Filed by Centra Software, Inc.
pursuant to Rule 425 under the
Securities Act of 1933, as amended
and deemed filed pursuant to Rule
14a-12 under the Securities
Exchange Act of 1934, as amended
Subject Company:
Centra Software, Inc.
Commission File No. 000-27861
Transcript of Fourth Quarter Earnings Conference Call
of Centra Software, Inc.
This filing is made to publish the following transcript of the fourth
quarter earnings conference call of Centra Software, Inc. including
presentations by Leon Navickas, Chairman of the Board and Chief Executive
Officer of Centra, and Stephen A. Johnson, Chief Financial Officer, Treasurer
and Secretary of Centra.
Centra Software, Inc.
Fourth Quarter Earnings Conference Call
January 24, 2002
5:30 pm EST
Operator: Good day - afternoon - good afternoon ladies and gentlemen,
welcome to Centra's 2001 Fourth Quarter and Year End
teleconference call. At this time, all participants are in a
listen-only mode. Later, we will conduct a question-and-
answer session and instructions will follow at that time. If
anyone should require assistance during the call, please
press the star key followed by the 0 on your touch-tone
phone. As a reminder, ladies and gentlemen, this conference
is being recorded. In addition, this teleconference is the
copyrighted material of Centra Software. Any use,
dissemination, or reproduction of this teleconference is
unlawful without the express written permission of Centra.
I would now like to introduce your host for today's
conference call, Mr. Corrie Cutler from Morgan Walke
Associates. Please go ahead sir.
Corrie Cutler: Thank you operator. Good afternoon everyone and welcome to
Centra's conference call. By now you should have received a
copy of the company's press release. If you have not, please
call my office at 212-850-5664 and a copy will be faxed to
you.
With us this afternoon are Leon Navickas, Chief Executive
Officer, Tony Mark, President and Chief Operating Officer,
and Steve Johnson, Chief Financial Officer.
After management has completed a review of the quarter, we
will open the call for questions.
Before management begins their formal remarks, I'd like to
read the following safe harbor language.
This call may contain forward-looking statements that
involve risks and uncertainties regarding Centra Software.
Investors are cautioned that such results or events
predicted in these statements may differ materially from
actual future events or results. These risks factors include
but not are limited to technologically - excuse me,
technological difficulties, the results of future research,
lack of product demand and market acceptance for future and
current products, the effect of economic conditions, the
impact of competitive products and pricing, and other
factors outside the control of the company which are
detailed from time to time in the company's SEC reports.
Now let's turn the call over to Centra's Chief Executive
Officer, Mr. Leon Navickas.
Leon Navickas: Good afternoon and thank you for joining us today. Our
agenda is as follows. First, I'll provide an overview of
Centra's performance across the various aspects of our
business during the fourth quarter and year ended December
31, 2001, and briefly comment on the announcement of our
plans to merge with SmartForce. Following that Steve
Johnson, Centra's Chief Financial Officer, will report on
the company's financial results. We will conclude this
conference call with a question and answer period. So
without further ado let's begin.
At our last quarterly conference call in October we
delivered news that despite demand for our solutions, our
ability to close business in Q3 had been directly impacted
by unforeseen economic and geopolitical events. Sales cycles
lengthened as prospects paused to evaluate the ramifications
on their own business and reassess expenditures. Fortunately
no deals were cancelled, only deferred.
Today, I am pleased to report to you that we had a strong
fourth quarter. Demand for our products and services has
heightened as a result of these challenging economic times
and we continue to win the majority of the competitive
evaluations that we participate in. In fact, we grew our
market share by signing a record number of new customers in
the fourth
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quarter and closing most of the deals that were delayed by
economic concerns in the third quarter.
For the year, we grew our international sales and our ASP
business according to plan, extended our platform with the
acquisition and successful integration of Mindlever,
generated significant traction and momentum in sales of the
knowledge products, and managed our business to achieve
Centra's first cash flow positive quarter.
In Q4 Centra generated a record $11 million in revenue,
meeting the analysts' consensus estimates. This represents a
20% increase from $9.2 million in the third quarter and a
41% increase over the same period last year. The company
came in on target for the year with $39.1 million in total
revenue. A 70% increase over last year. In addition to the
increased revenues for the fourth quarter, bookings were the
highest in the company's history providing positive momentum
into 2002.
