The Daily Magic Formula Stock for 07/13/2008 is Deltek Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.
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We are a leading provider of enterprise applications software and related services designed and developed specifically for project-focused organizations. Our customers represent a wide range of industries, including architectural and engineering (â€śA/Eâ€ť) firms, aerospace and defense and other federal government contractors, information technology services firms, consulting companies, discrete project manufacturing companies, grant-based not-for-profit organizations and government agencies, among others.
These project-focused organizations generate revenue from defined, discrete, customer-specific engagements or activities, rather than from mass-producing or distributing products, and they typically require specialized software to help them automate complex business processes around the engagement, execution and delivery of projects. Our software enables them to greatly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate project-specific financial information and real-time performance measurements surrounding the management and delivery of projects.
With our software applications, project-focused organizations can better measure business results, optimize performance and streamline operations, thereby enabling them to win new business. As of December 31, 2007, we had over 12,000 customers worldwide that spanned numerous project-focused industries and ranged in size from small organizations to large enterprises.
We believe the potential market for enterprise applications software for project-focused organizations is large and growing. Project-focused firms span numerous industries and range in size from small and medium-sized local and regional firms to Fortune 100 global organizations. International Data Corporation (â€śIDCâ€ť) estimated the size of the worldwide enterprise software market for project-focused organizations at $17.4 billion in 2005 and projected it to grow to $21.4 billion by 2010.
We believe that spending on software and technology in this market is increasing in large part due to growth in the services-based economy and the fact that enterprise applications software has generally become more affordable and accessible to small and medium-sized businesses. In 2006, AMR Research estimated that the small and midsize business market segment of the enterprise applications software market is the fastest growing segment, with expected cumulative annual growth rates of 8% to 10% from 2005 to 2010. We believe we are well positioned in this segment, as more than 95% of our customers have less than 1,000 employees.
Our enterprise applications software products provide end-to-end business process functionality designed to streamline and manage the complex business processes of project-focused organizations. Our software solutions are industry-specific and â€śpurpose-builtâ€ť for businesses that plan, forecast and otherwise manage their business processes based on projects, as opposed to generic software solutions that are generally designed for repetitive, unit-production-style businesses. Our broad portfolio of software applications includes:
Comprehensive financial management solutions that integrate project control, financial processing and accounting functions, providing business owners and project managers with real-time access to information needed to track the revenue, costs and profitability associated with the performance of any project or activity;
Business applications that enable employees across project-focused organizations to more effectively manage and streamline business processes, including resource management, sales generation, human resources, corporate governance and performance management; and
Enterprise project management solutions to plan and manage project costs and schedules, measure earned value, evaluate, select and prioritize projects based on strategic business objectives and facilitate compliance with regulatory reporting requirements.
For the year ended December 31, 2007, our total revenue increased 22% to $278.2 million, and our net income increased 47% to $22.5 million over the prior year.
See Item 7, â€śCompany Overviewâ€ť and â€śHistoryâ€ť for additional information related to the development of our business.
Enterprise applications software provides organizations with the ability to streamline, automate and integrate a variety of business processes, including financial management, supply chain management, human capital management, project and resource management, customer relationship management, manufacturing and business performance management.
General purpose enterprise application vendors often are not able to meet the needs of project-focused businesses because they lack project-focused capabilities and market functionality. Adapting general purpose software to meet the needs of project-focused businesses and organizations frequently results in significantly higher deployment costs and longer implementation times and can require increased levels of ongoing support. It can also result in missing or inaccurate metrics that are critical to driving better business performance.
In 2007, Forrester Research, a leading industry research firm, identified the project-focused business software market as a separate category of enterprise applications software. Their findings indicated that project-focused organizations are inadequately served by existing generic enterprise software applications developed for the manufacturing world. According to Forrester Research, business process and applications professionals seeking a project-focused solution remain frustrated with many project management, enterprise resource planning and customer relationship management solutions that are ill-equipped to address the project needs of an industry. Forrester Research also observed that business process and applications professionals will continue to seek solutions that align interactive processes and streamline delivery of engagements, projects and programs. Forrester Research generally observed that project-focused organizations require highly specialized applications software that automates and streamlines project-focused engagements, projects and programs.
