So-Young International Inc.
Q4 2008 Earnings Call Transcript

Published: 28 Jan 2009

[Operator:]

Good day everybody and welcome to the Sybase Fourth Quarter 2008 Earnings Conference Call. This call is being recorded. Our speakers today are Chairman, Chief Executive Officer and President, John Chen and Senior Vice President and Chief Financial Officer, Jeff Ross. I would like to turn the call over to Mr. John Chen. Please go ahead sir.

[John Chen:]

Thank you, operator and good morning everybody, and welcome to our call. We'll begin with Jeff providing the Safe Harbor language.

[Jeffrey Ross:]

Thanks very much John and good morning to everybody. Today, certain statements we will make will be forward-looking statements, which represent our current judgment on future events and are subject to risk and uncertainties that could cause actual results to differ materially. Forward-looking statement reflect our opinions only as of the date of this call, and include statements about our future growth, future earnings, business prospects, and other statements regarding future events. Actual results could differ materially from statements we make today for a variety of reasons, which are described in our press release and in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2007, and our Form 10-Qs for the first, second, and third quarter of 2008. These documents are available in the Investor Relations Section of our website at www.sybase.com.

[John Chen:]

Okay, so let me start it by providing you the highlight for the quarter and Jeff, of course, will go through the details of the numbers. We'll come back and provide some guidance, some color of the market and then of course we will chat and open up for Q&A. Needless to say we're extremely proud of our consistently strong execution regarding the quarter, and I would say that this is obviously an effort of the entire team. I'm pleased to also report that the – everybody done well on the team; Steve and the database and IQ area, the mobility area, as well as the messaging area. So we have a lot of accomplishments to go through and a number of them are extremely significant, and given the environment, we're obviously very pleased. We delivered our first ever quarter exceeding $300 million in revenue, and that for us is a major milestone and a benchmark. Fourth quarter revenue and EPS exceeds first [quarter] consensus, as well as the high end of our guidance range. We also delivered our fifth consecutive record quarters, as well as second consecutive year of record revenue – well actually record revenue operating margin cash flow as well as earnings, and these are all done by and large of our organic growth. We achieved these results in a very challenging macro environment, not to mention against a very tough [time] a year ago, and if you recall that we delivered a record Q4 a year ago and as well as the record 2007. For the fourth quarter, total revenue came in at $305.1 million, so a little bit over $305 million. License grew 8% to $122.1 million, non-GAAP operating margin reached 28% and non-GAAP EPS grew 28% to $0.78 a share. This came despite that we have faced quite a bit of foreign currency headwinds; you all are very well aware of those, so I don't need to go into detail with that, which reduced our revenue growth by 5% a quarter, and that's pretty much a impact to us. In constant dollar debt though, we grew our license revenue by 13%. As we forecasted 90 days ago, we did not experience and have not witnessed a typical year end budget crash of any sorts, but for the fiscal year 2008, the total revenue grew 10% year-over-year to $1.13 billion, license revenue were up 11%, services increased 5%, messaging revenue up 29%. The non-GAAP operating margin reached 24%, up 200 basis points over 2007. Non-GAAP EPS rose 32% to $2.24 and cash flow from operations grew 16% to a record $295.5 million, which by the way, not – but you guys should not say that we're sent backwards, because that's well above our own expectations. I would like to make a few comments on what we see in the [IT] spending environment, and a number of you have asked that pretty consistently. Customers are still buying, they're still spending, and including those in the financial services sectors, but they're being highly selective. They very much focus on realizing the quick value and a quick return on investment. Sales cycles have been a little lengthened, so we have to model our business close rate quite conservatively in 2009. While customers are less willing to spend on professional services, we're actually seeing that, the consulting services is actually a little weaker but it's pretty much a industry wide phenomena. But they also don't make technology purchase require long consulting projects, so quick ROIs are important. They are, however, willing to spend on mission critical applications and new capabilities, and one that we see a lot that's done well, in the past – not only in the past quarter but pretty much the entire year – these features like security, real time reporting, and risk management. All these are very – topics high on their list of investments. Customers are also gravitating towards doing business with stable, well established vendors and so what are driving our success. So I like to just kind of highlight a couple of those star performers, which pretty much consistent for the entire year in 2008. First and foremost, our flagship enterprise Database ASE 15 continues to benefit from growing adoption, including demands for the options. So this whole strategy in the last three or four years by providing more options on a very robust base platform is – that's certainly working for us well. In analytics, IQ momentums remain strong, at least we saw strong pent up demand for our Risk Analytics Platform, otherwise known as RAP, we call it RAP, which is Risk Analytics Platform. Our financial services customers are very interested in both the IQ and the RAP because of the ability to reserve the real time information and analytics for the business risk. These products also offer extremely compelling price performance characteristics. Combined with our Enterprise Database, the license revenue actually grew 38% for the quarter, and 28% for the year. Clearly we're taking share from our competitors with these kinds of results. In the fourth quarter, we added 254 new ASE customers, of flagship database customers, and 58 new IQ customers around the world. We also added eight new Risk Analytics Platform customers or RAP customers in the quarter and now came the total of the RAP customers came in at 14 for the year. Now you may recall that we released the RAP in mid-May in New York Stock Exchange in the same week that we did Sybase Classic. In 2009, we plan to make a big push of this IQ RAP Solutions into the telco verticals, so '08 would be very much focus on the financial verticals, '09 we're going to push in the telco verticals, and it's probably a little bit on the government side, and then we'll continue to get more industry line up. On a mobility front, our device management solutions deliver very strong quarters, benefited from marketing and mobile security, which we talked about earlier. Messaging completed a very solid year, our messaging business did experience a disproportionately negative Q4 foreign