American Virtual Cloud Technologies, Inc.
Q3 2008 Earnings Call Transcript

Published: 22 Oct 2008

[Operator:]

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

[Sam Saracino:]

Thank you . Good afternoon, 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 future business prospects and economic conditions in general, statements about our integrated software, hardware, and firmware solutions, our sales activities and our strategy for leadership in IT operations management. Statements about the effect of our restructuring activities and about our future revenue, revenue growth, expenses, margins, tax rates, and operational earnings per share, including our expectations for the fourth 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 our product road map, our development and introduction of new products and technologies, and the size, growth and leadership of the markets for these products and technologies. 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 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 earlier today. That press release is also available on our website www.avocent.com and was furnished to the SEC on a form 8K. As we have previously stated, Avocent Corporation intends to comply fully with Regulation FD 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 conference call, since we will not be providing additional material, commentary, or guidance during one-on-one conversations with analysts or investors. I would now like to introduce Mike Borman, Avocent Corporation’s Chief Executive Officer. Mike?

[Mike Borman:]

Thank you, Sam. Good afternoon everyone and thank you for joining us. Also with me on the call today is Avocent’s CFO, Teddy Blankenship. Let me begin by describing some of the high level results of the third quarter. Teddy will then review the financials in more detail and then I will close with my comments on my first 100 days here at Avocent. Avocent’s revenues were up 13% year-over-year to a record $183 million in the third quarter. The revenue increase was driven by growth across both business units and international sales accounted for almost 49% of sales up from 41% in the third quarter of 07. LANDesk revenue of $41.6 million represented a 45% increase over Q307. Revenue and management systems was up 7% over Q307 to $138 million. The success of our cross-selling efforts across our management systems and LANDesk sales teams continued in the third quarter. We close an additional ten opportunities in the quarter adding to the ten in the second quarter. Looking forward, we continue to see opportunities across all geographies. Overall, the integrations of Ergo and Touch Paper are going very smoothly and are on schedule. Combined, Touch Paper and Ergo contributed $14.1 million and were slightly accretive in 3Q. Similarly, our restructuring efforts announced at the beginning of the third quarter are on track. Teddy will offer more details when he speaks. Operational earnings per share were $0.67 cents in the third quarter of 2008 compared to $0.56 cents in 3Q07. In addition, we have previously state our goal to moving operating margins at LANDesk to the 18% range by the end of 2008. We are pleased that we reached this goal ahead of schedule with the LANDesk operating margin at 18.2% in the third quarter. Let me turn to new products. We announced multiple new offerings in the power management area in the third quarter. These power management tools allow IT managers to get energy costs under better control by monitoring real time energy consumption that can then lead to rapid remedial actions from the desktop to the data center. Not only do these solutions help IT administrators monitor and reduce energy costs associated with the desktop, server room, or data center, but they also help organizations launch or sustain their green IT programs. As an example of the overlap of the green initiative and sound business asset use, a large manufacturer saved over $100,000 dollars in the first six months using our DSView software to remotely power off network switches during off peak hours at their development facility in Israel. Last week at the Gartner IT Expo, we introduced the LANDesk asset lifecycle manager, which extends the breadth of our suite of asset management tools. The new product helps enterprises better understand their online and offline technology resources enabling better informed business analysis, cost control, and risk mitigation. Of the more than 100 vendors demonstrating products at the Expo, Tech Republic, an online IT magazine, ranked the top ten most important products in our LANDesk asset lifecycle manager ranked number two. A third example of business partners. Business partners around the world continue to embrace our solutions and technology. One example is a recent expanded relationship with Lenovo, who had selected LANDesk as their partner to deliver their server management platform. These solution offerings are great examples of how Avocent continues to build our product roadmap and deliver integrated solutions, both hardware and software, that are based upon the needs of our customers. Let me now turn the call over to Teddy who will provide a detailed commentary on this quarter’s financial results and our fourth quarter 2008 outlook. Teddy?

