So-Young International Inc.
Q2 2007 Earnings Call Transcript

Published: 26 Jul 2007

[Operator:]

Welcome to the Sybase Second Quarter Earnings Conference Call. This call is being recorded. Our speakers today are the Chairman, Chief Executive Officer, and President John Chen; and Chief Financial Officer, Pieter Van der Vorst. Now, at this time, I would like to turn the conference over to John Chen.

[John S. Chen:]

Thank you and good morning everybody, and before we begin I will ask Pieter to provide Safe Harbor language.

[Pieter Van der Vorst:]

Thank you, John. Good morning, everyone. Today certain statements we will make will be forward-looking statements including statements regarding our future growth, future operating results, potential business combinations, market opportunities, and business prospects. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements which reflect our opinions only as of the date of this presentation. Also please keep in mind we're not obligating ourselves to revise or publicly release the results of any revision of these forward-looking statements in light of new information or future events. Throughout today's discussion we will attempt to present some important factors relating to our business that may affect our predictions. Actual results and the direction of our progress and our future growth if any could differ materially from statements we make or imply today for a variety of reasons. These reasons 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, 2006, and the quarterly report on Form 10-Q for the three months ended March 31, 2007. All non-GAAP amounts disclosed in this conference call have been calculated and presented in accordance with the most directly comparable generally accepted accounting principle financial measures which are posted in the earnings release section of our investor relations website at www.sybase.com. Back to you, John.

[John S. Chen:]