The unique characteristics of project-focused organizations create special requirements for their business applications that frequently surpass the capabilities of generic applications software packages (for example, those designed primarily for manufacturing or financial services firms). Project-focused organizations require sophisticated, highly integrated software applications that automate end-to-end business processes across each stage of the project lifecycle. Project lifecycles vary significantly in length and complexity and can be difficult to forecast accurately. These projects need to be managed within the context of a companyâ€™s complete portfolio of existing and potential future projects.
Project-focused organizations often operate in environments or industries that pose unique challenges for their managers, who are frequently required to maintain specific business processes and accounting methodologies to meet contract requirements. For example, government contractors are subject to oversight by various U.S. federal government agencies, such as the Government Accountability Office (â€śGAOâ€ť) and the Defense Contract Audit Agency (â€śDCAAâ€ť), which have regulations that require these companies to have the ability to accurately maintain and audit specific project-based accounting records and to report on their compliance with government cost accounting requirements.
Our Competitive Strengths
Our key competitive strengths include the following:
Superior Value Proposition . Our software applications offer built-in project functionality at their core, making them faster and less costly to deploy, use and maintain when compared to general purpose enterprise applications. Our modular software architecture also enables our products to be deployed as a comprehensive solution or as individual applications, which provides our customers with
the flexibility to select the applications that are relevant to them. Conversely, generic â€śone size fits allâ€ť applications software often requires extensive customization to add the specific functionality needed to manage complex project-focused organizations. This customization usually requires significantly more time and expense for the customer to install, operate and maintain the software.
Built-In Processes and Compliance . Project-focused organizations are often challenged with tracking and complying with intricate accounting policies and procedures, auditing requirements, contract terms and customer expectations. Our software is designed to make it easy for project managers and business executives to accurately monitor and measure specific project performance in detail with consistent application of business processes. Our applications also enable our customers to maintain and report compliance with contract requirements to government agencies and their customers.
Deep Domain Expertise . For more than 24 years, our exclusive focus on meeting the complex needs of project-focused organizations has provided us with extensive knowledge and industry expertise. Our significant subject matter expertise enables us to develop, implement, sell and support applications that are tailored to the existing and future needs of our customers.
Leading Market Position . We are a leading provider of enterprise applications software designed specifically for project-focused organizations. Our customer base includes leading federal information technology contractors, architectural and engineering firms, information technology services companies and aerospace and defense companies.
Our Business Strategy and Growth Opportunities
We plan to focus on the following objectives to enhance our position as a leading provider of enterprise software applications to project-focused organizations:
Expanding Penetration of Established Markets . We believe that our strong brand recognition and leading market position within the project-focused software market, particularly among the A/E and government contracting industries, provide us with significant opportunities to expand our sales within these markets.
Expanding Within Existing Customer Base . We are continuously looking to increase our sales to our existing customers, both by increasing the number of our applications utilized by them and by offering upgrades from our legacy applications to our current portfolio. We offer a broad range of project-focused software applications addressing a variety of business processes and regularly introduce additional functionality to further expand the capabilities of our applications as well as simplify and accelerate deployment of our existing products. We also introduce new products through internal development, acquisitions and partnering with third parties. We believe that customers experiencing the benefits afforded by our applications will look to us as they expand the scope of business processes that they seek to automate.
Expanding Our Network of Alliance Partners . We have a growing network of alliance partners to assist our marketing, sales and product implementation efforts in the United States and in international markets. This network includes various market participants in the enterprise applications software industry, such as software resellers, industry-specific vendors, software consultants, complementary technology providers, accounting and tax advisors and data and server infrastructure service providers. We plan to expand this network of alliance partners to help penetrate new markets, increase our geographical sales force coverage and develop and maintain attractive software products.
Growing Our Presence in New Markets . We believe that our experience and success in attaining leadership in a number of key project-focused industries provides us with the opportunity to penetrate additional project-focused markets. We are building upon our track record of customer successes outside our established markets in industries such as consulting, information technology services, discrete project manufacturing and grant-based not-for-profits. We continue to develop additional industry-specific product functionality and are investing in targeted sales and marketing activities for new markets.
Growing Internationally . We intend to further expand our presence outside the United States, initially targeting countries where English is the primary business language. We believe project-focused organizations in Canada, the United Kingdom, the Middle East, Europe and the Asia-Pacific region are currently underserved for the products we offer. We are increasing the size of our international sales, consulting, support and marketing organizations, as well as modifying existing products to meet the needs of our existing and future international customers.