[Teddy Blankenship:]

Thanks, Mike, and good afternoon everyone. Q3 was very busy for us at Avocent. First we began implementation of our restructuring plan that we announced at the beginning of this quarter. This will improve efficiencies throughout the organization as we announced in our June 30 press release. We also completed the purchase and began the integration of Touch Paper Group Limited and Ergo 2000 as announced in our press release on July 1. In addition, we achieved record revenue for the third quarter of approximately $183 million dollars. Our operational EPS was $0.67. The $0.67 includes the result in an item that was not anticipated at the time of our original guidance. We had a $0.07 EPS benefit related to the foreign exchange gain resulting from the repatriation of Euro denominated investments. These were repatriated back to Ireland to help us firm the acquisition of Touch Paper. Revenue of $183 million dollars was at the top end of our guidance provided in July. This represents a year-over-year increase of 13%. Branded sales increased within all major geographies to an overall increase of approximately 13% with the largest increase in Amea at approximately 40%, followed by Asia Pacific at approximately 20%, and the Americas at 3%. Branded sales in Amea benefited from additional revenue of Touch Paper, which generated 27 points of Amea increase. OEM sales increased by 12% overall during Q3 compared to 2007, primarily due to the additional revenue provided by Ergo. Our management systems business unit achieved Q3 revenue of approximately $138 million dollars compared to $129 million dollars last year for an increase of 7%. Approximately 5 points of this increase was due to Ergo product sales. Channel inventories remain consistent with levels of Q1 and Q2 of this year. LANDesk revenue increase 45% to $41.6 million dollars for the third quarter of this year from $28.6 million last year. Touch Paper product sales made up 26 points of this growth. The remaining 19 points of the growth was mainly due to an increase in new license sales of LANDesk management sweep and subscription revenue from the LANDesk security sweep products. It is interesting to note that our LANDesk software revenues grew to represent almost 23% of our Q3 revenues. Overall, our non-KBM revenues increased from 35% of our total revenue in Q307 to 47% of our total revenue for this quarter. Our gross profit was $118.6 million dollars for the third quarter of this year compared to $107.3 million dollars last year. The increase in gross profit was due to the increase in revenue, including that resulting from the Touch Paper and Ergo acquisitions. Gross margin decreased from 66% in the third quarter of 07 to 64.8% for the third quarter of 08, primarily due to product mix change related to Touch Paper and Ergo. Products from both of these acquisitions generate lower gross margins than those of our Legacy product lines. As Touch Paper and Ergo become fully integrated, we expect margins to improve. Management systems gross margin declined slightly to 59.4% compared to 61.9% in 07, due primarily to the inclusion of Ergo revenue. LANDesk gross margin decreased to 84.4% for the third quarter of 08 compared to 88.1% last year. This decrease is primarily due to the inclusion of Touch Paper revenue, which generated approximately 37% of its revenue from Professional Services versus license and prescription fills. R&D costs during the third quarter were $22.9 million dollars or 12.5% of sales compared to $20.8 million dollars or 12.8% of sales for the same period last year. The increase was primarily due to the impact of our continued investments and targeted R&D projects to expand our markets and enhance existing products. Our third quarter R&D expenditures were relatively flat with those of the second quarter of this year of $23 million dollars. Selling, general, and administrative expenses were $56.3 million dollars or 3.7% of sales for the third quarter of this year compared to $48.8 million dollars or 30% in the same period of 07. The increase was primarily attributable to inclusion of Touch Paper and Ego as well as higher commissions paid as a result of higher sales. Our operating profit increased by $1.7 million dollars to $39.4 million dollars for the third quarter of 08 compared to the $37.7 million dollars in the third quarter of 07. This resulted in an operating margin of 21.5% for the third quarter of 08 compared to 23.2% for the same period of last year. Our decreased operating percentage is a result of the inclusion of Touch Paper and Ergo. As I mentioned, we expect margins of Ergo and Touch Paper to improve as we progress on our integration activities. Our operating margin did improve from the 15.9% we experienced in Q2 of this year, due to our higher overall revenue and the restructuring activities. In addition to the above, on a net of tax basis, we incurred about $4.2 million dollars in net restructuring and acquisition integration expenses for this quarter. The restructuring activities are designed to make our operations more efficient and return us to our targeted operating margins of 24 to 26%. Other income and expense net through an income amount of approximately $440,000 for this quarter. This compares to net expense amount of approximately $570,000 in the same period of 07 and $1.2 million in the second quarter of 08. The increase from the second quarter of this year was primarily due to the impact of foreign exchange gains, resulting mainly from the