exchange impact, since most of the business – a big portion of the business messaging is done in Europe and other overseas market. So aside from these positive business trends working for us, additional reasons for our success are related to obviously Sybase's continue fiscal discipline and our visibility of the business. Under our diverse business model, and thank God we did that, roughly 60% of our revenue now comes from recurring source, recurring sources. Principally these are support maintenance revenue, as well as messaging revenue. Further, we worked hard to improve revenue linearity, which also help us manage visibility of this environment. With this visibility and the growing pipeline, the pipeline is indeed growing, has enabled us to further expand our profit margin and this is why you saw the 200 basis point increase year-over-year. Now I'd like to spend a minute on what we see entering the '09. Foreign exchange – exchange still looks like a headwind problem most of the year, however, we feel good about ability to grow in constant currency. I think this is the same thing we talked about 90 days ago. We feel the company business and the pipeline are very robust, people responding very well, we think on our business could grow, whether we grow faster than the foreign currency headwind, remains to be seen. In addition, the IT spending environment looks reasonably tough, if you look at all the reports. Forrester published a report early this month, last month. They forecast a 3% decline in global [IT] spending at goods and services. Goldman Sachs has also issued a pretty bearish forecast on software spending, they said the range is going to be flat to minus 3%. But despite the challenges I would like to highlight some of our key growth drivers for '09. Let's see the first one, the strong growth trend we have enjoyed and experienced for the ASE and IQ and the RAP, we believe that will continue. One of the big driver this year is a new release IQ 15, which is scheduled next quarter in Q2. This new version will bring enhancement such as partitioning and parallel load. We call it IQ 15-O. Ramp momentum we'll also continue to build in 2008, this is the risk platform and finish with a very strong Q4. We expect this momentum to carry into '09 with two major enhancements to the RAP platform. The first is a very tight, a tighter couple integration into a complex event processing, which is CEP and the second one is the additional time series capability. ASE 15, we have a few options that's coming out obviously, but most importantly the one that's currently selling, which is the cause for addition. We're also planning to release the MME and time series option for the ASE later this year, or early 2010. Also, ASE 12-5, which when, you know, serving us well for many years will reach the end of support status by year end, by the end of this year, which will buy a good reason for a customer to upgrade to 15. As the customer upgrades we will have an opportunity to up sell the ASE 15 option to these newly upgraded customers. We recently announced a company acquisition of a private-held company, a German-based company, called Paybox. Paybox bring us the mobile wallet technology which is extremely important to our M-commerce initiative. This solution increased our ability to leverage our messaging infrastructure and mobile payment and drive in with, recommend to revenue opportunities. Lastly we recently launched a Sybase Unwired Platform which is a platform I think many of you heard us talk about for quite a bit of time. We believe that SUP which is Sybase Unwired Platform will be the industry leading development in department platform for mobile apps. I always like to think of it as a very comprehensive application server for the mobile space, for the M space versus the E space. This year expand our relationship with system integrators and the developer community and we have a big push on that. We expect this will to be a key driver for the year 2010. Now to optimize the success of these initiatives and the overall unwired by strategy, many of you have heard me speak about this for the last year, year and a half, about the importance of broadening the go-to-market strategy. So, we've been working very hard to identify those synergies that will drive higher profitability and leverage across all our sales channel and discuss as many times with you. Going forward we expect our end of pipeline sales [customers], so, both the data management products as well as the mobility offerings which will be the major anchor of that is going be the SUP platform. The iAnywhere sales force will focus exclusively on the indirect channel and expanding relationships with the bars and system integrators. I guess for two years you've heard me talk about system integrators with importance of the F5 to us. And I expect to see good progress in 2009 and on this front. And also Sybase 365, with that channels we are pursuing hosting opportunity. The first hosted solution we're going to be in IQ and analytics So, as you can see that we are really organizing ourselves to the market to be of a channel strategy. In addition we're obviously cognizant of the economic realities out there and the need to maintain a good tight cost control in this uncertain environment. To deliver the further operational synergy we also combine much of the engineering team of iAnywhere, especially when it comes to device driver management, security software, collaborative software. These products are like the Afaria and the OneBridge that you know of and that has now been combined with the enterprise engineering teams which obviously for the IQ, for the development [functions] and for the database. We also have combined all the product marketing groups, 365 iAnywhere and IPG into corporate marketing, under the leadership of [Rodge Nathan]. Lastly, we have integrated the back office functions and removed a lot of the overlap between different business operations. These expense synergies will allow us to invest in the channel growth we talked about as well as being able to expand the operating margin in 2009 by 50 to 100 basis points even in a slower revenue growth environment. So I think we are well prepared on that. Our business will diminish to three primary revenue streams, license revenue, services revenue which of course includes maintenance, and messaging revenue. This will represent a change from our historical business segments. Because of this change we are required to align the financial reporting accordingly. We will also report margin performance for each revenue streams including the costs of goods sold and expenses. Now all of the above mentioned changes on channels and operation initiative will be completed by the next release of the SUP, the Unwired Platform, which we expect to be sometime in the fall, early fall, late summer time in 2009. We will, because of that, we will provide all of the historical [inaudible] in format and the new format for the next two quarters. You will find an example of the new format at the supplementary table in this morning's release. I believe this should be the last page as well as our Investor Relations – it says on the Investor Relations website. Now I'd to turn the call over to Jeff for a more detailed review of the financial performance. Jeff.