Making Strategic Acquisitions . Since October 2005, we have acquired five companies to broaden our product portfolio, expand our customer base, and add additional development, services and support resources. We plan to continue to pursue acquisitions that present a strong strategic fit with our existing operations and are consistent with our overall growth strategy. We also may target future acquisitions of varying sizes to expand or add product functionality and capabilities to our existing product portfolio, add new products or solutions to our product portfolio or further expand our services team.
Our Products and Services
We provide integrated solutions that are designed to meet the evolving needs of project-focused organizations of various sizes and complexity. These organizations use our software to automate critical business processes across all phases of the project lifecycle, including business development, project selection and prioritization, resource allocation, project planning and scheduling, team collaboration, risk mitigation, accounting, reporting and analysis. Our portfolio of applications is designed to provide the following benefits to our customers:
Improving Business Decisions . Our applications enable decision makers to analyze multiple facets of their businesses in real-time and improve decision making by providing reporting, business intelligence, planning and analytical capabilities.
Optimizing Resources . Our applications enable automation of scheduling, allocation, budgeting and forecasting of resources dispersed across projects based on skills, location, availability and other attributes. As a result, resource planners can determine whether proposed fees are accurate, appropriate staff is available and utilized effectively, and projects are completed on time and on budget.
Winning New Business . Our customer relationship management applications enable our customersâ€™ sales and marketing groups to generate demand for their services, build stronger customer relationships, manage their project pipeline, more accurately forecast revenue, automate proposals and create accurate estimates for proposed services.
Streamlining Business Operations . Our applications help organizations lower their transaction processing costs, improve billing processes, improve cash flow and reduce administrative burdens on employees through automation of a variety of key business processes, including time collection, expense management and employee self-service.
Facilitating Compliance and Governance . Our applications help organizations comply with complex accounting and auditing requirements and report compliance to government agencies and their customers and maintain standardized controls around key business processes.
Managing, Evaluating and Prioritizing Projects . Our applications enable our customers to efficiently manage project profitability, monitor project schedule and progress and evaluate, select and prioritize projects based on strategic business objectives. In addition, our earned value management applications enable organizations to plan and monitor the complex relationships between actual and forecasted project costs, schedules, physical progress and earned revenue.
We employ a services team that provides a full range of consulting and technical services, from the early planning and design stages of an implementation to end-user training and after-implementation consulting services. Our services team is comprised of application consultants, project managers and technical applications specialists who work closely with our customers to implement and maintain our software solutions. Our primary consulting services offerings may be categorized into the following activities:
Solution architecture services that align our applications and software solutions with our customersâ€™ business processes;
Application implementation services for our products, including business process design, software installation and configuration, application security, data conversion, integration with legacy applications and project management;
Technology architecture design and optimization of our applications and related third party software and hardware configuration in our customersâ€™ specific technology environments;
Project team and end-user training for our customers and partners in the functionality, configuration, administration and use of our products, including classroom training at various internal facilities, which we refer to as Deltek University; classroom training at customer sites; public seminars and webinars; and self-paced, self-study e-learning modules; and
After-implementation consulting services, including version upgrade consulting, system productivity review, industry best practice consulting, network/database maintenance services, acquisition integration support and long-term strategic business system planning.
Technical Maintenance and Support
We receive maintenance services fees from customers for product support, upgrades and other customer services. Our technical support organization focuses on answering questions, resolving issues and keeping our customersâ€™ operations running efficiently. We offer technical support through in-person unlimited phone-based support six days a week, and we also provide 24x7 access to our web support system. Our comprehensive support programs also include ongoing product development and software updates, which includes minor enhancements, such as tax and other regulatory updates, as well as major updates such as new functionality and technology upgrades.
Our maintenance services revenues have been growing primarily as a result of our growth in license revenue, strong customer satisfaction with our products, low customer turnover, and our customersâ€™ need to purchase additional licenses as their businesses grow. Initial annual maintenance fees are set as a fixed percentage of the software list price at the time of the initial license sale. Maintenance services are generally billed quarterly and paid in advance.
We consider a customer to be an organization that has purchased one or more licenses for our software, maintenance or support for those licenses, or services related to that software, pursuant to a written agreement or a â€śclick-wrapâ€ť license that is activated upon installation.