previously mentioned repatriation of our Euro denominated investments to help fund the acquisition of Touch Paper. Our operational effective tax rate for the Q308 was 23.6% in line with that of the second quarter of this year. Operational net income for the Q308 was $30.4 million compared to $28.5 million for the same period of 07. At the end of the third quarter, we had approximately $115 million dollars in cash and investments. We generated approximately $27.3 million dollars in cash flow from operations for the quarter, compared to $34.2 million dollars in the second quarter of this year. Our net account receivable balance increased by about $12 million compared to that of the end of the third quarter of 07, primarily due to the two acquisitions and increased revenue for the quarter. Although the overall balance increased, due to our continued emphasis on cash collections, our day sales outstanding declined from 65 days for the third quarter last year to 63 days for the third quarter this year. Inventory returns increased to 8.6 during the third quarter of 08 compared to 6.8 in the same period of 07. This was primarily a result of the higher revenue for the quarter combined with our efforts to maintain lower overall net inventories, which declined by about $2 million dollars compared to the same time last year, even with the acquisition of Ergo inventory. We borrowed an additional $50 million dollars on our line of credit during Q3, increasing the borrow balance to $180 million dollars. The increase in borrowings was to partially finance the $80 million incurred for the Ergo and Touch Paper acquisitions. We increased the amount of our credit facility during Q3 by $90 million dollars to a total possible capacity of $340 million with maturity at just under three years from now in June 2011. Thus, we have $160 million of remaining capacity in addition to the $115 million of cash and investments at the end of Q3. We will continue our focus on generating positive operating cash flows and solid balance sheet management to maintain our liquidity and position Avocent for possible strategic opportunities that may arise. At this time, I would also like to give you an update on our progress this far related to the restructuring announced at the beginning of Q3. As we mentioned at that time, we anticipate this restructuring effort to provide a net pre-tax savings of approximately $26 to $28 million dollars in 2009. These exclude the cost savings related to the Ergo and Touch Paper integration activities. Approximately 60% of the 2009 savings are to come from net labor cost reductions, from both the personnel reductions that occurred thus far as well as those to occur during Q4 and Q1 of 09. Approximately one third of the anticipated 2009 savings is expected to come from supply chain realignment activities and product cost reductions. We are finalizing our agreements with the related vendors to achieve these targeted savings, some of which we expect to benefit from during the fourth quarter. The remainder of the savings come from cost reductions related to reducing facilities we occupy, mainly in Redmond, Washington and Ireland. We believe we are on track to attain our targeted 2009 savings. We will continue to evaluate and will further adjust our cost base as more information emerges about the state of the global economy in the next few months. As for the integration of Touch Paper and Ergo, the combined financial impact for the quarter on an operational basis was slightly above break even. This was in line with our expectations for this quarter. We expect to improve profitability from the products attained in these operations in the relative near term. Our integration strategy include savings from people and facility costs associated with Ergo as we finish the transition of those functions into our Avocent operations. Much of this should be completed in November. For Touch Paper, our integration strategy includes some cost savings from people in administrative costs, but much of the improvement is to come from the expansion of sales channels for this product. Touch Paper had primarily focused on the European market, generating 90% of their Q3 revenue from Europe, mostly from the UK and Germany. We believe that for the use of our global sales force within the LANDesk business unit, we can greatly increase their market reach and overall sales volumes. This should not only increase sales of licenses, but also improve the operating margins through better leverage of a combined cost base. For our Q4 expectations, in light on ongoing economic uncertainty, we have adopted a conservative stance towards our revenue forecast and anticipate Q4 revenues will be in the range of $175 to $185 million dollars. At the midpoint, this would represent an approximate 16% growth year-over-year. This includes $14 to $16 million dollars in revenue from the Touch Paper and Ergo acquisitions. We anticipate gross margins to be approximately 64 to 66% during the fourth quarter. We expect operating expenses to be relatively flat from Q3. We expect our diluted shares to be approximately $45 to $46 million in the fourth quarter, with resulting EPS between $0.55 and $0.63. These amounts exclude estimate for pre-tax stock base compensation of $6 to $7 million dollars. They also exclude pre-tax intangible amortization expense of about $13 to $14 million dollars and restructuring and integration cost of $3 to $4 million dollars. Now, I’d like to turn the discussion back over to Mike.