Thank you. Again, good morning, and thank you very much for joining us. I am still getting used to not using the word pro forma versus non-GAAP, but I am sure you guys and Pieter will have a good chat about that. The key takeaway from Q2, I think really the top story is margin, great margin expansion, good cash flow from operations, and pretty solid executions across the board, and I will go through each of the segments. It does speak very well for our confidence in our long-term growth and all the opportunities that lay in front of us for Sybase, and a couple of really top kind of, in my mind a top bullet where we first before we resume growth in our I&E segment, and dramatically improved the operating margin. I think the margin went from 10 to 19% sequentially. Second, total maintenance revenue actually grew 4% year-over-year and reflecting an improving trend and some of the attention that we put on it for the IPG surfaces, and I know it is something that a number of you and I have chatted in the past about what the trend may look like. Third, our ESE 15 flagship database is seeing grow traction amount new customers, and the new customer's revenue is actually starting to increase as a total percentage. Demand for the IQ server, the analytics remains very robust and in fact, is kind of most talked about thing between our industry analysts, ourselves, and our customer base and our partner base, so when we get together for ourselves for planning the future, IQ always comes up, as one of the positive topics. And finally Sybase 365 continued to deliver and delivered very, very strong quarter, so I will go through that with you a little later. Total revenue for the second quarter increased 14% from a year-over-year growth at $245 million. License revenue was 77.4, surface $135.2 million, and messaging revenue was $32.4 million. I talk about margin expansion. The year-over-year non-GAAP operating income increased 14%, and we expanded the consolidated non-GAAP operating margin for the fifth consecutive quarter, so five quarters in a row we have improved that number, and it is now at 20%. At 20% in Q2 I wouldn't claim as a record because I haven't looked at it, but it is a pretty strong result for us. Additionally, we reported non-GAAP fully diluted EPS of $0.37 which beat the consensus earning estimates by $0.04 a share and exceeded our own guidance range of $0.32 to $0.36 a share. We also delivered in the solid quarter cash flow from operations, and we'll go into that a little later and Pieter will go through the exit number, and we remain positive about the outlook for the second half of the year. Pieter and I spent a lot of time this quarter, this past quarter meeting with many of you, and we have actually chatted a little about a few of many questions around five main areas which I will now take the time to address. First is renewal growth in iAnywhere, second the sustainability of the core businesses. Third, the margin in the 365 messaging business. Fourth, the cash flow from operations. Fifth, the Sybase consolidating operating margin. If you all feel that we have talked through this enough number of times and I will, just send me an e-mail right now and I will skip all of that. Let me begin by discussing our iAnywhere segment. Total iAnywhere revenue the quarter came in at $42.6 million, license revenue of $23.6 million. This represents 6% year-over-year growth in total revenue. iAnywhere delivered a very solid quarter so with 18% growth, sequential growth that is from Q1 to Q2, 18% in license revenue and 12% in total revenue. So it grew quarter over quarter and sequentially Q1 to Q2. Operating margin for our segment increased to 19% compared with 10% a quarter ago and 14% a year ago same quarter. Our EBITDA beginning to yield very positive results. In the quarter we closed over 3,000 iAnywhere transactions and added over about 500 new customers to the list. The total transaction volume and average selling price both increased year-over-year. We are reaffirming our expectation that this segment will deliver sequential revenue growth in the second half, obviously from Q2, 3, and 4 and total revenue growth of 10% for the year for the segment. On the topic of the sustainability of the infrastructure platform group, IPG results, this segment's deliver a solid operating margin of about, slightly above 20% up from 17% la quarter and up 90 basis points versus a year ago. The key driver of growth was IQ which I mentioned as analytic servers, and we continue to see good robust demand in the IQ analytic servers. We have signed up about 15 new IQ customers in the quarter. As we entered the quarter we knew we faced a very tough segment comp against Q2 '06. I hope to remind everybody that Q2 '06 over Q2 '05 we actually saw 21% in license growth in IPG year-over-year. For 2007 second quarter IPG license revenue grew 10% on a sequential basis, that's over Q1 and above our historical seasonal average of 6% growth and that's in the past seven years. That is we normally see a 7% growth from Q1 to Q2. We actually came in at 10%, but we did decline that IPG license revenue by about 9% year-over-year, and the bulk of this decline is attributable to a $5 million transaction we are working on throughout the quarter. And in the last week of the quarter this particular customer, which is global customers asked for additional terms that we collectively deemed not in the best interests of Sybase, and it is really not about the dollars and discount. This is terms of how wide its spread, and we have to respectfully decline their offer. Given the needs of these customers, we fully expect to arrive at agreeable terms in the future or in the near future. Even without the deal, segment profitability is very strong, evidenced by positive year-over-year growth in the operating income for Q2 which is at 13% growth for the first half of the year. ASE 15 added a total of 273 new customers in the quarter. That number is up 18% year-over-year. We have a positive outlook for the balance of 2007 based on ongoing momentum of our IQ again, analytic servers. We have a number of site renews that are the reasonable size coming up for the ASE in the second half, and we do see some growing tractions with our data integration offerings. We expect a strong Q3 performance for our database business. On July 6, we released a data version of our share disc customer options for ASE 15, and we currently have 12 major global customers sign up for the beta program I believe two or three of them actually have the code that they're already loaded up and going. We expect this important database option to be one of our key growth drivers in 2008. The third most frequently asked question posed by investors is about Sybase 365. This segment's performing extremely well in Q2 and exceeded our expectations with revenue of $32.4 million and 8% operating margin. While we continue to invest in our messaging infrastructure as planned, our plan for operating margin expansion is pretty much... I wouldn't use the word way ahead of schedule. It is definitely ahead of schedule, based on strong revenue performance and faster than expected cost synergies. Total messaging volume delivered in the quarter was $19.5 billion which is an increase of 12% over Q1, and a higher margin MMS volume increased 33% over the first quarter although those are still relatively smaller absolute number compared to the total SMS numbers. Our infrastructure investment in 365 in the quarter including hiring operators and support personnel around the world plus adding seven new connectors to the China Mobile network which gives China Mobile now 2 AFS to roughly about 78 international destination. I think they went up a little bit this morning to the best of my knowledge. With a strong first half performance for Sybase 365 we are raising our messaging revenue target for the year from $120 million to $130 million. We're comfortably on track to achieve our full year operating margin target in the range of 6 to 8%. We continue to expect 365 to be accretive on a consolidated basis by the end of this year which is obviously in Q4. So in answer to the last two frequently asked questions related to cash flow and operating margins, you can all see that cash flow from operations was $123 million for the first half of the year and we're now raising our full year cash flow target to a range of $195 million to $205 million, and from the previous guiding range of 190 to 200, slightly more of this uptick. Regarding operating margin, with Sybase 365 margin expansion ahead of our schedules and strong margin performance across all our business units, we're now expecting full year consolidated operating margin to be at least comparable to the 20% we achieve in 2006 versus our prior expectation of a modest year-over-year decline. Before I return the call to Pieter, I would like to provide a quick view of our geographies. Total business volume grew across all geographies, and Pieter will go into that later. From a license revenue perspective, our stronger performance came from Asia Pacific, particularly in China and Korea where we have landed a number of very sizable and visible deals. And I think throughout the quarter we have came up with some of the announcements agricultural China and China Mobile and all that is coming through. North America had a very good quarter. So I would like to turn the call over to Pieter right now to discuss the financial results in greater details. Pieter.