As of December 31, 2007, we had over 12,000 customers worldwide representing a wide range of industries, including A/E firms, aerospace and defense and other federal government contractors, information technology services firms, consulting companies, discrete project manufacturing companies, grant-based not-for-profit organizations and government agencies, among others. Our software is used by organizations of various sizes, from small businesses to large enterprises. In 2007 no single customer accounted for 5% or more of our total revenue.
Sales and Marketing
We sell our products primarily through our own sales force complemented by a growing network of indirect sales partners. Our direct sales force consists of experienced software sales professionals organized by customer type (for example, new v. existing) under common management. Our sales teams all operate under a common sales methodology that focuses on the individual markets and customers we serve. Our network of alliance partners complements our direct sales efforts by selling our products to specific customer segments and providing implementation services and support to our customers. These alliance partners primarily serve our Vision product family, support our international sales activity and provide sales and implementation support for our products sold to the entry level government contracting and A/E markets. Our indirect sales channel is comprised of independent reseller partners who primarily cover entry level markets. In 2007, our direct sales force generated approximately 90% of our license revenue sales and our indirect channel was responsible for the remaining 10% .
In 2007, 2006 and 2005, more than 95% of our total revenue was generated from customers inside the United States, and less than 5% of our revenue was generated from international customers.
See Note 17, â€śSegment Information,â€ť of our consolidated financial statements contained elsewhere in this Annual Report for additional information related to our revenue derived from international customers. See Item 2, â€śPropertiesâ€ť for information related to our long-lived assets located domestically and in foreign countries.
We engage in a variety of marketing activities, including market research, product promotion and participation at industry conferences and trade shows, in order to optimize our market position, enhance lead generation, increase overall brand awareness, increase our revenues within key markets and promote our new and existing products.
A significant component of our business strategy is to maintain and form alliances to better enable us to market, sell and implement our software and services. Our existing alliances encompass a wide variety of technology companies, business services firms, value-added resellers, accounting firms, specialized consulting firms, software vendors, business process outsourcers and other service providers. These alliances enable us to:
Provide infrastructure technologies on which our products operate, including database, hardware and platform solutions;
Provide applications that leverage our customersâ€™ existing information technology infrastructure;
Provide applications that complement and integrate with our products;
Provide our customers with additional point solution functionality complementing their Deltek applications;
Sell our products into new markets and geographies;
Promote wider acceptance and adoption of our solutions;
Receive referrals from accounting, tax and related advisory service providers;
Provide managed services for our solutions;
Provide off-site hosting and/or managed infrastructure services;
Offer an alternative to our customers that would rather outsource systems administration and information technology management;
Provide products and business services that complement back-office systems, such as forms and checks; and
Offer additional products and features to our customer base.
Research and Development
Our research and development organization is structured to optimize our efforts around the design, development and release of our products. Specific disciplines within research and development include engineering, programming, quality assurance, product management, documentation, design and project management. Our research and development expenses were $42.9 million, $37.3 million and $26.2 million in 2007, 2006 and 2005, respectively. As of December 31, 2007, we had approximately 400 employees in research and development, including approximately 240 in the United States and approximately 155 in Manila, Philippines. To complement our internal capabilities, we contract with a third party offshore development facility in Bangalore, India for additional product development. This third party facility includes approximately 50 software and product developers that are trained on several of our products. This third party arrangement allows us to increase our staffing capabilities on a project-by-project basis and as the need for additional development support arises.
In the development of our software, we use broadly adopted, standards-based software technologies in order to create, maintain and enhance our project-focused solutions. Our solutions are both scalable and easily integrated into our customersâ€™ existing information technology infrastructure. Our software design and engineering efforts are tailored to meet specific requirements of project-focused enterprises and provide the optimal experience for end-users who interact with our software to accomplish their job requirements.
The specific architecture and platform for each of our major product families is as follows:
Vision offers a full range of highly integrated applications, which incorporate critical business functions, including project accounting, customer relationship management, resource management, time and expense capture and billing. Vision is a completely web-native software application based on the latest Microsoft platform technologies, including Microsoft.NET (â€ś.NETâ€ť), Microsoft SQL Server and the Microsoft Office System. Designed for small and medium-sized businesses, Vision is intended to minimize the technology burden on firms with limited information technology staff.