[Mike Borman:]

Thank you, Teddy. Tomorrow marks my 100th day here at Avocent. During this time, I’ve had the pleasure of meeting with many of Avocent’s customers, business partners, employees, and shareholders. Customers who were proud to show me how they used our products to reduce costs and manage better, but in meeting these customers, I also found IT managers and CIOs struggling with multiple pain points. Things like sheer complexity of IT, security and compliance issues, 24x7 uptime, improving effectiveness, while simultaneously lowering costs, power monitoring and management in the illusive IT business alignment. I found customers looking for an integrated solution to manage all elements, rather than a collection of individual point products with limited or no integration capabilities. At our Asian regional headquarters in Singapore, I recently met with several customers, each described how Avocent Solutions answered integration, return on investment, in their specific needs. For example, LANDesk server manager, Dashboard, was deployed by credit union Australia to provide something the company did not have before, a detailed view of its IT systems. They are now able to get an accurate understanding of what hardware and software and actions needed in their environment. Bank of China’s data center, as you can imagine has a very diverse IT infrastructure, which includes PCs, networking devices, servers, and storage networks. Avocent has provided them with a single unified management solution to manage their entire IT infrastructure operations. In Japan, it was security aspects of DS View 3 that led MT Dokomo to select our solution. DS View 3 has enhanced physical security by reducing the necessity to go on site to the data center. It also allowed them to control and access to the counsel with ID password authentication and provides them with detailed access logs. These are specific examples of how our research and development and engineering efforts are aimed at the delivering solutions specific to our customer’s needs. Through a combination of hardware and software and firmware products, Avocent is in a unique position to provide our customers with an integrated solution that spans the IT department from desktop to data center. Also in the first 100 days, I have met hundreds of Avocent employees in our locations worldwide. I found committed, talented, and incredibly enthusiastic employees and I found a management team that puts Avocent shareholders first. As you know, Avocent was formed with world class technology and has world class people, but we are not perfect. We must improve in areas of operational efficiencies and organizational synergies. For example, our sales people will be enabled and paid to sell a wider array of Avocent solutions compared to what they sell today. Even though difficult steps were taken during the quarter to improve our operational efficiencies that Teddy went through, I am proud of all Avocent employee contributions in driving the revenue growth and earnings in the third quarter and I look forward to working with my team to build on our success. Now let me address the current economic environment. Despite our strong results for Q3 in the face of an uncertain global economy, we recognize that in general there is limited visibility into IT and to enterprise IT spending going forward. It is worth noting that in previous economic downturns, we experienced an increase in demand for our products that help IT managers enhance efficiency, cut costs, and offer rapid payback. For example, an IDC report showed customers utilizing LANDesk management sweep, achieved and ROI of five months on average. We believe our products offer a compelling value proposition regardless of the state of IT spending. Although early in the quarter revenues are trending slightly ahead of Q407. From my recent discussions with customers, it appears that Q4 budgets and projects involving Avocent solutions remain on track. We know, however, that in this environment, we can take nothing for granted. Our Q4 guidance reflects this general uncertainty. As a result, we remain focused on those areas that we as a company can control. We intend on managing our expenses as well as our margins to deliver profitability to achieve our targets. So let me just close by saying I’m confident that Avocent has the strength that will allow us to continue to grow our business in an uncertain economic environment. We have a sound balance sheet with solid cash flow. We’re in a leadership position within the high growth IT operation management space, R&D priorities aligned with customer market needs and pain points and a motivated employee base. In short, we have all the necessary assets in place to achieve our goals. Now we would like to turn the call over to the operator for any questions you may have. Operator?

[Operator:]

(Operator Instructions) We’ll take our first question from Aaron Schwartz with JP Morgan.

[Aaron Schwartz:]

Had a follow-up question on the economic comments you just made. I was wondering if you could provide more detail. Are you assuming a more challenging environment in Europe than you just saw in Q3 or much lower close rates across your business?

[Sam Saracino:]

The guidance in the revenue forecast were built this quarter similar to how we’ve done in prior quarter where we start with the underlying forecast provided by the sales forces and looking at the pipeline of activity that they see and projected deal closure rates. WE also take into account the forecast that our OEM partners provide us and we also look at information provided by other technology partners in other tech companies in their public statements and public forecasts. We try to bake all of that in to come up with our revenue forecast and then we took a conservative view of that on top of that to say what happens if deals get deferred from Q4 into next year on an unforeseen basis. So we did a little bit of an extra conservative measure this quarter that we don’t normally do based on the amount of uncertainty that we’re seeing and hearing in the press and from some of the industry analysts.