[Jeffrey Ross:]

Thanks very much John. Let me take you through the numbers for the 2008 fourth quarter and the full year. I'm going to start with the Q4 results. During the fourth quarter our total revenue increased 3% to $305.1 million. License revenue for the quarter grew 8% to $122.1 million and service revenues were down slightly at $139.8 million. Maintenance revenues were up slightly despite the FX impact, but were offset by lower revenues from our professional services business. Net [seeking] revenues increased 11% to $43.2 million. Turning to the geographies, North American revenues were $156.9 million and represented 52% of our total revenue. EMEA revenues were $107.3 million and represented 35% of our total revenue. And intercontinental which includes Asia-Pacific and Latin America was $40.9 million and represented 13% of our total revenue. Non-GAAP operating income for the fourth quarter rose 5% to $85.8 million. This represented a 28.1% operating margin. Non-GAAP net income was $63.4 million and our non-GAAP EPS was $0.78, which is a 28% year-over-year increase. On a GAAP basis operating income increased 4% to $69.8 million. This represented an operating margin of 23%. Our GAAP EPS was $0.58 compared with $0.81 in the prior year. As a reminder to everyone, compared to this quarter net income a year ago reflected a $20.3 million GAAP tax credit, which translated into a 22% EPS benefit. This credit related to the reversal of valuation allowances on certain U.S. tax assets and stemmed from the company's growing U.S. profits. Also in Q4 of '08 our GAAP results reflected the downward revaluation of auction rates securities. Our cash flow from operations was $84.5 million in the quarter. Capital expenditures in the fourth quarter were $6.3 million with depreciation at $7.6 million. Capitalized software and the amortization of capitalized software were $11.8 million and $10.8 million respectively. DSO for the quarter came in at 80 days on a consolidated basis which was up somewhat from Q3 largely due to the revenue mix. Deferred revenue came in at $216.4 million which was up 4% year-over-year and reflected strong maintenance renewals as well as our growth in license revenues. Deals over $1 million represented 37% of Q4 license revenue compared with 31% in the fourth quarter of 2008. And headcount at the end of the quarter was 3,961 employees. During the quarter the company used $5.4 million to repurchase [inaudible] shares bringing total repurchases for the year to $306.1 million. A total of $77.5 million remained authorized in the company's stock repurchase program. Switching to our 2008 full-year results, our revenue for the full year was $1.13 billion up 10% year-over-year with license revenue growing at 11% to $383.7 million, total services growing at 5% to $572.1 million, and messaging revenues increasing 29% to $176.2 million. For the year our non-GAAP operating income increased 21% to $266.1 million, representing a 23.5% operating margin, which was a 200 point, basis point improvement from 2007. Our non-GAAP net income was $189 million equating to EPS at $2.24. Full year EPS benefited from lower convert dilution and certain year-end tax credits. Normalized for these effects, full year EPS would have been $2.10 which would represent a 24% increase year over year. On a GAAP basis 2008 operating income increased 25% to $210 million. This represented an operating margin of 18.6%. GAAP net income was $138.6 million or EPS of $1.64 compared with $1.61 in 2007. As mentioned earlier our 2007 tax rate was extremely low due to certain one time credits, and 2008 was also impacted by write downs on auction rate securities totaling $13 million. Two thousand eight’s cash flow from operations was $295.5 million, which was up 16% year-over-year. And we exited the year with $638.3 million in cash and cash investments. Now I’d like to turn the call back over to John. John?

[John Chen:]

Thank you, Jeff. Okay so we probably provide the guidance, but I’d like to offer a few comments on the outlook. Some of you may wonder if any company has sufficient risk aversion this of early in this environment to forecast the full year summary and some of the larger peers have backed off in giving two-year guidance. It is fair to say that there are greater risks than being able to accurately forecast IT spending in 2009. However, we do have a working view of the full year and we sure it’s worth sharing our thinking with you. So also known as don’t shoot me if I’m wrong. I actually did have a call with [Terry], this morning on my way in, and I asked him again and again, I said “Are you really could see it, right?” So he said yes. So anyway, our 2009 pipeline looks very strong and as a result we have reasonable near term visibility. The second half of '09 still holds some uncertainty to the macro environment. Therefore, we are modeling rather conservatively for the back half of the year. We also feel very good about our ability to manage costs, expand margins, and grow EPS despite an anticipated currency headwind of somewhere between 5% to 6% of which nobody knows of that, too. Now onto the guidance, for '09 first quarter, we anticipate total revenue in the range of $260 to $270 million, with a percentage gross of 6% to 10% in constant currency. We anticipate non-GAAP EPS in the range of $0.40 to $0.42 and GAAP EPS in the range of $0.27 to $0.29. For the full year we anticipate a total revenue of approximately $1.14 billon, or growth of about 5 to 6% in constant currency. We anticipate a non-GAAP EPS in the range of $2.16 to $2.21 and a GAAP EPS in the range of $1.62 to $1.67. With the operation synergy and judicious expense management we discussed earlier, we expect continued leverage in our model with operating margin anticipated growth by somewhere between 50 to 100 basis point for full year 2009. We anticipate a cash flow from operations for the full year of approximately $250 million. In closing I am very proud, pleased – proud of our performance in 2008. We are well prepared for 2009 and I’m equally if not more excited about how well we’re positioned in 2010 in a potentially healthier macro environment. Our comparative positions and financial foundations are as strong as they ever been, and as a result this is the very opportune time for Sybase. So operator, I’m ready for the Q&A please.