Costpoint is designed to automate and manage complex project-focused business processes. Built using Java 2 Platform, Enterprise Edition (â€śJ2EEâ€ť) technology, Costpoint is highly configurable and modular, enabling our customers to support project-centric business processes and large workloads. Costpointâ€™s modular architecture supports seamless integration of business applications which deliver specialized functionality such as time collection, expense management, business performance management, employee self-service and human capital management.
GCS Premier is a turnkey Windows application designed for small and medium-sized government contracting organizations. Built using .NET platform technologies, this solution is designed to be easy to install, learn and maintain with minimal information technology support.
Our Enterprise Project Management Solutions product line provides a comprehensive enterprise project management solution for our customers, including earned value management throughout the project lifecycle. Built using .NET and web-based technologies, these solutions integrate with our own applications as well as third party applications. This product line also includes a secure, web-based collaboration portal that provides the ability for distributed team members to collaborate on a project.
Our products are designed for easy deployment and integration with third party technologies within a companyâ€™s enterprise, including application servers, security systems and portals. Costpoint and Vision also provide web services interfaces and support for Service-Oriented Architectures to facilitate enhanced integration within the enterprise.
The global enterprise applications market for project-focused organizations is competitive and segmented. When competing for large enterprise customers with over 1,000 employees, we face the greatest competition from large, well-capitalized competitors such as Oracle, SAP and Lawson Software. These larger companies have recently refocused their marketing and sales efforts to the middle market, in which we have a substantial market position. These vendors seek to influence customersâ€™ purchase decisions by emphasizing their more comprehensive horizontal product portfolios, greater global presence and more sophisticated multi-national product capabilities. In addition, these vendors commonly bundle their enterprise resource planning solutions with a broader set of software applications, including middleware and database applications, and often significantly discount their individual solutions as part of a potentially larger sale.
When competing for middle-market customers, which range in size from 100 to 1,000 employees, we often compete with vendors such as Epicor, Lawson Software and Primavera. Middle-market customers are typically searching for industry specific functionality, ease of deployment and a lower total cost of ownership with the ability to add functionality over time as their businesses continue to grow.
When competing in the small business segment, which consists of organizations with fewer than 100 employees, we face fewer competitors, including JAMIS, BST Global and Microsoft. Customers in the small business segment typically are searching for solutions which provide out-of-the-box functionality that help them automate all of their business processes and improve operational efficiency.
Although some of our competitors are larger organizations, have greater marketing resources and offer a broader range of applications and infrastructure, we believe that we compete effectively on the basis of our superior value proposition, built-in compliance functionality, domain expertise, leading market position and highly referenceable customer base.
We rely upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual arrangements to protect our proprietary rights. We provide our software to customers pursuant to license agreements, including shrink-wrap and click-wrap licenses. These measures may afford only limited protection of our intellectual property and proprietary rights associated with our software. We also enter into confidentiality agreements with employees and consultants involved in product development. We routinely require our employees, customers and potential business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our software, technology or business plans.
We also incorporate a number of third party software products into our technology platform pursuant to relevant licenses. We use third party software, in certain cases, to meet the business requirements of our customers. We are not materially dependent upon these third party software licenses, and we believe the licensed software is generally replaceable, by either licensing or purchasing similar software from another vendor or building the software functions ourselves.
As of December 31, 2007, we had 1,255 employees worldwide, including 173 in sales and marketing, 401 in product development, 512 in customer services and support and 169 in general and administrative positions. Of our 1,255 worldwide employees, 1,070 were located in the United States and 185 were located internationally. None of our employees is represented by a union or is a party to a collective bargaining agreement.
Kevin T. Parker has served as our President and Chief Executive Officer since June 2005 and as Chairman of the Board since April 2006. Prior to joining Deltek, Mr. Parker served as Co-President and Chief Financial Officer of PeopleSoft, Inc., an enterprise applications software company, from October 2004 to December 2004, and as Executive Vice President of Finance and Administration and Chief Financial Officer of PeopleSoft from January 2002 to October 2004. Prior to January 2002, Mr. Parker held various positions, including Senior Vice President and Chief Financial Officer of PeopleSoft, Senior Vice President and Chief Financial Officer of Aspect Communications Corporation, a customer relationship management software company, and Senior Vice President of Finance and Administration at Fujitsu Computer Products of America. He currently serves on the Board of Directors of Polycom, Inc. and is Chairman of the Audit Committee. Mr. Parker received his B.S. in Accounting from Clarkson University, where he serves on the board of trustees.