Pro forma EPS loss for Q4 was 8 cents per share, bettering
analysts estimates by 1 penny and down from a pro forma loss
of 14 cents per share for the third quarter. For the year
2001, pro forma EPS loss was 47 cents per share, versus a
pro forma EPS loss of 57 cents per share in 2000.
Our gross margins improved this quarter on the strength of
our software business model, up 400 basis points
sequentially from the previous quarter to 84%. Most of this
increase can be attributed to higher margins for both
Centra's ASP service and for our professional services
business.
Software license revenue, which accounted for 69% of total
revenue for the quarter, was $7.6 million. A 21% increase
over the same period last year and an 18% increase
sequentially over the prior quarter.
Services revenue for the quarter, driven by a surge in
demand over the second half of 2001 for the company's
products delivered on a subscription basis by ASP model,
increased by 24% over the previous quarter to $3.4 million.
The company had a very strong quarter for new customer
acquisition signing 97 new accounts. This brings the total
roster of customers worldwide to over 775, serving a
population of nearly 2 million licensed users. New customers
include Ameritas, AutoNation, BMW, CheckFree,
CitiFinancial, Deutsche Telekom, Genentech, Cambar and
Barkley, Hitachi, Iron Mountain, Kinkos, Navidmedix and NCR
Teradata, New Balance, Queensland Rail, Sybase,
Underwriters Laboratories, University of Michigan, and
University of Montreal.
-3-
Through efforts to advance customer propagation more than
50% of total revenue in the fourth quarter came from our
install base corporations, government agencies, and
universities.
Organizations that added central licenses to their existing
deployments included Aventis, Cadbury Schweppes, Cingular,
ConAgra, Daimler-Chrysler, FirstUnion, France Telecom,
McKesson, Nortel Networks, Novartis, Ortho-McNeil,
PricewaterhouseCoopers, Siemens, and the US Internal Revenue
Service.
Other highlights of the quarter included the delivery of
CentraOne 5.3, which provides significant new recording
capabilities and out of the box support of Centra Knowledge
Catalogue, the unique product extension that gives users
instant access to searchable, self-service library of
knowledge objects, Centra recordings, and other third party
content from their Centra home page. These major
enhancements to CentraOne further reinforce the online
collaborative learning experience and maximize customers
investments through unparalleled support for standards that
insure interoperability and content reusability across a
broad range of live and self-paced delivery formats.
During the quarter we also strengthened our partner
ecosystem while deepening relationships with KPMG and PwC
Consulting, two of the world's largest professional services
firms. In Q4 KPMG Consulting Europe announced the
integration of Centra into a new end-to-end interactive
learning solution called ILS. And PwC Consulting selected
Centra to provide e-learning and real-time collaboration
capabilities to their global 2000 customers through a new
business initiative known as B2E.
Other new solution partners in Q4 included agreements with
Blackboard, DK Systems, Edcor, ePharmaLearning, Epiance, The
Forum Corporation, GP e-Learning Technologies, Plateau
Systems and Richardson.
Altering our growing international presence, Centra
established a sales office in Germany increasing its ability
to acquire and manage clients in one of the fastest growing
markets in Europe. Working closely with its local
distribution pattern, TERTIA Edusoft GmbH, Centra has added
some of the most prestigious organizations in Germany to its
customer list including Deutsche Telekom, Siemens AG, and
Sony Europe GmbH.
In Asia, a newly formed e-learning initiative group called
the EIG, comprised of Oracle Corporation, Global Knowledge,
CSK Corporation and Macnica, which is Centra's exclusive
distribution partner in Japan, announced that it will
underpin its offerings with Centra's real-time
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collaboration platform to accelerate the adoption of
e-learning and collaboration within corporations across
Japan.
Centra also added four new distribution partners to its
international indirect sales channel in Q4 expanding
coverage in the Nordics and Latin America.
I'm very proud of the Centra team of employees and business
partners in achieving these results. We entered 2002 with
great expectations to see our business grow and flourish
further.
So now, let me spend a moment on a topic of our business
combination with SmartForce. First of all, we see this as
two phenomenally successful and market leading companies
coming together to meet real customer demand.