[Operator:]

(Operator Instructions) Your first question comes from Trip Chowdhry – Global Equities Research.

[Trip Chowdhry—Global Equities Research:]

First regarding the projects, what is your sense like? What projects are getting approved and in which were difficult in the geographies? If you could give some color to that effect, that will be helpful; t then I have a follow on question.

[John Chen:]

Okay, so it looks like our financials and telcos and government and then followed by retail and healthcare. They all are expanding in some form. As I said earlier, I think the, and I said at last quarter, too, if you want to sell more of the same capability that’s a problem; that’s hard to sell. But if you focus on making sure that they sell things that help them to navigate these times, which of course everybody’s feeling the pinch on that. It would be a lot easier, so that’s why IQ and risks, our risks and analytics management tools are a big deal. We’ve had those appointments very easily and we got those discussion going extremely easily and again a lot of people, a lot of company are willing to try it and even a company that is falling on hard times today, but looking forward they’re very interested in these types of solution. We talk about price performance being very competitive and also the ability to load up our IQ and RAP and get going. The time to install is very small, so it’s very easy quick return and so all these are very positive things. The geography side, actually North America looks reasonably good. We had a good quarter in Europe. We had a good quarter in China. We had a good quarter in Japan. All in all there’s not much weakness. The only weakness comes from, the weakness on the license side it really comes from the currency, the FX. We have a slightly weak Korean quarters and Australian quarters and those are because the currency impact year-over-year is so different and so strong. So outside of that, I think we’ve done pretty well. Messaging had a FX hit pretty hard because 60 some % in Europe –

[Jeff:]

Sixty, almost 70%.

[John Chen:]

Almost 70% of [modeling] business is outside the United States, so that was a little impact. With that said, they’ve done a good job and they can show that the bottom line, the margin they were able to continue to invest and continue to deliver the margin. So that was good on their part. So we did pretty good all around, but those are kind of the highlights.

[Trip Chowdhry —Global Equities Research:]

Now regarding telcos, you did mention that this would be your thrust in 2009. I was wondering is it the back office infrastructure in telcos where you see some opportunities, or is it in a customer sitting facing portion of telcos?

[John Chen:]

More of the latter, more of the customer facing, so there’s two things we’re trying to bring into the telco world. One is to not just do messaging for messaging sake, but to allow things like the mobile payment system that we’ve said we talk about, the M-Commerce initiative so we’re trying to get message texting and messagings as part of the solution not the thing, the solution. So that’s one thing. So it’s really helping more of the customer facing of the telco and then we’re trying to push our analytics and IQ into the – I wouldn’t say the back office; I would say those are business decision systems. We’re trying to give them a better visibility on charging gateway, where this is coming from, who are their helps and how do they collaborate with different telcos around the world, because we actually have a piece of the charging gateways so, on settlements of charges. So those are ideas that we’re going to try to create more business in '09. We have obviously talked to the key customers. They all resonated very well.

[Trip Chowdhry—Global Equities Research:]

The last question I have on a sales execution front, like if you see certain companies that rate they have four quarters to the sales guys have been this account is worth X dollars and increase this account by X percent and sell as many products as you can. And then there's other set of companies in the software space who have put individual quotas on each product that needs to be penetrated in the marketplace. I was wondering what is the general sales execution you have in place concerning these two models which are in the market right now?

[John Chen:]

The philosophy we have is that obviously we are using the first approach that you outlined which is we need to look at – align the opportunity with what the customer really needs. I can't really get a sales person and say here's X percent of quota across the board because, as I said earlier, there are products that today that just, you know, it's just a waste of effort. The customers aren't really interested in that, a product that's tied to stuff they already have, more servers, more headcounts. I mean, none of those are really resonating very well for obvious reasons. You come to here and sell to me about those things. That doesn't work either. But you could give me a new capability that will give me better visibility of my business so that I either contain my risk better or I could approach my customers better or shorten my sell cycle with my business. I mean, I'll be very interested in that. Or compliance, I mean, there are – a lot of our solution is in IQ XL to compliance reporting. So those are all the stuff that – so to answer your question, Trip, it's the first method.

[Operator:]

And we'll move on to our next question from Steven Koenig – KeyBanc Capital Markets.

[Steven Koenig:]

Wondering if you all could provide a little bit of color in terms of the segments? I know you're changing your reporting, but as you look into the first half, maybe, or however you're most comfortable, as you look on the segments of your business as they are today, what sorts of – can you give us a little bit more granularity or color in growth rates that you're seeing?

[John Chen:]

For the year, Steve, how we – let me stay with constant currency if you don't mind, because that's a better way of looking at things. I mean, IT database as a segment is still going to be able in [MySQL], still they're going to be growing somewhere between 8%, around 8%, 8 to 10% in that range. I see our mobile middleware to grow roughly about 10% and I see the messaging business somewhere between 15 to 20%. So I expect all three segments to grow.

[Steven Koenig:]

And, John, I'm wondering the acceleration in mobile middleware compared to a fairly tough '08. What would be driving that?

[John Chen:]

Some of the projects that we are ongoing that we believe will come to fruition and a lot of them were device management security and better solutions with – and some of those are things that – stay tuned for the year. I mean, I don't want to just kind of be presumptuous and talk through that, but we have a lot of good things going in enterprise using and application providers using our mobile middleware technology. And we're in a lot of discussion. It will announce it – hopefully we'll announce that within the next six months.