[Pieter Van der Vorst:]

Thank you, John. Let me take you through the numbers for the 2007 second quarter. Overall revenue for the second quarter increased 14% to $245 million compared to $215.6 million in the second quarter 2006. We reported license revenues for the quarter of $77.4 million, services revenues of $135.2 million, and messaging revenue of $32.4 million. Looking at it from a geographic point of view, total revenue from North America came in at $129.5 million representing 53% of total Q2 revenue. Europe came in at $78.6 million, representing 32% of total revenue and intercontinental which includes Asia Pacific and Latin America came in at $36.9 million representing 15% of the total. As John mentioned earlier, we are pleased with our performance in our Asia Pacific operation where license revenue grew 14% year-over-year. We remain optimistic about our growth potential in the region and are looking forward to the second half of the year. Total non-GAAP expenses for the second quarter increased 14% to $197.2 million, up from $173.7 million a year ago. The year-over-year increase is primarily related to the acquisition of Mobile 365. Non-GAAP operating income for the quarter increased 14% to $47.8 million representing a 19.5 operating margin. This compares with non-GAAP operating income of $41.8 million or an operating margin of 19.4% in the second quarter of 2006. The Company reported non-GAAP net income for the 2007 second quarter of $34.3 million or diluted earnings per share of $0.37. This compares with non-GAAP net income of $32.8 million or diluted EPS of $0.36 in the second quarter of 2006. On a GAAP basis operating income was $35.6 million representing a 15% operating margin. This amount includes $2.8 million for the amortization of intangibles related to the acquisition of Mobile 365. On a GAAP basis net income came in at $26 million or $0.28 per diluted share. A more detailed description of the reconciliation between GAAP and non-GAAP numbers is contained in the press release distributed pre-market. Our financial position continues to remain strong as evidenced by some of these key highlights from our balance sheet and statement of cash flows. The cash balance as of June 30, 2007 was $709.1 million including restricted cash of $6 million. Cash flow from operations was $53.8 million, capital expenditures in the quarter was $6.8 million, depreciation for the quarter was $6.6 million, capitalized software came in at $8.8 million, and the amortization of capitalized software came in at $8.2 million. Accounts receivable net were $196.7 million and our DSO for the quarter came in at 72 days, and that's a three-day sequential improvement. Deferred revenue came in at $219.3 million, the renewal rate for Q2 was 92% which remains consistent with our historical range of 90 to 95%. The number of deals over $1 million represented 20% of licensed revenues compared with 19% in the second quarter of 2006, and we finished the quarter with a head count of 4,001 employees.

[John S. Chen:]

One too many, huh?

[Pieter Van der Vorst:]

I hope that one doesn't feel that way. During the quarter we purchased $40 million worth of Sybase stock that remains $191.8 million authorized in our current stock repurchase program. Our 2007 second quarter non-GAAP tax rate was 36%, and with that I would now like to turn it back to Mr. Chen.

[John S. Chen:]

Thank you, Pieter. On Q3 we anticipate revenue in the range of $250 million to $255 million, non-GAAP EPS expected to be approximately $0.40 a share. We expect the GAAP EPS of approximately $0.30 a share. For the full year '07 we're raising our outlook for the full year non-GAAP EPS to approximately $1.56 a share from $1.52 and on revenue in the range of a $1.015 billion to $1.025 billion. We are also raising our outlook for the GAAP EPS to approximately $1.19 a share from $1.12, and given our cash flow from operations for the first half was very strong, we're raising our guidance for full year cash operations to the rate of $195 million to $205 million which compares to our prior range of $190 million to $200 million. So with that I would like to open up for the question and answers. Operator, could you give us the instructions, please. Question and Answer

[Operator:]

[Operator Instructions] Our first question comes from Alan Cooke with Merrill Lynch.

[John S. Chen:]

Hey, Alan, good morning.

[Alan Cooke:]

Good morning. With respect to the database business, it looks like the miss was more than just $5 million, and I was wondering if you could give a little bit more clarification on that because it looks like the database market is doing pretty well, at least by the numbers that your competitors are putting up, and also why are you expecting a strong Q3 after a relatively weak Q2?

[John S. Chen:]

Good question. First of all, as I pointed out, the comparable year-over-year, it is just very, very difficult, notwithstanding that $5 million deal we would have sequentially... well, sequentially grew 10% which was better than historically we would have done a lot better with $5 million mall. So from our perspective the miss was really about that amount, and if you look at my previous guidance range in the quarter, I said 2.45 to 2.50, and we came in at 2.45. That pretty much explains the whole, that covers the entire range. Given that, now, I would like to take this opportunity and add a little bit of color to it. It was some... it was a decision... it was a very difficult decision, and I chatted with Pieter earlier, and all the management pretty much weighted in the geographies and Steve Cappelli and Pieter, but everybody weighted in on this discussion, and on June 30, I just couldn't see why that would be good for Sybase to take a much broader reach of that particular deal. Again, it was not about the amount of money. I think both sides have pretty much settled on that, and even the scope of the products, but it is just that some of the conditions that they wanted and the flexibility they wanted I believe that Sybase was giving up values that we otherwise could work with the customers to better the deal for us so to speak. So we walk away from that, so if we have that deal in the picture, I would declare it a pretty strong particular quarter. As you know, a lot of our strength of the data base business comes from the ASE 15 upgrades, and this is going through the process that is probably the tail end of the ASE 15 upgrade notwithstanding that I feel second half will be strong because I fully expect that this particular transaction have a very good chance of getting it resolved in Q3 together with the other normal database pipeline that we have built up. So that, and of course, the data integration business, and all of that will come in and IQ will continue to have strong growth. By and large my Q3 numbers in database I am hopeful that we'll have a good one.