[Aaron Schwartz:]

LANDesk, if we back out the Touch Paper, it still looks like growth reaccelerated from Q2 to Q3 and I’m wondering if you could provide more color on that.

[Sam Saracino:]

Sure. If you back out the Touch Paper acquisition, LANDesk revenue still grew 19% year-over-year, which we believe is an excellent result that our guys there achieved in a typical economy and the growth was across geographies and across product lines. Large part of it was sales of the LANDesk management sweep and the traditional product that we’ve had for a number of years, as well as the newer subscription revenues from the securities sweep products.

[Aaron Schwartz:]

Last question. Mike, you had mentioned that you had made some changes within the sales organization in terms of the comp lans and what sales people are able to sell. Is that something that has gone into effect or something that will go into effect as you start next year.

[Mike Borman:]

The comments that I made will be that they go into effect next year.

[Operator:]

We’ll move onto Scott Zeller with Needham and Co.

[Scott Zeller:]

Could you give us color and explanation as to why your business is holding up better than other areas might be around the data center. There’s a lot of concern obviously with the macro environment, but what is it about Avocent’s offering that you think is giving you some insulation in this kind of environment? Second part, could you give us color on what you’re hearing from Dell and other partners about the business they’re facing in reselling your products.

[Sam Saracino:]

We have the benefit of having a diversified set of products. So we’re not reliant on any one particular product to try revenue growth. In fact, we saw softness in some of our enterprise class products, which is consistent with what you’re probably seeing other people say about softness in enterprise spending. Unfortunately, we have a solid government business and that tends to come on strong in the third quarter. We had a strong Q2 and Q3 from our government products. We’ve had growth not only in the US but in Europe and Asia. This diversity of products and across the S&B space and enterprise space that help us achieve that revenue growth.

[Mike Borman:]

I would add to that is no one is insulated entirely in where we are. I think everybody has some I think. The point that Teddy made, I like to think of our balance in three areas now. We’re balanced better in software and hardware. In the past we used to be much more just hardware reliant in the data center. Now we’re better balanced between hardware and software. We’re better balanced in geographies, so US, International, there it’s about half and half now, and we’re better balanced in enterprise and government. So each one of those has a better balance than being all enterprise.

[Sam Saracino:]

One other thing, our products tend to help people control their costs and cut their costs and those become very important in times of economic uncertainty when people are trying to control their IT costs and our products can show them savings not only on headcount, but now with our recent power management products, we can show them some real savings on power as well.

[Scott Zeller:]

Any color at all from your partners, such as Dell and HP? Are they seeing a drastically different environment than you might be in your sales team?

[Sam Saracino:]

I don’t think so. The comments we’ve gotten back from our guys that work with our partners on a daily basis has been consistent with what we’ve heard from our branded sales force.

[Operator:]

Moving on to our next question from Manny Recarey with Kaufman Brothers.

[Manny Recarey:]

The marginal LANDesk, you spoke about it. Can you give more color on the sustainability of that level. From first to second quarter, now from second to third quarter. So any color around sustainability of an 18% or mid-teens type of range?

[Teddy Blankenship:]

Sure, Manny, we’ve taken several actions with our management teams and LANDesk and the people across that unit to try to control the cost growth to a much lower rate than the revenue growth. So we are still continuing to increase the investment in R&D and marketing program, but at a much lower rate than the revenue is growing so we can get better leverage and get to a model that we want to sustain going forward and targeting operating margins for LANDesk to the 18 to 20% range over the next year or two. A number of actions with our resellers and sales force to try to get better leverage and work with our partners there to get our channel partners to handle more of the smaller deals and let our guys focus more on the bigger deals and we seen increase in the productivity of our sales force.

[Manny Recarey:]

International now almost 50% of your business. Was any impact on currency or some currency on the revenue?

[Sam Saracino:]

We did see a currency impact that lowered our revenues from what they would have been using the rates in effect in Q2 for instance as you might expect. We had a similar effect on our operating expenses as well. So it wasn’t much of an impact on our bottom line other than the repatriation of investments denominated in Euros that we mentioned. We converted that back at beginning of the quarter when the rate of the Euro to the dollar was higher than it is today. So we were able to get a bigger gain to help fund the Touch Paper acquisition.

[Manny Recarey:]

Channel, the inventory, been an issue for the first quarter over the past several years. Do you feel comfortable with that now?