[Steven Koenig:]

And on the messaging side, should we expect if currencies stay where they are that we should normalize to a mid-single digit sort of sequential growth rates there?

[John Chen:]

Yes, if the currency continues, yes. But on the other hand it does offset by some generic, I mean, organic growth on that. We see – we will see better global roaming, data roaming, the [GRX] business. We should see some traction in the mobile banking because I just had a huge conference here and there must be about 30 mobile, 30 customers in mobile banking here at Sybase headquarters and they're very interested in a solution. A lot of them are rolling it out. I haven't seen the revenue '08, but they're rolling it out. So I should see the revenue '09, so I see some reasonably strong organic growth. So maybe it's better than the single digit.

[Steven Koenig:]

And very last question then I'll turn it over. As you look at your pattern of where site licenses are renewing in the year and how that could cause quarterly volatility in licenses, where do you see strength or risk, etc., as the year rolls along?

[John Chen:]

A good question; on site license, when I laid it all out, it's probably more in skew to Q1 and Q4.

[Steven Koenig:]

So like last year?

[John Chen:]

Yes, pretty much the same because a lot of them are on anniversary or by anniversary.

[Operator:]

And we'll take our next question from Brent Williams – Benchmark Company.

[Brent Williams:]

A couple of things, so you had talked about increasing percentage of database license revenues coming from options on the ASE side, kind of can you tell me where that's been in the course of '08 and where do you think that might go in '09?

[John Chen:]

Let's see. On '08, I don't know if I tracked it separately like that.

[Brent Williams:]

Well at the very least, qualitatively would help.

[Jeffrey Ross:]

Yes, OK. So, let me spend a minute on the '09 number and I'll kind of back myself into the '08 in this. The '09 we will see good Q4 on the MME database solutions. And with potential we'll get time series in it, too, but that's touch and go right now. It may or may not happen, because if it does happen it'll be early 2010. So there will be a reasonable pent up demand in the MME database in Q4. Cluster is starting to have reasonably good tractions. I think we have like 12 customers on it right now. I am not 100% sure about that. I know that we have at least that many in [Vader] and there's no bad news anywhere. I have not gotten any bad report of any sort. So I'm assuming they will be all converted already. So encryption is still good and vertical column is still good. So I would say half of the database growth come from options and the other half probably come from the IQ area. So that's 4, 5% each that I made on that. On '08, so the '09 number was a little bit more conservative because of the economic environment and everything that we talked about. On '08 we obviously grow better than double digit and so '08s were a little stronger. But the similar trend, we really haven't seen a major shift in trends in our business in where the growth comes from.

[Brent Williams:]

And then following up Trip's question about the XL product quotas or account or just overall dollar quotas, so I think you said that you were moving the IPG sales force, what was formally, I guess, the division formerly known as IPG, that sales force is now going to sell the mobile stuff. It's kind of a different sale. Kind of different buyers I would think, maybe a little different sales cycle. So how do you incentivize those guys so that given that there's extra work that there is mind share focused on selling these products? So, in other words, that they don't just in a tough climate just retreat to what they know.

[John Chen:]

That's a good question, a wonderful question. No, I don't anticipate that the immediate switch over like you pointed out. You are absolutely right. It needs a lot of training and somewhat of an incentive. But on the other hand our sales coordinations are quite good. We have – part of the reason we feel comfortable doing that is in front of me there are a list of about 20 accounts that it's new win in the database segment for the quarter. And if you look deep into it, a lot of them are actually already taking over, getting both database as well as the Afaria and all that coming in. So we're starting to have that penetration already. I just -–what we're doing right now is just making more formalized push on that. We've been doing an awful lot of training of our sales force, the database sales force in why does the device management, a good solution for their enterprise customers? And I feel reasonably comfortable that we'll have tractions. But notwithstanding that, your point is a very good point. And these are things that kept me awake at night. It's just that transition needs to be continued to nurture and kind of push, because like you said the muscle memory is to go back to what you've done before. But if you don't add new capabilities into these enterprise accounts, eventually people will say that, hey, I'm not interested in buying more data Initially, people will say I'm not interested in buying more databases anymore. I don’t anticipate that in a very near-term, but eventually I have to broaden where my sales guys back [inaudible]. So that's a good question but it’s a very involved and kind of a keep at it everyday kind of an answer.

[Brent Williams:]

I suppose I guess as you were speaking I realized you can always just give them free iPhones to explain how wonderful mobile is.

[John Chen:]

We do give them something. Some device, but at this point it's not iPhone yet.

[Brent Williams:]

But you can dangle that out there as a carrot right John.

[John Chen:]

You're right. You point out very good questions that this is the number one thing that we have to do well.

[Brent Williams:]

The last question is on the RAP business unfolding, given that that may be a slightly different buyer crowd, a little bit more business unit management than that sort of core heavy metal DBAs that are for traditional. Is the pipeline already in place? Should I look for RAP to really start to crank because that's a little bit of a different buyer in the second half of ‘09, or do you think you already got enough prospects in the pipeline that it should be just growing so much more smoothly over the year?

[John Chen:]

We already got enough in the pipeline.

[Operator:]

Your next question comes from analyst Terry Tillman – Raymond James.

[Terry Tillman:]

So John I guess I'm stunned by one of your comments.

[John Chen:]

You always do.

[Terry Tillman:]

You said you saw no budget flush?

[John Chen:]

Yes.

[Terry Tillman:]

Thirty eight percent database growth I was expecting even some offset, but that seems phenomenal. So you're saying you saw no outliers whether it's the ASE or the options or the IQ or RAP that really kind of made a big difference or you got business that you didn’t necessarily anticipate. You saw none of that at all?