[Alan Cooke:]

Okay. And so you said that you're at the tail end of the ASE upgrade cycle. What percentage of customers do you think have upgraded at this point?

[John S. Chen:]

The major ones have pretty much upgraded. I wouldn't say... a number of you will probably think it is more. I would say about maybe 30, 40%. Some of them may think it is much longer time to upgrade, but the fast pent up demand has already gone through the last six quarters or the previous six quarters.

[Alan Cooke:]

Okay. With regards to database maintenance, did it grow during the quarter and if so by how much?

[John S. Chen:]

Database maintenance, well, that I don't think we actually even have that. We're going to do a major project to go separate it out, but the total IPG service... maintenance revenue grew 4% and is predominantly driven by database because the other major part of IPG is on 2s which are power builder. They actually don't pay maintenance they just pay to purchase. I would say that that whole 4% are pretty much all database.

[Alan Cooke:]

And what steps are you taking to get better maintenance revenues?

[John S. Chen:]

A couple of things. I think we have a pretty strong focus now on renewed, and going back and trying to figure out how to motivate people to even renew sooner and more actively. We have a plan to increase our price adjusted through cost of living adjustment, maybe that's a better way to say it. That hasn't been... that just rolled out in June. This small percent is not that. I think that we may still have some good movement there. I can't promise anything at this point because it has to do with the receptivity of the customer base but we have a price increase that we wrote out starting June, we will see that further improve the renew cycle for the next twelve months, and we also have people that we assign and especially outside of North America geographies where we're more a little bit more focused on getting the renewal done.

[Alan Cooke:]

Then on the R&D spending I noticed it's down from Q1 to Q2 by almost $2 million, why was that spending down and what are your plans for R&D?

[John S. Chen:]

I haven't really focused in on that being down. Nothing really has changed. I think it could be very well be just a lot of small numbers come in differently. For example, some of them move off some of the investment in North America over to our Brunei operations, our Singapore operations and our China operations, but it is not a major movement. We don't have any... let's keep the R&D down. Of in fact, R&D we're starting up some new projects in M-commerce relatively quickly. I think we expected to spend more money in that area, but usually there is no significant trend there, Alan.

[Alan Cooke:]

Do you expect spending to increase at all especially as you look to the next major release of your database cycle?

[John S. Chen:]

The next major release in my database is on Cluster. Right now it is released for beta.

[Alan Cooke:]

Okay.

[John S. Chen:]

And we are now working very hard in focusing on that and making sure the next six months make the customer release a more robust release so we can roll it into customer base by the end of the year. Of course we're working on the next generation of that, but it was, most engineers hands on deck on the ASE 15 customer upgrade.

[Alan Cooke:]

Okay.

[Pieter Van der Vorst:]

I don't think you should set the expectation that there is going to be a material change in the run rate for R&D over the remaining balance of the year.

[Alan Cooke:]

All right. And then my last question, fiscal, the fiscal revenue guidance was lower at least at the mid-point and yet you're raising earnings. Where are you getting the efficiencies from?

[John S. Chen:]

It is pretty much across the board. First of all, I think you're one of the people that pointed out the maintenance revenue growth is very solid for margin, right?

[Alan Cooke:]

Right.

[John S. Chen:]

That's one aspect of it. We have taking some professional service... we're taking a more cautious approach of a professional services business, because we don't want to have lower margin business, because post serve is typically lower margin, and so that's one aspect of it. So that's for IPG. The iAnywhere, as we resume this growth path and sequential growth in revenue which you see our margin to be at or better at this level. Let's say it is around 19% or the high teens and then 365 we did 3% in Q1, 8% in Q2, we will do a 6 to 8% for the year, and to get accretive for Q4 it almost has to be 10%. So everybody is reporting in pretty solid margin at this point so I am comfortable with our EPS guidance. The revenue range was really simply because of some big deals are pending in the second half which we have reasonable visibility today. I thought it was at least prudent it give ourselves a range that maybe not every one of the deals that has to be like guns at my head at the end of the quarter, so we have some level of flexibility. We certainly, at this point in time see good business growth pretty much in database, in IQ, in messaging, and in iAnywhere, so I think we could... if we fire all cylinder, we will see the high range. If we don't fire all cylinder, we may see the lower end of the range, but it is reasonable.