[Sam Saracino:]

Yes, we took a lot of efforts last year, particular in fourth quarter last year in the management channel and inventory down and then we’ve held it relatively flat throughout this year. So the ending channel inventories in Q1, Q2 and Q3 has been essentially flat in dollar terms.

[Operator:]

We’ll take our next question from Aaron Honing - Canaccord Adams.

[Aaron Honing:]

On Touch Paper, you said that 90% of revenue comes internationally from Touch Paper. What’s the goal going forward? Do you want that to trend to 50-50? What’s the goal?

[Teddy Blankenship:]

Over time, we want to have that revenue mirror our revenue mix around the world. That will tell us that we have successfully cross sold the Touch Paper products into our existing install base.

[Mike Borman:]

If I could add to that, I’d say the sales people in LANDesk, for example, so is the sales people in the US, they could resell Touch Paper as an OEM product before, but it’s not the same. So when you really have it as your own product and you are trained on it and know the strengths, you take it personally. I think we’ll see the sales. I mean our goal is to see the sales of Touch Paper pick up around the world that it’s now our product. Secondarily, that product can apply in the data center as well. There’s no reason that some of our traditional MSD sales people couldn’t look at this product and actually represent that product in the data center too.

[Aaron Honing:]

On LANDesk, you hit the 18% operating margin goal? New target? Maybe 20.

[Sam Saracino:]

Well we want to sustain the 18% again in the fourth quarter. That’s our goal to keep that going in the fourth quarter and then we will have hit our 12% target for the year that we announced internally and externally at the beginning of the year. We’re already in the process putting together our budgets and plans for next year for 09, which includes looking at the state of IT spending, the impact of the new products that we recently introduced, as well as those we have planned next year, and additional investment opportunities that we may decide to pursue in certain R&D programs or marketing programs.

[Aaron Honing:]

You mentioned labor reduction in Q3, how much more do you have left?

[Sam Saracino:]

The headcount reductions that we talked about is roughly 200 – 210 positions gross and then we are going to have some replacements in other offices where we were consolidating functions. We completed about a fourth of those right away. So in early July. Another 25% are so happened right at the end of Q3, beginning of Q4. So end of September, beginning of October, and then the remainder will happen largely later in the fourth quarter with a handful happening in Q1.

[Operator:]

Moving on to Reik Read with RW Baird & Co.

[Reik Read:]

Can you talk a little more about the new products that have been out there and the power management products we’ve waiting for those for awhile. What’s the level of traction that you’re getting and if you could talk about it from a US perspective and an international perspective.

[Sam Saracino:]

It’s still early days for the power management offerings that were just announced in September, but we’ve had good anecdotal feedback from the sales force and resellers, a good reaction to those, and we’re not expecting much revenue contribution from those in the fourth quarter since it’s still relatively early, but we believe they can have a meaningful impact on our growth rate next year.

[Mike Borman:]

If I could add to that, we announced the LANDesk, I think it was 8.8 power management capability. So that is relatively new. We announced the power strips down to the outlet level monitoring at the end of the month, and so we now have a solution that we can go sell to customers in the desktop or the data center. I actually enabled all of our sales people, we held a sales call for everybody in the company, where we went through with my chief technology officer, all the strengths of our product, and what the benefits to customers, and from my personal anecdotes, I mean I’ve made customer calls in Germany and Italy and Singapore and China and every single call, whether it’s on an IT manager that’s managing the data center or somebody that’s managing the desktops, they’re all interested in our power management solutions. I find that some of them didn’t know about them and the ones that knew were anxious to implement them. So it’s a really hot topic.

[Reik Read:]

So sounds like lots of interest but lots of testing and no real traction for those. What about some of the others? The virtualization product that came out? Is there a level of traction that’s building with those as well?

[Sam Saracino:]

There is, Reik, that is built into our overall revenues from the newer products. From the things that LANDesk has announced over the past several months, particularly the service management offerings that are enhanced with the Touch Paper acquisition. Process management is expected to be a big benefit to our customers going forward. Application virtualization is an important topic as people are trying to prolong the use of assets that they have, including Legacy software packages. So we have several new products that are contributing some to our revenue of growth and expect them to grow more next year as their acceptance increases.

[Mike Borman:]

If I can add to that, you know that we have the virtualization capability on LANDesk and then we also have the virtualization plugged in in DSView. You know, when I’d go visit customers, what they would show me, for example DSView, they would show me all their servers and DSView, what the status was, as well as all the virtualized servers. So the customers that I met with were using the products to management something that they couldn’t manage any other way.