While more and more businesses deploy e-learning solutions
to accelerate knowledge transfer and increase human
interaction at lower cost, customers worldwide are looking
for one vendor to deliver solutions, not just component
technologies and point products. With Centra this vendor is
now SmartForce. As one company we plan to integrate the
strongest elements of our respected technology creating the
most robust and powerful e-learning platform. On this
platform we will deliver a wealth of content and
applications, some of which will come from SmartForce and
others from our vital ecosystem of partners.
Customers will be served by our comprehensive solutions. And
our business model will be enhanced by AOL-like economics
capitalizing on the interplay between our platform and the
value-add delivered on it resulting in lucrative recurring
revenue opportunity. This will be a win-win situation for
Centra customers. For the first time they will be able to
seamlessly deploy the world's largest and most engaging
content and robust set of e-learning applications over their
existing Centra infrastructure.
For the new SmartForce, this will represent a very large
cross selling opportunity starting today. For the existing
SmartForce customers we will offer more technology
infrastructure intended to preserve and enhance their
investment in e-learning solutions.
The SmartForce sales force of 220 strong and growing will
offer Centra capabilities to new accounts and existing
deployments.
This should also be good news for the many potential
customers that are waiting for a comprehensive solutions
provider to consolidate the market and simplify the
provisioning of e-learning.
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We plan to be the enabler and prime beneficiary of the
expanding market.
From an investor's perspective, the combined company has
scale, market leadership, and long-term sustainability. The
combined R&D investment that I will manage will be equal to
the cumulative spend of all the public e-learning companies.
Our brand and global presence will drive revenue opportunity
from around the world. With high gross margins and excellent
business fundamentals we envision an accretive transaction
that will generate healthy profits going forward.
To remain in the lead there will be very little that we
won't be able to do to address customer needs and extend our
leadership. This company is truly poised to be the industry
juggernaut with great opportunity for long-term equity
appreciation.
The Centra team is looking forward to joining SmartForce on
top of the e-learning industry, building this large and
sustainably profitable company for our customers, partners,
stakeholders, and employees. And I look forward to seeing
many of you in person over the next several weeks as we
launch the business combination of Centra with SmartForce.
Thank you very much and now let me turn the podium over to
Steve Johnson, Centra's Chief Financial Officer.
Steve Johnson: Thank you Leon. For the next few minutes, I would like to
review with you the financial highlights of the fourth
quarter and for the year 2001. At the end, I'll provide
insight into our financial objectives for the first quarter
of 2002 and for the full 2002 year.
First, I am very pleased to announce that the fourth
quarter, by almost all financial metrics, was an extremely
positive quarter and one of the best quarters in the
company's history.
Some of the highlights include record bookings, the highest
quarterly amount to date for the company which was fueled by
strong activity from Centra's outsourced application
service, ASP, increased customer propagation from our
products and services, and a record number of new customers
added to our growing but large installed base now totaling
775 customers.
In addition, our pro forma loss per share was significantly
reduced down to 8 cents as expenses continued to remain in
check while the top line revenues increased significantly
during the quarter.
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Lastly, for the fourth quarter, the company achieved a major
financial milestone. This was the first quarter in which the
company generated positive cash flow which, I might add,
amounted to approximately $1.1 million. The positive cash
flow was attributed to our strong efforts in collecting
$13.8 million in receivables during the quarter. In turn,
this also had a very favorable effect on reducing our DSOs
down to more normal levels. Our DSO at the end of the year
was 79 days.
Now, let me begin with a review of the income statement.
Total revenues for the fourth quarter of 2001 was $11
million. This was up 41% over the same period last year and
a 20% increase over the third quarter. Revenue for the full
year of 2001 was $39.1 million, an increase of 70% over the
previous year of $23 million.
Product license revenues for the fourth quarter were $7.6
million. A 21% increase over the same quarter last year and
an 18% increase over last quarter. Product license revenue
for the full year of 2001 was $28.8 million or a 54%
increase over the prior year.
Service revenues continued to grow at an increased rate
primarily driven by the demand for the company's software
products delivered on a hosted service basis or on a rental
basis as an ASP. For the fourth quarter, service revenues
increased to $3.4 million. A 124% increase over the fourth
quarter of 2000 and a 24% increase from the third quarter.
In addition, actual ASP orders during the quarter
represented approximately 10% of the total value of our
bookings for the fourth quarter and 9% of the total bookings
for the full year.