[Alan Cooke:]

Thank you very much.

[Operator:]

Our next question is from Terry Tillman with SunTrust Robinson Humphrey.

[John S. Chen:]

Good morning.

[Terry Tillman:]

Good morning. Thanks for taking my questions.

[John S. Chen:]

Sure.

[Terry Tillman:]

John, appreciate the color on that $5 million deal. What I am trying it get a sense on, though, is that actually out of the planning parameter altogether for 3Q?

[John S. Chen:]

Yes. Well, that's one of the reasons why Q3 at that range.

[Terry Tillman:]

Okay. But at the high end of the--?

[John S. Chen:]

Currently we tell our guys to plan it out.

[Terry Tillman:]

Yes. Okay. In terms of the full year though in IPG, can you remind us, you talked about I think reiterating the iAnywhere guidance but what about IPG? Are you standing by 8 to 10% growth for the full year or is that... are you softening that a little bit because of the large deal miss in the second quarter?

[John S. Chen:]

Yes. Right now the model reflects 6%?

[Terry Tillman:]

6%?

[John S. Chen:]

Right now the model is 6%, but Charlie was the first one to caution me. He said are you taking it down there? No. I think there is a reasonable chance that we can get to 8%.

[Terry Tillman:]

Okay.

[John S. Chen:]

Again, I am not taking the guidance down. I think the 8% has a reasonably chance given the strength of our messaging business our model to meet our mid-range of our... if you could do the math and we'll all sit down and do the math together, we built up the model so that it would require 6% growth on IPG license.

[Terry Tillman:]

Okay. I guess, though, the one thing I was intrigued by, as we get into though, next year and maybe the idea of the low-hanging fruit of existing customers upgrading to ASE 15 and then buying more CPUs kind of runs its course, are you contending that in '08 first can ASE though have growth and if it is going to have growth, is it going to be more from just net new logos?

[John S. Chen:]

Yes. I am contending that there will be growth in ASE 15 especially on the Cluster side. My plan is to grow Cluster, a new logo like you pointed out, and we're very focused on doing that, in fact our sales force are motivated in doing so, and data integration should help kick in and IQ should continue to grow, and therefore the whole total IPG license segment should be able to continue to show some reasonable growth and 15 is... 15 Cluster is probably the highest portion, or biggest portion of it.

[Terry Tillman:]

Thanks. Then John, I was pleased to see iAnywhere beat my numbers, so it is nice inflection point there. I am curious, though, was there any aid in the quarter from maybe any large technology OEMs, I know you didn't really have much in 1Q. Did you have--?

[John S. Chen:]

We had one. We had one, but we looked up a year ago. It is comparable, exactly comparable in size.

[Terry Tillman:]

Okay.

[John S. Chen:]

Year-over-year we didn't have the benefit of a bigger deal or more but we had one in it.

[Terry Tillman:]

And then in the back half of the year, is the sense that your back half of the year is definitely more geared towards some of those lumpier large technology OEM deals which you have good visibility into?

[John S. Chen:]

In Q4 we have some. We have a couple of bigger deals in Q4 that has to happen. We have re-service ability and at this point in time there is no reason to believe they would not happen. A couple of them are tied to somebody shipping... big company shipping products, and they need to continue to ship products and these seems to be doing pretty well on using our embedded, and one of them is the end users has been doing this renewal at that level over the last X number of years, it is one of those things that I don't want to jinx it by saying therefore it will guarantee to come in, but it will be extremely surprising if it doesn't.

[Terry Tillman:]

My last question, John, just relates to... sorry, Pieter, I don't have questions for you today, but, John, last question just relates to, maybe I am reading too much into this, but I look at these, some of the data points in the press release kind of recaps for the quarter, and it talked about China Mobile which we all know you got a good win there on Sybase 365. Did they actually also buy IQ and they're going to couple it together? Because I am trying to get a sense on the--?

[John S. Chen:]

Go ahead. Finish.

[Terry Tillman:]

I was just trying to get a sense on as it relates to that are we starting to see some synergies where you can tie in traditional products with Sybase 365?