[Reik Read:]

Mike, maybe a question for you on your comments before on the sales force. It sounds to me like you’re really trying to get these guys involved in more cross-selling activities so you changed the compensation. What kind of disruption do you think that can cause as you do that in 09 and how do you guard against it?

[Mike Borman:]

First of all, what we did earlier this year, the strategy was to get a better cross-selling. Sent the guys to work better together on key accounts, so the top 20 accounts, for example, where we do joint calls. We would have a contact with one customer with an MSD sales person. They would bring in the LANDesk sales person. They would make a joint call and there was some incentive associated with that. I’ve not changed the sales plan in the fourth quarter to change anything. We didn’t want to disrupt the fourth quarter. The intent here is as we go into next year, we want the sales teams to have more tools in their kit as they go call on their customers and several examples are service management. We talked about Touch Paper before. Teddy mentioned process manager. We talked about LANDesk server manager. There’s a variety of products that can apply more than just where we’re selling them today. So my view is there won’t be disruption. The focus has to be on the enablement and the support once the customers are interested. You need to have the infrastructure and the skills built in order to follow up on the leads, otherwise it’s not worth it. So our focus will be on building the skills once I gain interest.

[Reik Read:]

Does that mean that your existing salesmen, there’s maybe two groups that are selling into two different channels, and those guys will get different tools to sell? I guess what I’m worried about is you have displacement of guys that are selling to the same customer and all of the sudden one guy is left out.

[Mike Borman:]

So where we have key accounts, we’ve already designated. I mean some of our largest customers, we’ve already designated one person to be the lead person.

[Sam Saracino:]

Our programs are designed so that people aren’t left out or feel cut out, but we will compensate all the people that are involved in a particular customer and a particular sale.

[Mike Borman:]

I came from a company that had thousands and thousands of sales people and so I think our opportunity here is to spread our coverage a little bit rather than worry about each covering the same customer.

[Operator:]

We’ll move onto our last question from Eric Kainer with ThinkEquity Partners.

[Eric Kainer:]

My first question here is about your target operating margin for next year. I saw that you published that you were looking at 24 to 26%. Was that from a full year 2009 or was that for by the end of 2009?

[Teddy Blankenship:]

Eric, probably by the end of 2009. As I mentioned, we’re going through already our planning process for next year and firming up our goals and the business plan and where we want to invest. So we still have some key decisions to make on selected R&D programs for next year and how we want to fund those, but we do plan to get back to our target operating model by the end of the year and how we want to fund those.

[Eric Kainer:]

I wish you good luck on those. The next is, you mentioned that for the Touch Paper acquisition that that was roughly 90% of those revenues coming from overseas. I wonder if you could give us a similar metric for Ergo, specifically in the third quarter or really historically.

[Teddy Blankenship:]

I believe Ergo largely mirrors our OEM customer base, because of the OEM channels and it is being sold through our OEM partners in hubs around the world already. So the US component I believe is somewhere around 40% and that would leave 60% around the world with a typical split of probably 30% or so in Europe and 15 to 20% or so in Asia Pacific.

[Eric Kainer:]

Last question is about the US financial sector. I don’t think I’m breaking any news by saying that that obviously has slowed down as far as their spend and I think you had sold a fair amount of product from the management systems side into that segment. I wonder if you can talk about how much that may be held back what otherwise would have been even stronger results in the third quarter here.

[Teddy Blankenship:]

For us, dating back to fourth quarter of last year. We seen several quarters now of relative weakness in that segment, not saying they totally stopped buying. They do continue to buy, but they’re just not carrying on nearly as large projects as they used to. So it definitely had an impact on our growth or the third quarter compared to last year on pulling that down. We are still selling to a lot of financial institutions overseas where they haven’t experienced quite the weakness yet that the financials have in the US.

[Eric Kainer:]

I think that historically had been somewhere in the 10-15% of revenues for you. Maybe pre-LANDesk. Any view on what that looked like maybe in the third quarter?

[Teddy Blankenship:]

I don’t have the exact figure, Eric, but just based on anecdotal feedback, in the larger projects that we do track in the pipeline, it was well below 10% we believe.

[Operator:]

That does conclude the question-and-answer session. That also concludes today’s conference. Thank you for your participation and have a wonderful day.