Gross profit was $9.3 million for the quarter. An increase
of 42% over the same period last year and an increase of 26%
from the third quarter.
Gross margins for the fourth quarter increased to 84%, an
improvement of 400 basis points from the third quarter.
The higher gross margin percent was attributed to higher
margins on Centra's ASP servers and on our maintenance
contract and support business during the fourth quarter.
Total operating expenses for the fourth quarter, excluding
non-cash items, was $11.4 million. A 5% increase over the
same period last year and only a slight 2% sequential
increase from the third quarter. For the full year,
operating expenses, excluding non-cash items, was $45.4
million, a 26% increase over the prior year.
-7-
Taking a closer look at the operating expenses, sales and
marketing expenses for the quarter increased in absolute
dollars from the third quarter by approximately $700,000 to
$6.6 million and declined sequentially as a percentage of
revenues from 64% to 59%. The increase in dollars is a
result of increased marketing activity and an increase in
the provision of bad debts.
Sales and marketing expenses for the full year 2001
increased by $2.9 million to $25.5 million from $22.6
million in 2000. This increase is primarily attributed to
headcount related spending.
Product development expenses for the fourth quarter
decreased from the third quarter by approximately $400,000
to $3 million. And declined as a percentage of revenues from
37% to 27%. The decrease can be attributed to reduced
recruiting and consulting fees and a reduction in other
headcount related expenses. Product development expenses for
the full year 2001 increased by $4 million to $12.5 million
from $8.5 million in 2000. This increases is primarily
attributable to headcount related spending.
General administrative expenses for the quarter remained
flat with the previous quarter at $1.8 million, and declined
quarter to quarter to 16% of revenues from 20% of revenues
in the previous quarter. General and administrative expenses
for the full year 2001 increased by $2.4 million to $7.4
million from $5 million in 2000. The increase is related to
increased headcount and an increase in audit and legal
services.
On a pro forma basis, which excludes non-cash stock based
compensation expense and the amortization of goodwill and
other intangible assets related to the Mindlever
acquisition, the net loss for the fourth quarter was $1.9
million or 8 cents per share compared to a pro forma net
loss of $3.2 million or 14 cents per share in the same
period last year.
The pro forma net loss for the year 2001, which in addition
to the items excluded for the fourth quarter excludes a one
time non-operating charge in the first quarter related to
losses from short term investments and the write-off of
acquired in-process research and development related to the
Mindlever acquisition, was $11.5 million or 47 cents per
share compared to a pro forma net loss of $12.9 million or
57 cents per share for the year 2000.
The pro forma net loss per share for the fourth quarter
improved by 5 cents over the third quarter.
Net loss on a GAAP basis for the fourth quarter of 2001 was
$2.6 million or 10 cents per share compared with a net loss
of $3.4 million or 15 cents
-8-
per share for the same period of last year. Net loss for the
full year of 2001 was $16.7 million or 68 cents per share
compared with a net loss of $14.5 million or 67 cents per
share for the same period of last year.
Next I'd like to turn your attention to the balance sheet.
As I mentioned earlier, the company generated $1.1 million
in positive cash flow in the fourth quarter. This is the
first quarter in which the company was cash flow positive.
And this was the direct result of strong receivable
collections during the quarter. Our cash position, including
short-term investments, at the end of the fourth quarter
totaled $48.2 million.
Net accounts receivables decreased during the fourth quarter
by $237,000 to $9.7 million. We collected $13.8 million in
receivables during the quarter. As result, our DSOs declined
significantly to 79 days from 96 days in the previous
quarter.
Lastly, deferred revenue at the end of the quarter was $8.2
million, a significant increase of over $2 million or 32%
over the previous quarter.
Now let me review the financial objectives of the company
for the first quarter and full year of 2002.
Reflecting the seasonal trend of our business, which in the
first quarter typically produces the lowest revenue growth
rate of any quarter in the year, we expect to report
revenues for the first quarter of 2002 in the range of 11 to
$11.3 million.
The pro forma net loss for the quarter excluding stock based
compensation expense and other intangible assets is expected
to be 8 cents per share while the net loss on a GAAP basis
for the first quarter is expected to be 10 cents per share.
For 2002 our expectations are consistent with what we have
stated previously, that census revenue is anticipated to be
in the range of $55 to $60 million representing annual
revenue growth of approximately 50%.