Alok Singh has served as a director since April 2005, and as lead director since April 2006. Mr. Singhâ€™s duties as lead director are to assist the Chairman of the Board in establishing the agenda for meetings of the Board of Directors, to preside, in the absence of the chairman, at meetings consisting solely of the non-executive members of the Board of Directors and to act as a liaison between the Board of Directors and stockholders or other third parties who request direct communications with the Board of Directors. Mr. Singh is a Managing Director of New Mountain Capital, a private equity investment firm based in New York. Prior to joining New Mountain Capital in September 2002, Mr. Singh served as a Partner and Managing Director of Bankers Trust. He also established and led the Corporate Financial Advisory Group for the Americas for Barclays Capital. Mr. Singh is non-executive Chairman of Overland Solutions, Inc. and serves on the Boards of Directors of Apptis, Inc., Ikaria Holdings, Inc. and Validus Holdings, Ltd. He also serves on the advisory board of Sonenshine Partners, an investment bank. Mr. Singh received both his B.A. in Economics and History and his M.B.A. in Finance from New York University.
Michael B. Ajouz has served as a director since April 2005. Mr. Ajouz joined New Mountain Capital in 2000 and is currently a Managing Director. Prior to 2000, Mr. Ajouz served as an Associate at the private equity firm of Kohlberg Kravis Roberts & Co., where he conducted analytical evaluations in various industries and in various analyst positions at Goldman, Sachs & Co. and Cornerstone Research. Mr. Ajouz serves as a director of Connextions, Inc., Apptis, Inc., National Medical Health Card Systems, Inc. and Oakleaf Global Holdings, Inc. Mr. Ajouz received his B.S. in Economics from The Wharton School of the University of Pennsylvania.
Nanci E. Caldwell has served as a director since August 2005. Ms. Caldwell has been a technology consultant since January 2005. From April 2001 to December 2004, Ms. Caldwell worked at PeopleSoft, Inc., serving as Senior Vice President and Chief Marketing Officer from April 2001 to January 2002, and as Executive Vice President and Chief Marketing Officer from January 2002 to December 2004. Prior to joining PeopleSoft in 2001, Ms. Caldwell held various senior management positions at Hewlett-Packard Company. Ms. Caldwell serves on the Boards of Directors of Live Ops, Inc. and Sophos Plc. Ms. Caldwell received her B.A. in Psychology from Queenâ€™s University, Kingston, Canada, and completed the University of Western Ontarioâ€™s Executive Marketing Management Program.
Kathleen deLaski has served as a director since April 2006. She is also currently President of The Sallie Mae Fund, a charitable organization sponsored by SLM Corporation (generally known as Sallie Mae) to increase access to higher education. From April 2001 to February 2005, Ms. deLaski held various other positions at Sallie Mae, including Senior Vice President, Chief Communications Officer and Senior Vice President of Consumer Marketing. Prior to April 2001, Ms. deLaski served as AOL Group Director for America Online, Inc. Ms. deLaski received her B.A. degree in political science and English from Duke University and her Masters of Public Administration from the John F. Kennedy School of Government of Harvard University. Ms. deLaski is the sister of Kenneth E. deLaski and daughter of Donald deLaski, our co-founders.
Joseph M. Kampf has served as a director since April 2006. Mr. Kampf has served as Chairman and Chief Executive Officer of CoVant Management, Inc., a technology investment company, since July 2006. From 1996 until June 2006, Mr. Kampf served as President and Chief Executive Officer of Anteon International Corporation, an information technology and engineering service company. Prior to 1996, Mr. Kampf served as a senior partner of Avenac Corporation, a consulting firm providing management and strategic planning advice to middle market companies. He served as Chairman of the Professional Services Council from 2003 to 2004 and as a member of its Executive Committee. Mr. Kampf serves on the Board of Directors of CoVant Management, Inc., CoVant Technologies, LLC, A-T Solutions, Inc. and the Wolf Trap Foundation for the Performing Arts. He received his B.A. in Economics from the University of North Carolina, Chapel Hill.
