Q1 2004 MatrixOne Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good evening, ladies and gentlemen, and welcome to the MatrixOne first quarter earnings release conference call. At this time all participants in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time.

During the question-and-answer portion of today's call, we ask participants to limit themselves to one question and one follow-up question. If anyone should require assistance during the call, please press star then zero on your touch-tone phone. As a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce Brian Norris, Director of Investor Relations for MatrixOne. Please go ahead.

BRIAN NORRIS, DIRECTOR OF INVESTOR RELATIONS, MATRIXONE INCORPORATED: Good evening, everyone, and thank you for joining us.

With me on the call this evening is Mark O'Connell, the company's President and Chief Executive Officer and Moe Castonguay, the company's Senior Vice President and Chief Financial Officer.

Earlier tonight MatrixOne issued a press release which outlined its first quarter results. In a moment I will turn the call over to Moe who will review these results and then Mark who will share his thoughts on the business.

I will now present the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements made during this call are not promises or guarantees and are subject to risks and uncertainties that could cause our actual results to differ materially from those anticipated. We caution you not to place undue reliance upon any such forward-looking statements which speak only as of the date made. Such statements may relate to the long-term growth prospects of the PLM market, our ability to take advantage of market opportunities, and our position in the market.

Our growth prospects, our plans, objectives, and expected financial and operating results, our ability to respond to economic changes and improve operational efficiency or the benefit of our products to be realized by our customers. Forward-looking statements will also include, without limitation, any statement relating to future events, conditions, or circumstances or using words such as, will, believe, anticipate, expect, could, may, estimate, project, plan, predict, or intend.

For a more detailed discussion of the risks and uncertainties of our business, please refer to our periodic reports filed with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended June 28, 2003.

A Web cast replay of this evening's conference call along with the related press release and accompanying financial and operating statistics is accessible from the company's IR Web site at www.matrixone.com/investor. At this time I would like to turn the call over to Moe.

MAURICE CASTONGUAY, SR. VICE PRESIDENT, CFO, MATRIXONE INCORPORATED: Thank you, Brian, good evening, everyone.

The financial results for the first quarter were as follows: Total revenues were $23.2 million and included software license revenues of $6.1 million and service revenues of $17.1 million. We recorded 40 separate software revenue transactions during the first quarter, one of which was in excess of $1 million. One customer from the automotive industry accounted for 11% of total revenues.

Application revenues represented 40% of software license revenues, with significant revenue from our Engineering Central product, recently released Product Central, and Program Central.

The geographic split of total revenues was 54% from the Americas, 36% from Europe, and 10% from Asia-Pacific. The best performing vertical markets as measured by trailing 12-month software license revenues were high tech at 34%, automotive at 28%, and aerospace and defense at 13%.

Software license revenue was split 27% from new customers and 73% from our install base. The average software revenue transaction was $153,000. Eliminating orders under $75,000, the average software revenue transaction was $325,000.

Looking at the rest of the P&L, total operating expenses, excluding stock-based compensation was $17.2 million, virtually unchanged on a sequential basis despite incremental sales and marketing expenses related to Matrix University, the company's annual sales kickoff and training event for partners and employees.

Total headcount at the end of the first quarter was 442, down from 450 at the end of the fourth quarter.

Product gross margin was 75% due to lower software license revenue, a higher percentage of revenue from integration products, and amortizations of third-party royalties. Service gross margin improved to 36%, reflecting solid performance on our software business and continued cost containment efforts.

Other income, which consists primarily of interest income, was $315,000. A tax revision of $53,000 was recorded as a result of minimum taxes due in various tax jurisdictions.

Net loss was $6.7 million, or 14 cents per share, slightly better than the preliminary estimates we provided on October 3rd. Pro forma net loss was $6.3 million, or 13 cents per share, also slightly better than preliminary estimates. Pro forma results exclude stock-based compensation charges of $379,000, or 1 cent per share.

Moving to the balance sheet, at the end of the first quarter, we had cash and cash equivalents of $121.5 million. Day sales outstanding were 78 days.

Deferred revenue was up slightly on a sequential basis to $18.5 million and we ended the quarter with no long-term debt and total net worth of $123.6 million.

With that I will turn the call over to Mark for his comments.

MARK O'CONNELL, PRESIDENT, CEO, MATRIXONE INCORPORATED: Good evening, everyone.

While we were disappointed with our first quarter operating results, we do not believe our performance this past quarter is indicative of the PLM market opportunity or our ability to capitalize on it. As Moe outlined, we ended the quarter with our service business on plan with improved margins but with an unanticipated shortfall in software license revenue that impacted our bottom line performance.

Tonight I will share with you our perspective on the PLM market, the actions we are taking to improve sales execution and align our operating costs, and our strategic initiatives to drive increased software revenue and improve our performance over the next several quarters.

Let me start with our perspective on the PLM market. We are all frustrated, the geopolitical factors, the global economy and very constrained IT capital spending have caused the PLM market to lag behind expectations.

At many companies, PLM initiatives continue to compete for funding with the completion of large ERP and supply chain projects. Despite this, we, like many industry analysts, believe the compelling benefits of product life cycle management that are being realized by MatrixOne customers such as General Electric, Honda, Nokia, Texas Instruments, Toshiba, and Proctor & Gamble will drive increased adoption and growth over the next several quarters.

This week, Mark Halpern, PLM research director at Gartner is presenting the results of his latest research at the Gartner symposium in Orlando, Florida. These findings clearly demonstrate that PLM is a strategic class of software that provides a much greater impact on revenue generation than either ERP or supply chain management solutions.

While Gartner recognizes that PLM has historically received a much smaller allocation of corporate IT investments, they predict that PLM will experience significant growth over the next several years as the market understands the dual impact of PLM as both a cost reduction and revenue generation engine.

AMR Research also gave its clients similar advice in their recent deep dive on the PLM market. In this comprehensive study, AMR advised companies to raise the priority of their PLM initiatives to improve their ability and efficiency in bringing new products to market.

According to Kevin O'Marah of AMR, as companies focus on the strategic class of enterprise software, vendors like MatrixOne with a clear technology advantage and a track record of customer success will be rewarded over the long-term.

In the near-term, however, we recognize that we must balance our belief in the strategic benefits of PLM and the significant market opportunity it represents with the reality of today's customer-buying behavior. We have taken decisive action to improve sales execution and align our operating cost structure with current market conditions.

Let's start with the actions we're taking to improve sales execution. Our…