Gross margin for the year are expected to be in the range of
84 to 86%.
The company's objective is to report positive earnings on a
pro forma basis excluding stock based compensation expense
and other intangible assets in the range of 10 to 13 cents
per share. And positive earnings on a GAAP basis of 4 to 7
cents per share.
Based on management's current assessment of market
conditions, we forecast achieving profitability on a pro
forma basis in the first half of
-9-
2002. Now I'd like to open the call up to answer any
questions you may have.
Operator: Thank you. Our Q&A session will be handled electronically
today. To ask a question, please press the star key followed
by the digit 1 on your touch-tone telephone. We'll take your
questions in the order we receive them and as many as time
permits. We'll pause for a moment to assemble our roster.
And our first question today comes from Mr. Dalton Chandler
with Needham & Company.
Dalton Chandler: Yeah hi guys. I was just wondering if maybe you could
comment on Mindlever. I know you had some expectations for
its contribution this quarter if, you know, met those
expectations or not and what you see going forward there?
Leon Navickas: Hi, Dalton, yes, we met those expectations and we're very
happy with the progress we've made integrating the Mindlever
technology into the central end platform and believe that
going forward as an integral part of the solution we'll have
more opportunity to put that product into the hands of our
existing customer base, new customers, and will provide more
propagation opportunity in the future.
Dalton Chandler: Okay. I don't know if you gave this or not, did you give the
average selling price on the quarter? I didn't hear it.
Steve Johnson: No, we didn't. The average selling price is consistent with
past quarters in the neighborhood of $100,000.
Dalton Chandler: Okay. And one other question on the SmartForce merger. Since
they're an Irish corporation, will you be able to utilize
any of your tax benefits with the merger or no?
Steve Johnson: Not directly the result of the merger to start with. But
there will be, as time progresses, there will be revenues or
profits in the United States that can be offset by some of
the tax losses that they would pick up. The exact amount has
not been determined.
Dalton Chandler: Okay. Thanks very much.
Steve Johnson: No problem.
Operator: Thank you and our next question comes from Mr. George Sutton
with RBC Capital Markets.
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George Sutton: Hi, guys. I wanted to see if you could give some sense of
the reaction that you've seen from partners and customers
and everybody since this deal was announced?
Leon Navickas: Well from an employee standpoint I think we're all very
jazzed to execute on a breakout strategy to create the
industry gorilla. From our partners' standpoint this has
been some mixed reaction. Some are more directly affected by
some of the overlapping capabilities that SmartForce brings.
And we'll need to manage those carefully.
Our stated goal is to be open and extensible like we always
have been and continue to have that philosophy as part of
SmartForce and as part of our platform going forward.
And in terms of some other partners, certainly the
combination presents many more value-add opportunities to
create new businesses, drive larger transactions and think
it's all positive.
George Sutton: I'm curious how your sales force will be integrated into the
SmartForce sales force meeting next week. Will there be any
direct involvement?
Leon Navickas: We can't really do anything directly with each other's
products until we pass Hart-Scott-Rodino. And thereafter
we'll be doubling our efforts. Given that it's a purchase
transaction we'll be free to begin integration of products
in a substantial way and begin sharing leads and so forth.
Going forward we are already engaged in a partnering
arrangement of the same type that we have with other third
party companies who are doing business with us. And so that
collaboration market is already beginning at the same level
as other companies.
And we expect that to get stronger and more meaningful going
forward so that by the time this transaction closes not only
will we have some integrated solutions to offer our
customers but a sales force that's fully geared up and ready
to go.
How it's going to be organized is as a separate unit so as
to maintain some of its autonomy as well as its control over
its destiny in terms of delivering on the revenue for this
year. Next year the plan is to have a gradual integration of
the SmartForce sales force and the Centra sales force into a
larger entity.
George Sutton: And lastly you made an interesting parallel to AOL. I admit
my naivete about AOL economics. Can you go into a little
more detail there?
-11-
Leon Navickas: Well there's a tremendous interplay between content and
platforms or delivery mechanisms that AOL has taken
advantage of in terms of being able to drive their delivery
system with the appeal of their content. And then once their
delivery system is in place drive additional content through
that delivery system as value-add.