Steven B. Klinsky has served as a director since April 2005. Mr. Klinsky is a Managing Director of New Mountain Capital and has served as its Founder and Chief Executive Officer since its inception in 1999. Prior to 1999, Mr. Klinsky served as a General Partner and an Associate Partner with Forstmann Little & Co. and co-founded Goldman, Sachs & Co.â€™s Leveraged Buyout Group. He serves on the Boards of Directors of MailSouth, Inc., Overland Solutions, Inc., Apptis, Inc., National Medical Health Card Systems, Inc., Inmar, Inc., Connextions, Inc. and Oakleaf Global Holdings, Inc. Mr. Klinsky received his B.A. in economics and political philosophy from the University of Michigan. He received his M.B.A. from Harvard Business School and his J.D. from Harvard Law School.
Albert A. Notini has served as a director since August 2005. Mr. Notini has served as Chief Executive Officer of Apptis, Inc., a provider of information technology solutions and services, since August 2007. Mr. Notini also serves as a senior advisor to New Mountain Capital. Prior to August 2007, he served as President and Chief Operating Officer of Sonus Networks, Inc., a voice infrastructure product provider, since April 2004. From May 2000 to March 2004, Mr. Notini served as the Chief Financial Officer and a member of the Board of Directors of Manufacturersâ€™ Services Limited, a global electronics and supply chain services company. Prior to May 2000, Mr. Notini served as Executive Vice President of information technology services provider Getronics NV, following its acquisition of technology services provider Wang Global, Inc., where Mr. Notini had served as Executive Vice President of Corporate Development and Administration and General Counsel. Mr. Notini serves on the Boards of Directors of Apptis, Inc. and Saints Memorial Hospital. He received his A.B. from Boston College, his M.A. from Boston University and his J.D. from Boston College Law School.
Janet R. Perna has served as a director since June 2006. Ms. Perna served as General Manager of Information Management for IBMâ€™s Software Group from November 1996 until her retirement in January 2006. Prior to November 1996, she held various other system programming and management positions at IBM. Ms. Perna received her B.S. degree in Mathematics from the State University of New York at Oneonta.
MANAGEMENT DISCUSSION FROM LATEST 10K
Since our founding in 1983, we have established a leading position as a provider of enterprise applications software and related services designed and developed specifically for project-focused organizations. These organizations include architectural and engineering firms, government contractors, aerospace and defense contractors, information technology services firms, consulting companies, discrete project manufacturing companies, grant-based not-for-profit organizations and government agencies, among others.
These project-focused organizations generate revenue from defined customer-specific engagements or activities. Project-focused organizations typically require specialized software to help them automate complex business processes around the engagement, execution and delivery of projects. Our software applications enable project-focused companies to significantly enhance the visibility they have over all aspects of their operations by providing them increased control over their critical business processes, accurate, project-specific financial information, and real-time performance measurements.
With our software applications, project-focused organizations can better measure business results, optimize performance, streamline operations, and win new business. As of December 31, 2007, we had over 12,000 customers worldwide that spanned numerous project-focused industries and ranged in size from small organizations to large enterprises.
Our revenue is generated from sales of software licenses and related software maintenance and support agreements and professional services to assist customers with the implementation of our products, as well as education and training services. Our continued growth depends, in part, on our ability to generate license revenues from new customers and to continue to expand our presence within our existing installed base of customers.
In our management decision making, we continuously balance our need to achieve short-term financial goals with the equally critical need to continuously invest in our products and infrastructure to ensure our future success. In making decisions around spending levels in our various functional organizations, we consider many factors, including:
Our ability to expand our presence and penetration of existing markets;
The extent to which we can sell new products to existing customers and sell upgrades to applications from legacy products in our current portfolio;
Our success in expanding our network of alliance partners;
Our ability to expand our presence in new markets and broaden our reach geographically; and
The pursuit and successful integration of acquired companies.
We have acquired companies to broaden our product offerings, expand our customer base and provide us with a future opportunity to migrate those added customers to newer applications we may develop. The products of the acquired companies provide our customers with core functionality that complements our own established products.