[John S. Chen:]

Not yet. That's my major '08 push. China Mobile has always been a customer's ply through which we acquired 365. With that, we were helping... the only synergy there was a market synergy we were able to help 365 to land China Mobile because it is part of Sybase, and other than that, there hasn't been the, kind of the product, sales synergy in that today. Now, we have start seeing and we have really publicly disclosed it, but it is not a secret or anything, but since we're on webcast, we are start pushing FM messaging into the banks that uses our FFI platform, and we have roughly about 60 of those banks of which one of the major ones picked up the FMS alert on the FFI platform and that's definitely a synergy that came through in less than 60 days. When we put our heads together, numbers are very, very small because they just started to use it and they are going to pay us for messaging, but there certainly is an added capability, and we're obviously going to roll up all 60 banks or at least pitch to all 60 banks, and then that will continue to add to this level of sophistication. I would say there is a lot of area of synergy and some of those you are going to hear at Tech Wave.

[Terry Tillman:]

Thank you, John.

[John S. Chen:]

Thanks.

[Operator:]

Our next question is from Kirk Materne with Banc of America.

[John S. Chen:]

Hey, Kirk, good morning.

[Kirk Materne:]

Good morning. A couple quick questions for you all. First, on the maintenance side of things, obviously it is nice to see that growth pick back up. Can you guys describe, was that mainly an improvement in renewal rates you guys have always had very high renewal rates. Or was this really recapturing some customers that have perhaps fallen off maintenance over the years?

[John S. Chen:]

Recapturing.

[Kirk Materne:]

How much low hanging fruit do you see out there? Obviously your maintenance... or your renewal rates have always been very high. Is this a big opportunity in terms of going back out there and recapturing some more of this maintenance?

[John S. Chen:]

We have more opportunity of that in Europe than anywhere else at this point, and I think it is... I wouldn't say it is a huge thing, but I think it is moderate. We do have some low-hanging fruit left.

[Kirk Materne:]

That's helpful. And then just actually on the balance sheet, it seems like your stock buyback picked up a bit this quarter. John, any thoughts on, or Pieter, any thoughts on the level of buyback over the remainder of the year?

[John S. Chen:]

I expect, Pieter may add some thought. At this level the stock is cheap. I am preparing for my Board of Directors strategic meeting next week, and I looked at it last night from any which way from peer comparisons, this, that, and the other, looking forward PE and everything. I hope everybody would agree with me that the stock is cheap, so I expect to... I can't guarantee on the call that I would do $40 million a quarter buyback, but if it's at this level we will be a definitive buyer.

[Pieter Van der Vorst:]

I would agree with that. If we see the opportunity to be opportunistic, we will.

[Kirk Materne:]

Just on the margin, obviously a nice pop in the margin expansion around 365 this quarter. Can you just go over... can you just run through that? Is that just simply getting greater efficiencies on the higher level of volume? Was there anything specifically this quarter that got put in place that helped you guys see a pretty nice pop sequentially? MMS volume? I guess just any color around that would be helpful.

[John S. Chen:]

8% was very natural. There was nothing that is pundit. The efficiency in the back offices came in faster than we expected. It was one of those things, bite the bullet and move on type thing, and there are still room for us to improve that. We may not see that in this year yet. We may see some margin expansion next year, and that's our goal, so nothing unnatural. I don't know whether Q3 is going to come in at 8%, but I would tell you Q3 definitely is not going to come in much lower than 8% if not higher. 8% will be a reasonable benchmark.

[Kirk Materne:]

Then the final movement wouldn't have to be to get up to 10% or so in the fourth quarter to reach your goals, correct.

[John S. Chen:]

Fourth quarter I have to get to 10% for the accretiveness and you could, just by this conversation 3, 8, and then some number and then 10 you can do the math. We'll probably be doing slightly better than the whole 6 to 8% for the year that I keep saying. I wouldn't be surprised that we'll be coming in the high-end of that or maybe beat that a little.

[Pieter Van der Vorst:]

And the revenue. We've taken the revenue from $120 million to $130 million, and certainly the incremental revenue generates operating margin, so it is not so much... there have been some synergy savings, but to a large extent that improvement is associated with the better than expected revenues.

[John S. Chen:]

That, too.

[Kirk Materne:]

Okay. That's great. That's it for me. Thanks very much.

[John S. Chen:]

Thank you.

[Operator:]

[Operator Instructions] We'll next to Trip Chowdhry with Global Equity Research.

[Trip Chowdhry:]

Thank you. I think you had good execution on the mobility front. Two quick questions. First is on the hiring front, seems like hiring in Silicon Valley is becoming a little difficult, and also the Rev 2.0 companies somehow seem to be attracting some new talent at good salary ranges. I was wondering how are you coping with the hiring issues and are you also seeing any hiring issues since you're really not in Silicon Valley, you're really off 30, 40 miles away? Any color on that?