So we believe that same opportunity will exist for the new
SmartForce as we're able to drive solutions into the Global
2000 and bring along the infrastructure or the platform and
then when the platform is in place bring along additional
value-add in the form of content and other solutions from
ourselves and from third parties, all of which contribute to
new sources of revenue and a revenue model that's much more
robust than if we had individual piece parts or different
kind of business model.
George Sutton: Got it. Okay congratulations.
Leon Navickas: Thank you.
Operator: Thank you. Once again that's star, 1 to ask a question.
And our next question will come from Mr. Howard Block with
Bank of America Securities.
Howard Block: Good afternoon, Leon, Steve. How are you? A question I
guess, Steve, actually on the ASP business that contributing
to the services revenue, can you give us a sense maybe in
more of static state were you to mature to that point before
the acquisition what the gross margin would be on the ASP
business?
Steve Johnson: Sure. As a static state today it's better than 50% gross
margin. And we expect it to grow to at least 70 to 75% gross
margin.
Howard Block: Okay so the ASP business then right now doesn't necessarily
have much better gross margin than the other services
business. But as it grows it begin to approach the software
gross margin?
Steve Johnson: Yes, although the services, the maintenance piece of the
services is also continuing to increase in terms of our
margins. And I expect that to be in the mid-60s over time,
the 60 gross margin range.
Howard Block: And then on the 775 customers, Leon, I'm sure you've had
some chance to sort give at least give a cursory review of
those customers and sort of map it to SmartForce's installed
base.
Can you give a little color as to where you see maybe even
quantify a little bit a number of accounts where there's
either parallel efforts, number of
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accounts where you maybe have the same relationship with the
business manager, where you have different relationships
just so we can sort of get a sense as to how long until we
would see some synergies and merge from the combined
entities?
Leon Navickas: Sure. At first blush we've done a review of our customer
bases. And it looks as though among SmartForce's more than
2500 account base we have about 10% common customers. And
among our account base we have about 50% common customers
within their base. That's as a starting point.
And I think then we're also both engaged in really creating
solutions. And so going forward we're going to be doubling
our efforts to attack economic buyers in functional
organizations across sales, IT, human resources and service.
And in those functional organizations I'm sure we're going
to find more and more commonality.
There's also the idea that with each of our respective
solutions given that there's very little overlap there will
be opportunity to bring one another into each other's
opportunities. And that will be something that will
obviously result in revenue synergies for us going forward
and much more powerful revenue synergies when products are
more integrated and when the sales forces are more incented
to collaborate with each other.
Howard Block: Okay. And in terms of the comments about the bookings being
the best ever, is it possible to even attempt to maybe back
out of that bookings in the fourth quarter what maybe would
have been booked in the third quarter if not for the tragic
September end to get a sense of how strong the bookings
really were in the more normalized environment?
Steve Johnson: Sure. We estimate between 3/4 and $1 million was activity
that we expected to close in the third quarter that actually
moved into the fourth quarter. But bear in mind you always
have some stuff that moves. But again, this was a little bit
more pronounced with the events of 9/11.
Howard Block: Okay and then lastly, Steve, I guess on the DSO that is an
impressive improvement. And to that extent maybe you can try
to reconcile how you were able to improve DSOs sequentially
whereas SmartForce obviously has their sort of DSO
challenges and an erosion, if you will, sequentially? Is
there something unique to your cash collecting efforts or
something that...
Steve Johnson: Well we have - the way we do it is we communicate with the
field. And we incorporate them into the help of that
process. But we lend a lot of focus to it. We have a
terrific team here that we stay on top of the receivables.
We invoice the appropriate way so that the customer has no
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complaint and doesn't delay the payment process. And we just
take the normal aggressive tactics and work on it.
Howard Block: Okay thanks a lot, guys.
Steve Johnson: Thanks, Howard.
Operator: Okay and one final reminder, if you'd like to ask a
question, please press star, 1 on your phone.
And we have a follow-up question from Mr. George Sutton.
George Sutton: Leon, could you run through your overlap numbers again? I
didn't quite understand the 10 and the 50%.
Leon Navickas: Ten percent of SmartForce's customer base are in common with
our customer base. And 50% of our customer base seems to be
in common with SmartForce's base. So that's how we look at
the overlap.