[John Chen:]

I said if you go back to our notes two quarters ago, I told everybody that, although the economy doesn’t look very good it doesn’t sound very good, but our pipelines our visibility is very good. I've been very consistent and I try not to go too crazy because all of you will think I'm smoking something. But I was really staring at real good customer indirection. We went back and check and check and check and we worked it and so no we have not seen anybody who call us and say by the way I came into some year end money which one I buy. That didn’t happen to the best of my knowledge and if did then Steve didn’t tell me that, but I don’t think so. So every deal needs to be worked and was in the pipelines for quite a bit of time and we know it's going to come to fruition one way or another and we did. And so highly selective business also that's why the margin was very good and I don’t know what else to say. We have the RAP pipeline so we just convert most of the RAP pipeline that supposed to come in Q4 ASE, options and IQ is really the strength of the pipeline really not as much as some kind of budget [inaudible].

[Terry Tillman:]

So you're having good sales coverage, the coverage for what you need to get done. You're just having good sales coverage in terms of deals, they’re possible.

[John Chen:]

That's correct.

[Terry Tillman:]

In terms of, if I look in to ‘09 if we think about RAP now going into Telco would that be upside or are you kind of relying on some of that Telco stuff to start playing out.

[John Chen:]

I'm hoping it's going to be upside but this is the beginning of it. So I'm not going to be able to say the first two quarters have any meaningful results from that but I'm hoping to build that pipeline for the second half.

[Terry Tillman:]

In terms of the growth rate in database, which it is database and data warehousing and the growth rate seems to be much better than industry trends. But if we segment it into database and then data warehousing, do you see more competitive vulnerabilities or one of the two that you think is more right for competitive market share shifts or are they both kind of equal?

[John Chen:]

Yes, IQ is better. Defiantly, I wouldn’t say this as too broad a statement I don’t want to exaggerate it but we do win most of the deals we enter.

[Terry Tillman:]

Then as it relates to that product, though, and going to the market with IBM any kind of update? I know it's still early but any early successes or is still just more about pipeline and trying to convert that.

[John Chen:]

Not that early any more. It's been a few years, a couple of years. We have seen good success in our numbers. IBM appliance is still early the one I'm talking about IBM, is IBM had moved quite a bit of our database on the P servers. That's been around for a couple of years.

[Terry Tillman:]

I meant the appliance, but okay. The last question, Jeff relates to where you come up with regarding the operational efficiencies and then the margin expansion in ‘09 as we're building our models. I just have a question as it relates to S365 gross margin, should we assume that directionally it improves or is it kind of flattish or downticks?

[Jeffrey Ross:]

I think we're modeling a slight improvement.

[Terry Tillman:]

Then on the three out box items, is there one that stands out more than the others? Because in the fourth quarter it was much lower in sales and marketing. Is that a primary area or do you see some leverage in all three areas?

[Jeffrey Ross:]

I would say that the leverage is probably more on the G&A and R&D sides going into 2009. In connection with some of the stuff John had talked about as opposed to really being on the sales and marketing side.

[John Chen:]

Yes we have to invest more in the channel. We intended to hire people on the channel side and that varies. So it's painful for Jeff to say this but we're going to have less accountants in the company.

[Operator:]

Your next question comes from analyst Ross Macmillan – Jeffries & Company.

[Ross Macmillan:]

If I took your IPG business and I split it between ASE, IQ and let’s say RAP, is there any generalization in terms of average deal size? So I'm trying to drive really at, are RAP deal sizes typically significantly larger than the other two for example.

[John Chen:]

No. In fact I say the ASE sides are still the bigger side of the IQ and RAP. Part of the reason is because we’re trying to gain as many accounts as possible with IQ and RAP and we go in at a slightly lower level in the server hoping to create that future [sale].

[Ross Macmillan:]

Just going on that comment you made around the 12.5 the ASE 12.5 base, could you frame that in terms of size, percentage or base today.

[John Chen:]

Currently we have slightly more than 50% of the base converted.

[Ross Macmillan:]

But how big would that residual be.

[John Chen:]

The residual would not be as big and typically the top 20% of the account probably represents 80% of the revenue. So those people are already converted. Those are mostly in the financial verticals in the last couple of years. So we will see some growth but not much.

[Ross Macmillan:]

On the messaging side, I know FX is really weighing on that business. If we try to look at the XFX, you've had sequential declines, but XFX could you comment on the growth rates there. I know that you’ve talked about 10% to 20% growth for ‘09. So is it still kind of growing in that 10% to 20% rate year-over-year to the last two quarters XFX.

[Jeffrey Ross:]

Yes, it's pretty much that.

[Ross Macmillan:]

Is there anything happening on volumes or for pricing that have changed maybe in the last six months?

[Jeffrey Ross:]

No not in the last sixth months no.

[Ross Macmillan:]

The last one is just housekeeping on the tax side. What's the tax assumption, Jeff for fiscal Q1 and for the full year?

[Jeffrey Ross:]

So for the full year it will be around, and I'm giving you a pro forma rate, it’ll be around 34%. It’ll be a little bit higher than that in Q1 so maybe 36%, 37% for Q1 then because of credits later in the end of the year we think it will normalize somewhere around 34%.

[Operator:]

Our next question comes from Curtis Shauger - Caris & Co..

[Curtis Shauger:]

John, you gave us some great color about what's driving your business. Can you help us out with the broader question, the database market? It seems to be holding up very strong despite concerns about cyclicality.