[John S. Chen:]

Hiring... first of all, let's talk about our turnover rates. Our turnover rates are at reasonable levels, it's about roughly 11 or 12% for the Company on an annualized basis, so I think it is lower than most other peers, entirely what you said, maybe we isolate everybody in a cave and they can't get to mainland and could very well be, but the other thing is maybe we're a good company to work for. We routinely win employee awards, so whatever employer awards across the world so. The other part, the other thing that we do is we have very much diverse locations. We have good engineering teams in Boise and Waterloo and up in Canada, in Alpharetta, Georgia and the middle of Colorado, the University of Colorado, and I am only naming a couple of the United States places. And so it help us a little bit on the hiring front because of that and especially most of our sites is so close to Universities. If it is all in Silicon Valley, I would agree with you, it's probably very difficult to get... talent is a pretty hot commodity right now in Silicon Valley.

[Trip Chowdhry:]

Also was wondering your major verticals where you have done very good, telcos and financial sectors, the industry seems to be consolidating. And I was just wondering like in situations where like I think bought maybe an ABN Amro as a potential acquirer of that company, or your customers, do you think we as investors should be a little worried like when the financial sector or your telco sector goes or thinks about acquisition or consolidation, they may protect the employee, delay in the enclosures, and if so how are you being proactive so that it doesn't disrupt your business?

[John S. Chen:]

Well, there is only certain amount, Trip, realistically only certain amount that we could control. You're right. Every time there is a major consolidation, we do see suffering of our deal being slowed down, but we didn't... financial verticals and telco verticals have been consolidating the last couple three, four, five years in a very aggressive way. I think we're more of a challenge on their consolidation phase than at the beginning of the consolidated phases, so the thing we have to do is make sure that we keep the customers happy and with the resulting joint customers we need to make sure that we are part of their day-to-day life, and that's been kind of the strategy is how do I [inaudible] mission critical. In the financial world as you know, and the investment banking side, Sybase is very mission critical as we power most of all the trades, the joint trading floors and the trading desk, and so as long as we stay kind of engaged at that kind of level is what I do for you, I usually can survive any of the major flash point of consolidation. It just makes our timing of calling the deal a little bit more difficult. As investor you probably shouldn't be concerned if you look beyond a 90 days or 180-days window, and the thing you sought to say is Sybase going to be the surviving technology providers in these consolidations. I couldn't say 100% about that in the telco world, but I could tell you in the financial world especially when it comes to investment banking and treasury groups, nine times out of ten if not ten times out of ten the two coming together parties both are about customer in the same area, and they just use the particular pricing stick with us which of course the only way to address that is make sure that we offer more values at times for progressives like features and functionalities. But at the end of the day we're still... have we been mission credit cat for them, the resulting entities will be even more mission-critical for them, so I am not uncomfortable with the consolidation taking away my business. It may delay some at times, that, I would agree.

[Pieter Van der Vorst:]

On the other side of it, there is those opportunities where consolidation creates new opportunities for us.

[John S. Chen:]

Right because we will be kind of one of the few standing.

[Pieter Van der Vorst:]

Right.

[Trip Chowdhry:]

The last question I had is the investors pointing out that there is a lot of activity in your Sybase IQ product line, and I was wondering, are we expecting any major upgrade say next six to twelve months on Sybase IQ and if so, what you feature or functionality maybe there? Again, thank--.

[John S. Chen:]

Right. Right now we have IQ 15.0 that's already out, and it was out, I think September of last year maybe a couple of months later than that, and we don't have anything that I am relying on in our forecast that is any major in the next twelve months. It is, we believe that our products are very fresh and extremely competitive. We're obviously working on a lot of stuff. One of the stuff that you will start hearing that we're focusing on is mobile analytics. This is where our mobility and messaging come together with IQ. We have spoken with a few customers and our advisory groups, customer advisory groups. And they all feel that this is very natural and this is absolutely the birth rights of Sybase to play given where we are today and it's going to be a well received feature, but that's not in the works for the next twelve months as far as the product is concerned. It will be in the works for the next twelve months for development, so you have got to wait a little bit more than twelve months.

[Trip Chowdhry:]

Perfect. Thank you.

[John S. Chen:]

Thanks.

[Operator:]

Our next question is from Brent Williams with Benchmark Company.

[Brent Williams:]

Thanks for taking the question, guys.

[John S. Chen:]

Good morning.

[Brent Williams:]

Hi. So first thing, back on the recapture of maintenance customers that Kirk was asking about, are we talking about people who were just sort of briefly late on their maintenance and got screwed up with the paperwork for 30 days or are we talking about people who had been off in the ozone for several years?

[John S. Chen:]

Off in the ocean... ozone. Ocean and ozone. Off in the ozone layer. A little bit of our fault also. Obviously the large customers we never miss, and if it is missed, it is not intentional. Okay? It is really the kind of mid-tier customers and I have a couple names in my head and I would rather not mention them on the call, but those customers who really is our fault of not engaging strong enough that we need to go back. And then in the past quarter, we did, and so we have seen that uptick. Part of the other uptick is a year ago we sold so much license. We should see an obvious uptick because our license base on renew was up, too. I don't want everybody to think that all 4% comes from just because in the past we're plain lazy and now we're not is because there is some here and there's some there, both of them contributed.