And we have some very large customers in common right off
the get-go that we know of because they've called us and
actually requested -- I'm being mild about the requesting
part of it -- to get our products integrated. And these
include accounts like Accenture and Ariba and KPMG. So we
intend to make those customers real happy and basically take
that template of having the demand for our combined products
and services delivered as a comprehensive solution sometime
after the transaction closes midyear.
George Sutton: Okay, great. Thanks.
Leon Navickas: You're welcome.
Operator: Thank you. And our next question will come from Mr. Peter
Martin with Jefferies & Company.
Peter Martin: Leon, I was wondering if you could provide some inside into
the product roadmap in terms of where you might go with R&D
and what you may release if it wouldn't, you know, put you
in a competitive bind, if you have any insight you could
provide to us?
Leon Navickas: Well, first of all, I'm going to be managing quite a lot of
firepower in terms of R&D capability. And we're going to be
able to do a lot in terms of inventing, innovating,
delivering solutions to customers any way they want to buy
them.
The first thing we'll do is look and find redundancies if
there are any and try to deploy the redundant work forces on
the task of integration,
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essentially doubling down on our efforts to create
seamlessly integrated solutions and have those ready for the
marketplace. That's the first task at hand. That's as much
as we can see right now in terms of the highest priority
development initiatives.
And then going forward I think it's safe to say you should
expect to see some of the things we've been talking about as
Centra and building out our e-learning collaborative
infrastructure as something that probably will continue to
be on the development roadmap. And we'll see those new
products and services coming out later.
Peter Martin: And I guess that was what I was trying to pinpoint is just
from the Centra side, you know, what is the focus right now
from your R&D department? What capabilities do you think are
critical to maintain your account growth and your leadership
position that you've established?
Leon Navickas: Well first of all, I think it's in three general categories.
First there's platforms. And we continue to invest heavily
in creating the best realtime collaborative engine that
exists on the market today with voice-over-IP and
application sharing and robust through the firewall and
over-proxy-server type communication capabilities.
We're also investing in knowledge management capabilities
for content and for the personalization and searching of
learning objects and central recordings and all kinds of
other dynamic and volatile content objects that can be
created.
Secondly, we're investing in applications. And these
applications include our live collaborative experiences.
Symposium conference and e-meetings are examples of those
collaborative experiences aimed at different types of ways
people communicate, collaborate and learn with each other.
We're also investing in content composers. These are tools
that enable subject matter experts to quickly get their arms
around their content and make it available through the
collaborative system. And we're investing in capabilities to
manage our systems more effectively on a global basis and
make them scalable and extensible. That's at the application
layer.
And the third piece that we're investing in are solutions.
And with SmartForce this will be a very important initiative
as we combine a very rich palette of capabilities that will
be some of our capabilities and some of theirs to create
end-to-end solutions that will appeal to economic buyers and
sales IT services and HR and where we will be able to
continue and penetrate and propagate according to our sales
model and drive our platform and drive value-added solutions
through our propagation.
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Peter Martin: Thank you so much.
Leon Navickas: You're welcome.
Operator: Thank you and our next question comes from Mr. Trace
Urdan with Think Equity Partners.
Trace Urdan: Afternoon, gentlemen. Leon, my principle question
about the merger is just as to the timing. I mean,
clearly you guys had a strong quarter. You seemed to
be selling into the enterprise fine on a standalone
basis. And you have, you know, the partner network
that you've described.
I'm wondering, you know, what it was that prompted
you to make this move with SmartForce at this point
versus, you know, a while ago versus, you know, at
some point in the future?
Leon Navickas: Well as I've been saying for about - at these
quarterly conference calls, we at Centra intended to
drive the inevitable industry consolidation
(inaudible). And we took the opportunity to do that
while we were in the strongest position to influence
our own outcomes and, therefore, recognize an
absolutely enormous opportunity to create an industry
juggernaut by putting two companies together, pursued
it aggressively and got it done so that we can make
2002 a very exciting year and essentially 2003 an
incredibly exciting year as we believe we'll be at
the top of the e-learning industry with platform
technology, value-added applications, content tools
and services that will be the catalyst event to
create this inflection in demand that we believe will
come from lots of new customers coming to the
marketplace looking for solutions that are easy to
deploy, easy to buy, simple, low cost to own. And we
intend to get started on that right away and become
the industry leader in that manner.