[John Chen:]

Yes it looks like everybody has done very well, I believe. I look at some of my competitors and some of my peers and so far everyone's done pretty well. But I need to add that we are doing better than they so, but everybody’s done pretty well. If you asked me why I can't really provide a very strong answer to that, but it seems that like when we go into any of the renewal situation where we can present new technologies I think most buyers out there are focusing on making sure their mission critical stuff runs and most efficiently I think they're more coming back to the core, so to speak, and adding features and values to the core. I'm pretty sure that's what other people are seeing too. I don't really have a solid answer to your question. Sometime I wonder myself also but the business is there and the customers are willing to invest in it.

[Curtis Shauger:]

I've heard commentary from both IBM and Microsoft to the point that, and I think that Oracle may have alluded to it as well, it seems as though the trend is economizing on hardware, virtualization and some other technologies [inaudible]. Does that resonate with you folks?

[John Chen:]

That resonates a lot.

[Curtis Shauger:]

So in other words, if we're saving a dollar on hardware we're not going to pocket it all in savings, and I guess that might add a little more optimist outlook in some of the IT forecasts that we've seen out there relative to software?

[John Chen:]

I think the enterprise mission critical stuff and the data warehousing and business intelligence areas, I think those two areas we expect to continue to see growth.

[Curtis Shauger:]

A follow-on to that, I couldn't help but notice yourselves and IBM faired a little better this quarter relative to Oracle and Microsoft. Would that kind of dovetail with that kind of commentary?

[John Chen:]

I always hate to arouse sleeping tigers, but I think in our case I could tell you solidly it's our analytics growth that has done well, the whole IQ area, the RAP helping to move the IQ. That probably has done the best, and that's probably done better than other people because of that.

[Curtis Shauger:]

Jeff, this is a question for you. Maintenance came in a little lighter than what I was expecting. Has that taken a little bit of a hit due to FX?

[Jeffrey Ross:]

Absolutely. We said somewhere between 3% and 5% annual growth in maintenance and we had a 5% FX headwind in Q4. So on a constant currency maintenance actually grew more quickly in Q4 than any of the other quarters.

[Curtis Shauger:]

I know there is some fairly decent pricing throughout the latter half of both '07 into '08, you folks had mentioned Oracle had mentioned etc. Any plans on that front, I mean I know the economy is tough I would assume you're not going to lean heavy on any kind of COLA or whatever on the maintenance side, any commentary there?

[Jeffrey Ross:]

We do expect to continue the COLA but the COLA is probably a low number and we are not intending to broad base wise to raise the license pricing. But in the RAP and IQ area, our strategy has been go into the market and going into low and going into and gain market share and get footholds into accounts. As we release the new products both in the partitioning and other features that we go into the IQ and the CEP technology that it goes into the RAP we will probably revise upwards our pricing.

[Curtis Shauger:]

Jeff, also other income is a big sequential decline. I would imagine it also due to FX. Is that right?

[Jeffrey Ross:]

Two things FX on a GAAP basis, you got to write down on the auction-rate securities, but the thing that was sort of unusual between the quarters was FX.

[Curtis Shauger:]

Can we expect it to kind of normalize over the next quarter or two back to more of a positive net interest income flow?

[Jeffrey Ross:]

You can. We're modeling for next year pretty much flat on other income and that's just because the yield is so poor on cash balances right now. So going next year we're basically modeling that flat but we wouldn't expect it to really be negative.

[Operator:]

Your next question comes from Scott Zeller – Needham & Company

[Scott Zeller:]

So the first question is on the deal size. Can you tell us what the largest deal was in the quarter?

[John Chen:]

We normally don't disclose that because we don't want that kind of proprietary information to get out there. We can only tell you that 37% of our license deal over a million bucks accounted for about 37% of our licenses.

[Scott Zeller:]

And no 10% customers then?

[John Chen:]

No, no 10% customers.

[Scott Zeller:]

Regarding the 365 business, could you just tell us with all of the news about handset volumes, I mean my belief is that the usage behavior of owners with phones is really what matters rather than handset volume for the prospects for 365.

[John Chen:]

To us there are three billion phones out there already and as long as they could receive and send messages we're fine. Whether they're new phones that send messages or old phones that send messages to us it's not much of a difference. Now that said, there is a part that will be driving growth in the future, which is how many of these phones are able to like data roaming? The more phones that could be sophisticated enough to do data roaming, to do GPS base, location base, to do all of that it would be better features that our customers could take advantage of using our messaging systems. For example, a simple GPS, a simple message of where am I is a good usage of a message system. So the answer to your question is fundamentally if you're focused on just messaging technology like text messaging or MMS there is no difference whether you have old phone or new phones. New phones give us more capability driving bigger, different type of usage that will allow us better growth going forward. Am I making any sense, Curtis?

[Scott Zeller:]

It's Scott.

[John Chen:]

Oh, it's Scott. I'm sorry. Am I making sense?

[Scott Zeller:]

Yes that's what my assumption was I just wanted to validate that. The next thing on the professional services, should we expect that to grow more slowly this year? You had mentioned earlier that you were trying to do more with the SI partners and then the commentary about people may be holding back about spending for services. Should we expect that grows but at a slower rate this year?

[John Chen:]

Well, I actually expected to decline slightly. In our model we expect our maintenance to grow slightly and the professional services and educational services to actually decline. I think it's a reflection of the times. A customer just doesn’t want to spend that kind of money.