[Brent Williams:]

Great. Now, if I look at database deals to new customers, on those initial orders, any thoughts on what percentage of deals will be including IQ? In other words, are you successfully tying the product there with the new customers or are you still really focused on selling into existing customers or anybody that you can get to listen? Can you give me some color of how that might evolve?

[John S. Chen:]

The existing customers are typically... this is a very broad answer, so the top tier customer s typically a customer of both ASE and IQ, and either we have both, winning both at the same time or we win one at a time. The brand new customers is usually we sell one first and then go with the other because it depends on the needs of the brand new customers. A lot of the brand new customers are actually focusing very much on the IQ side because they are trying to do more of an analytics kind of application. So over time I expect our customer base to have both, but the initial move is usually one versus the other. We don't show up and say let me just vote for the two together.

[Brent Williams:]

Okay. And then let's see, on the data integration business you mentioned that that seemed to see some accelerated momentum there. What's changed either internally or competitively in the marketplace that's driven that acceleration?

[John S. Chen:]

There is... it is just a matter of normally we need nine months or so through the process of pricing, training, getting our people comfortable in pitching it and building that pipeline. Our process is roughly usually about 9 to 12 months in the enterprise class customers, and what you're seeing right now is if you remember, the product was really released roughly about a year ago post our Tech Wave a year ago and we're just starting to see that pipeline becoming maturing. There is no real... that I know of any major competitive landscape change because of that. It is just a matter of us going through the pipelining and qualification process and getting to the point now we can sit down with a customer and say, okay, we demonstrated it, you now know what the needs are, whether it is because of the mirror activators, whether it's because of the faster recovery or other things that you're working on, projects you're working on, and we demonstrated now you're in the benchmark, your people getting comfortable, we trained it on it and now we can sit down and talk about the transaction. So it is really more that than is the aging of it than where there is any major internal to do.

[Brent Williams:]

Okay. And last question is there was some other database company, I forget who, announced an upgrade to version 11 of their database engine a couple weeks ago.

[John S. Chen:]

Yes.

[Brent Williams:]

Just wondering if now that you've had a chance to see the marketing message are there any particular areas where you might be licking your chops and seeing that maybe the opportunity to tell your story about particular features where you have an advantage maybe stronger than what you were thinking before they made their announcement?

[John S. Chen:]

No. I haven't had a chance to focus. I know the Company you're talking about. The only thing I focus on is whether they need to give me any royalty for copy catting our approach to this, but other than that I have not really focused in on... from a feature to feature comparisons, we are... that particular company and ours, the one that you forgot, and ours are pretty much very comparable and very formidable, i.e. with the ASE 15 Cluster that share this Cluster, again, we will be the only two companies that actually can do that. They've been ruling that market for awhile, shame on all of us, all the other competitors. Some of the competitors doesn't believe in that architecture strategy. I on the other hand really don't believe in whether I believe our belief... I do believe or don't believe, I want to make sure that our customer has an answer to that and so it is forthcoming. We're in beta now, so I think this is really the only way to adding more features and functionalities that you can tack on as marginal is a smart thing to do, and it is something that the customer appreciates and they are willing to pay for. They typically nowadays don't pay for re-buying the entire engine, buying features and functionality they could get their heads around it, and it is obviously an opportunity for all of us in the market. So it is such that it just happened right now that the two of us are now doing it more than just one, and I haven't really focused in on whether I have more competitive advantage or less based on what they have approached, announced they're going to approach the market with which is a similar way that we've been approaching the last year.

[Brent Williams:]

Okay. Great. Well, that's it for me. Appreciate you taking my questions.

[John S. Chen:]

Sure. Thank you.

[Operator:]

With that there are no further questions in the queue. I would like to turn the call to John Chen for any additional or closing comments.

[John S. Chen:]

Thank you, everybody, and I would just like to take the opportunity to remind all of you that our upcoming Tech Wave is going to be between August 6, and 10, at Mandalay Bay resort in Las Vegas. It will promise to be over 100 degrees. At this venue, we'll provide a detailed update on our overall and wire enterprise strategy. You'll find that very interesting by the way. We'll have a couple of very good speakers to really come and talk about, and customer to, and talk about how we collectively in the industry will move forward at and we will lay out our product and market road maps. So I will hope to see many of you there, and I am sure that we'll hear back from some of you and we have additional questions, feel free to call us. Thank you. Have a good day.