Trace Urdan: All right, I understand the rationale. I guess I'm
still wondering what the catalyst was? Were you
seeing some change in customer behavior? Was there
something about the way that the Mindlever - you
know, the way that was being received by customers
that made you think that this merger needed to happen
sooner rather than later?
Leon Navickas: I think you shouldn't read too much into it. It's
really as simply as two companies who did not need to
merge to be successful recognizing an enormous
opportunity and taking it, being able to really go on
a go out on a high note, attack a business that is
just sitting there waiting for some company to go and
capitalize on it. And we wanted to be that company
and so did SmartForce.
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And it's as simple as that. We saw a terrific
opportunity. And I think it's going to mean a lot of
benefits for our existing customers, our partners and
our investors going forward with lots of potential
equity appreciation.
Trace Urdan: Okay. Thank you.
Operator: Thank you. Mr. Clayton Kaneshiro with First Boston
has our next question.
Clayton Kaneshiro: Hello and congratulations on the quarter. Just a
couple of quick modeling questions, when I look at
the maintenance services component of your business,
what was the gross margin there? And where could it
go?
Steve Johnson: Clayton, this is Steve. I see the maintenance
excluding the ASP part of the business growing to -in
terms of margins growing to a 65% margin and in terms
of the percentage of the business, I can see that
growing to about 20 to 25% as our top line continues
to grow.
Clayton Kaneshiro: Okay. And in the quarter the maintenance gross margin
is as of now?
Steve Johnson: The maintenance gross margin right now is in the high
50% gross margin range.
Clayton Kaneshiro: Okay, okay. Great. Just one more thing, when I look
at the upgrade revenues or, you know, your installed
based revenues, can you talk about the mix between
product upgrade and user upgrade? Has that changed
meaningfully with the Mindlever acquisition here over
the last couple of quarters? Or has the mix not
changed significantly as of it?
Steve Johnson: Well we've seen a shift this year in terms of our
installed base. Because it is much larger now we're
starting to see more revenues generated from our
installed base. Even though we've had record number
of new customers, nonetheless because we're getting
a broader base, we're actually seeing that it's at
least 50% of our business now is coming from our
installed base. I think you should model that going
forward.
Clayton Kaneshiro: I guess within that 50% of the revenues coming from
the installed base, when I look at it maybe upgrades
to different types of products, different types of
servers that you offer versus a user upgrade has that
mix changed?
Steve Johnson: No, I mean...
Leon Navickas: Not really. We're still selling as many additional
user licenses to expand deployments as we are server
of various shapes and sizes to support the various
capabilities that are add-ons to our product.
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Steve Johnson: Right. There's both the increase relative to what you
might call upgrades of new modules whether it be from
symposium and adding on conference but also the
number of license continues to spread and propagate
throughout the organization.
Clayton Kaneshiro: Right. Okay. Thank you. That's helpful.
Operator: Thank you and now we have a follow-up question from
Mr. Peter Martin.
Peter Martin: Steve, I wanted to ask about the deferred
revenue coming in at the end of the year at about
$8.1 million. And I want to ask you what the
pull-through is to the revenue line? And is a lot of
that revenue just the maintenance contracts that will
be recognized ratably?
Steve Johnson: A percentage of it is. Also a significant percentage
is coming from our ASP business, which also gets
recognized ratably.
Peter Martin: Okay so overall it really is the maintenance and the
ASP which will be pulled through over the length of
the contract, 12 months or so.
Steve Johnson: Yeah typically that's what our deferred is. And what
happens is - yes you should expect all of that to be
pulled through in 2002. Okay that's the answer. Our
licenses mainly end up in a backlog position and not
on the books of the company.
Peter Martin: Correct because once you - I mean, you have a pretty
installation so you'd be recognizing that revenue
during the period.
Steve Johnson: Exactly.
Peter Martin: All right, I appreciate that.
Steve Johnson: No problem.
Operator: Thank you and that concludes our question and answer
session for today. I'll now turn the call back over
to Mr. Leon Navickas.
Leon Navickas: Thank you very much, everyone, for attending. I look
forward to reporting again great results to you at
the end of our Q1 2002.
Steve Johnson: Thanks
Leon Navickas: Goodbye.
Operator: And that concludes today's conference. Thank you for
calling.
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[End of Transcript]
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