[Operator:]

Your next question comes from Derek Wood – Pacific Growth

[Derek Wood:]

I was going to ask about who are you gaining market share from but I think it sounds like it's a little bit sensitive on the database side, but maybe you could shed some light on the mobility, where you're gaining market share and kind of why you are gaining that share?

[John Chen:]

We see a lot of positive response in the encryption area, the device management area. I think it's a function of there are more and more handsets are out there and different type of handsets. The kind of most typical question you always get is that hey could I really manage a RIM and a iPhone and a pocket PC environment at the same time and in the same way, and we do exactly just that, that's our sweet spot. And so we see a lot of that opportunity everywhere. Now gaining share from, since we're the market leader it's really hard to tell you where we're gaining share when there's a whole bunch of smaller, the little bit start-up type or beyond startup company but that's about it, but we don’t really track their shares because it’s not trackable.

[Derek Wood:]

And it’s definitely the device management side that’s doing a lot better then say maybe the email management side.

[John Chen:]

That’s correct. The device management side is doing a lot better then the email management side.

[Derek Wood:]

In terms of verticals, you did talk about financial services and Telco and government, I’m wondering if you could shed some light on what the pipeline and current demand levels look like on the OEM channel?

[John Chen:]

The pipeline looks reasonably good. I’m hoping we could close a deal that has a reasonably sizeable name in the OEM world relatively soon. I feel pretty good about the robustness of the OEM business. In fact, I think Charlie gave me a vertical thing last night. I think 30% plus is coming from the OEM technology sector. So I talk about financial because most people thought by financial. When I told people that we’re doing this good business in financial, they all looked at me like I’m crazy or something, but it is true. You can’t make those things up, so but they’re 30% in the OEM and technology space and we expect that to be pretty good. There are a couple of the customers that were a little bit troubled, but then on the other hand there are a lot of other new customers that came in.

[Derek Wood:]

I think previously you were alluding to maybe 6% to 8% constant currency growth in ‘09 and now you’re saying 5% or 6%. Just kind of curious where that the change has been, it sounds like it may be on the professional services seeing a little bit more weakness, any other areas that you’ve gotten more cautious about more recently?

[John Chen:]

Other then the professional services I’m just going to make sure that our close rate assumption, especially in the back half of the year, are not just kind of over inflated. So we have to taken a little more conservative view of that. I hope I’m wrong, but that’s pretty much that.

[Operator:]

Our next question comes from Brad Sills – Barclays Capital

[Brad Sills:]

You mentioned Telco and government being focuses for 2009. Are there specific solutions there? Are these IQ or ASE solutions where you see the opportunity there?

[John Chen:]

Obviously, Telco’s nig time on mobile banking and mobile commerce and the messaging, but more importantly we are going to bring IQ and RAP into Telco. And in government, interesting enough, they are already a good enough user of IQ and will obviously going to continue with IQ an [inaudible] but then now in the government we’re pushing the messaging into. Now there are a bunch of emergency response systems for example, in the government space, both state and federal, and county, for that matter. They wanted to use mobility as kind of their communication and structure. We think we have some good opportunity there. We already won one or two but I don’t know whether I’m allowed to disclose it because of the customer sensitivity. So I’ll just tell you that we have a couple win already, and we’re obviously are going to try to expand that.

[Brad Sills:]

What are you seeing in the financial services pipeline, given all of the changes there? Are you seeing more concentration of data warehouse type integration projects that’s driving that or is there a core database and ASE options as well?

[John Chen:]

I love to succeed a core database and ASE options, but I think a better bet on going the business is going to be on the analytics, the data warehouse and business intelligence and data integration and compliance side.

[Brad Sills:]

You mentioned obviously focus on the SI channel, what are the specific focuses on there and what kind of progress have you made there? This is for iAnywhere.

[John Chen:]

Yes, iAnywhere is staffing a team up and going around the world and lining up a few very major ones. We had on and off good business with Accenture. We’re going to try to get broader and deeper with that relationship as being one. We have a [partner] SI in Asia that we’d like to very much introduce our technology to, one in Japan and one in Korea and one in China. So we’re working that very hard, and I hope that we could generate that too. So those are the immediate term things we could actually do every day.

[Operator:]

Our next question comes from Steven Koenig – KeyBanc Capital Markets.

[Steven Koenig:]

Jeff, wondering accounting change on the convert, how does that affect you, any dilution from that, any color on share kind of assumptions next year?

[John Chen:]

Steve, the new rules don’t affect dilution per say from a GAAP-based result, they will result in additional imputed interest. So you’ll see in our reconciliations that we’re backing that out. As far as the share count assumptions, I think we’re showing modest growth from a share count from where we are at Q4 and obviously a bit of the wild card is how well our stock does, and then what the impact of the convert is on that. I do apologize. I know there are maybe a couple of more questions, but we overran the time by ten minutes and I have some media appointments I have to address. So I’m sure Charlie and Jeff will be available to chat. Please call them. Let me just wrap up quickly. First of all I’d like to make an announcement, on May 14 we will host an analyst at the New York Stock Exchange as part of the Sybase [inaudible] event that week and we always find it very informative, and the feedback has always been very informative. It will be helpful to us too and I hope that you guys can find time to come and please mark your calendar and details will be forthcoming. We enjoyed as a company two record-breaking years and we’re working hard to achieve a third one and I call a three peat. I wrote a welcome back email to our troops this year the last statement is trying to go for the three peat, and so thank you very much for joining us today and we look forward to chatting with many of you. Have a good day.

[Operator:]

That concludes today’s conference call. We appreciate your participation. Have a good day.