that we understand the customer’s needs and desires as we approach it. On the other hand we expect to be able to take full advantage of the cross-selling by the end of this year.

[Tom Curlin- RBC Capital Markets:]

Ok, then finally in terms of verticals or pieces of the market in the U.S. or maybe International, are you seeing some relative strength in the service provider market versus enterprise? Intel commented that enterprise for them was,, well I guess sort of weak by omission in terms of their comments but clearly focused on service provider strength and Intel servers. Do you see a similar trend in your business?

[Teddy Blankenship:]

Yes we do, Tom. Particularly in North America. The enterprise in Europe and Asia are still fairly strong, it’s not like in the U.S. But we are seeing that similar trend in the U.S.

[Operator:]

And we go next to Rod Kinney from Robert W Baird.

[Rod Kinney- RW Baird:]

Hi, good morning. Just one quick question on the legal fees mentioned in your press release. How long do you expect them to continue at an elevated level and any commentary you can provide about specifically was causing those to be a little higher than they were in the past?

[Teddy Blankenship:]

Sure, Rod. There were several IT related actions that were going on during the quarter. It’s always hard to predict the legal activity. WE have a few cases going on. We like to try and spread out the work that it doesn’t have any big impact but we are subject to judicial hearings and timing of depositions and things like that that tend to cause the legal fees to vary. I would expect the fees to go down in the second quarter from the level of the first quarter based on what we know today and the timing of depositions and hearings and investigations today That could change as they quarter goes on.

[Rod Kinney- RW Baird:]

So it’s more of a timing issue rather than an overall increased activity?

[Teddy Blankenship:]

That’s right, and I’d love to be able to comment on potential settlements but we can’t really until those become public.

[Rod Kinney- RW Baird:]

Ok, thanks.

[Operator:]

And as a reminder, ladies and gentlemen, if you would like to ask a question please press Star 1 at this time. We will go next to Eric Kainer with ThinkEquity.

[Eric Kainer- ThinkEquity Partners:]

Thank you very much and congratulations on a very strong first quarter. First question is, I believe the growth target for the year was somewhere in the 10-11% top line range and I was just wondering if that is still an expectation.

[Teddy Blankenship:]

Well Eric, that was the range we talked about back in early November at our analyst day in New York, but then when we had our calls in January we did talk about how we needed to revisit that as the year went on as the U.S. economy obviously weakened in the fourth quarter and has stayed weakened in the first quarter. So right now we are really just comfortable just giving guidance to the second quarter with the visibility that we have and we will need to see how things shake out with the economy as the year goes on. As we see different people predicting different levels of growth for the second half of the year that is a bit hard to foresee right now. Longer term, once the economy returns to a more stable state, we are very encouraged by our growth prospects with the product announcements, the product roadmap we discussed in November in New York. That is on track and we are getting good initial customer feedback from those.

[Eric Kainer- ThinkEquity Partners:]

Ok, so it sounds like that you think that is 10-11% is still at least possible? Right?

[Teddy Blankenship:]

Maybe in the second half, Eric. I don’t know that it would be for the year though, if we are basically at these levels in the first half we’d have to have pretty outstanding growth in the second half to get to that level for the year.

[Eric Kainer- ThinkEquity Partners:]

Ok, great. Just to talk about some specific products, you had mentioned again in the analyst event in November that you expected to have some power products that I think were scheduled for release somewhere in the middle of this year. Are we still on target with that, and could you provide us with any more granular expectations as far as when that might be announced?

[Ed Harper:]

Eric, I will take the question, and yes those still are on track. If you happen to be at N+I, again without stealing thunder from our product guys, if you happen to be at N+I you might drop by our booth.

[Eric Kainer- ThinkEquity Partners:]

Ok, that will just be an open secret between us then. One last question and this is specific to LANDesk because it looks like LANDesk really did a tremendous job in the quarter and it sounds like we will have continuing momentum behind that both on the product side as well as with the kind of new sales leadership there and maybe some new people who are really kind of ramping into full productivity. I wonder if you can talk to us about the sales force productivity because it sounds like as we come through the year we normally see greater productivity towards the back three quarters of the year in software business generally, and I wonder if you can kind of give us a little bit more color about how quickly LANDesk could grow just by itself? Is 22% sustainable?

[Ed Harper:]

Let me comment on the work with the sales force. I would characterize it as still a work in progress Eric. So we think that there is a lot more opportunity to be had there, both in terms of growth and productivity. So we continue to work on that and I’ll defer to Teddy for answers to the rest of it.

[Teddy Blankenship:]

Yes Eric we do expect to see the productivity to improve as the year goes on. And that is one of the key factors in how we see us achieving the 12% operating margin for the year vs. the 2% or so that we had in the first quarter. It’s seeing steady improvement and getting better leverage from the resellers and better productivity from our sales force and strength with some of the OEM relationships that LANDesk has as well.

[Eric Kainer- ThinkEquity Partners:]

Ok, Great. Thank you very much and good luck.

[Operator:]

And once again ladies and gentlemen please press Star 1 for a question. And we will go to a follow-up with Harsh Kumar with Morgan Keegan.

[Harsh Kumar- Morgan Keegan:]

Just wanted to get back to this cash flow question. Is it fair to say that the cash flow is somewhere, if you add up all the numbers that you gave, Teddy, is it fair to say that the cash flow is somewhere around the $11-12 million range?

[Teddy Blankenship:]

Yes, if you add back the one-time settlement, yes it would be in that range.

[Keegan Harsh Kumar- Morgan:]

So operations are somewhere around that. And next question- when you talk to your customers, Teddy or Ed, are you finding them to be just cautious and sort of holding back, or are you finding that they are seeing some issues in the U.S. and actually cutting back on orders and things of that nature? Is it more of a sentiment issue or are they backing it up with order reductions?

[Ed Harper:]

Certainly in the financial sector we are seeing holding back of orders. The rest of it I would characterize as being more cautious than anything else.

[Teddy Blankenship:]

One of our sales guys last week was telling me that they get a little bit frustrated with some of their financial institution clients here in the U.S. because their normal contacts in the IT groups are very anxious to take on some project. They need to expand capacity and improve their efficiency and talking to our guys about specific things that they need and want to buy and implement, but those orders are being held up by people above them in the CEO or CFO office due to macro factors or specific factors with those companies where they are trying to improve their profitability or metrics or what-not. But we are encouraged that they still need the product and want the product and want them yesterday so to speak but they are getting held up by the sentiment issues you mentioned.

[Harsh Kumar- Morgan Keegan:]

Got it. Thank you. You are very helpful. Great quarter, great guidance. Thanks.

[Operator:]

And ladies and gentlemen as a final reminder please press Star 1 if you have a question. And we will pause for just a brief moment.

[Ed Harper:]

If there are no more questions, Stacie…

[Operator:]

And we have no further questions, so I turn the conference back over to Mr. Harper for any additional or closing remarks.

[Ed Harper:]

Thanks Stacie. I appreciate the attendance of all you folks here today. In closing I would just like to highlight for you the main items we expressed in today’s call. Again we were very pleased with our Q1 revenue and especially pleased with LANDesk results. We are optimistic about the new strategic partnerships we are forming with CISCO and others that Teddy eluded to which I believe will play a key role in our long-term strategies and financial results. We are also very pleased to see some fruits from our integration efforts between our Management System and LANDesk products. In both cross-selling and product development areas. I want to thank you for all your participation in the call, all your questions, and look forward to showing you the results of our continued efforts on future calls. Thanks again.

[Operator:]

And ladies and gentlemen that will conclude today’s conference. We do thank you for your participation and you may disconnect at this time.