In evaluating our financial condition and operating performance, we consider a variety of factors including, but not limited to, the following:
The growth rates of the individual components of our revenues (licenses, services and support) relative to recent historical trends and the growth rate of the overall market as reported or predicted by industry analysts;
The gross margins of our business relative to recent historical trends;
Our cash flow from operations;
The long-term success of our development efforts;
Our ability to successfully penetrate new markets;
Our ability to successfully integrate acquisitions and achieve anticipated synergies;
Our win rate against our competitors;
Our long-term customer retention rates; and
Our long-term adjusted EBITDA margin trends.
Each of the factors may be evaluated individually or collectively by our senior management team in evaluating our performance as we balance our short-term quarterly objectives and our strategic goals and objectives.
We expect that sales of conversion licenses will continue to represent a meaningful portion of our license revenues. Over time, we expect our customers to respond to attractive opportunities to upgrade their legacy applications to more current, feature-rich applications we offer today and in the future. However, we believe we differentiate ourselves from competing vendors by maintaining a commitment to supporting acquired applications for many years after the acquisition of a company. We believe that by providing our customers with a longer time horizon for upgrading to a current product, we build greater customer loyalty and enjoy higher customer retention.
Since 2005, we have substantially increased our investments in product development, sales and marketing to increase our presence in our targeted markets so as to raise awareness among our potential customers and compete more aggressively. We believe that these additional investments have been instrumental in further improving our competitive position and driving our recent revenue growth.
Consistent with our business plan, we expect to continue to increase our spending on product development, sales and marketing in the future. We believe that our international expansion plans will require significant investment in local marketing initiatives and translation of our products and related user documentation into local languages. We may also acquire businesses or complementary products in foreign countries to facilitate our international growth objectives.
We were founded in 1983 to develop and sell accounting software solutions for firms that contract with the U.S. government. Since our founding, we have continued our focus on providing solutions to government contractors as well as to other project-focused organizations, and at the same time we have broadened our product offerings by developing new software products, selectively acquiring businesses with attractive project-focused applications and services and partnering with third parties.
In April 2005, New Mountain Funds purchased the majority ownership of our company from the founding deLaski stockholders through a recapitalization. Immediately after this transaction, we implemented a strategy to recruit additional management talent and significantly improve our competitive position and growth prospects through increased investments in product development, sales and marketing initiatives, complemented by strategic acquisitions aimed at broadening our customer base and our product offerings.
In October 2005, we acquired Wind2, an enterprise software provider serving project-focused architectural and engineering (â€śA/Eâ€ť) and other professional services firms. The acquisition of Wind2 enabled us to expand our presence in the A/E market by adding small and medium-sized engineering firms to our existing customer base.
In March 2006, we acquired WST, Inc. (â€śWelcomâ€ť), a leading provider of project portfolio management solutions, focused on earned value management, planning and scheduling, portfolio analysis, risk management and project collaboration products. The acquisition of Welcom increased our presence among a number of multinational aerospace, defense and government clients, augmenting our existing installed base of customers. This acquisition complemented our core product offerings and created opportunities for additional sales to our existing customer base.
In July 2006, we acquired C/S Solutions, Inc. (â€śCSSIâ€ť), a leading provider of business intelligence tools for the earned value management marketplace. The acquisition of CSSI built upon our leadership position in the enterprise project management sector by incorporating collaborative earned value management analytics delivered by CSSIâ€™s wInsight software with our own earned value management engine, Cobra, and Costpoint, our enterprise resource planning solution for mid- to large-sized government contractors.
In April 2007, we acquired the business assets of Applied Integration Management Corporation (â€śAIMâ€ť), a provider of project management consulting services. This acquisition supplemented our existing project portfolio management systems implementation expertise and capabilities and allowed us to provide additional project portfolio management consulting, training and implementation services.
In addition, in May 2007, we completed the acquisition of WST Pacific Pty Ltd. (â€śWSTPâ€ť), a provider of earned value management (â€śEVMâ€ť) solutions based in Australia, and previously a development partner of Welcom. The acquisition complemented our existing EVM development, services and support resources.
In April 2007, we reincorporated in the State of Delaware as Deltek, Inc.
In November 2007, the Company completed its initial public offering consisting of 9,000,000 shares of common stock for $18.00 per share. For additional information regarding the initial public offering, see the Initial Public Offering section of Note 1 in our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.
Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Actual results may differ significantly from these estimates. Future results may differ from our estimates under different assumptions or conditions.
We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements.
For further information on our critical and other significant accounting policies, see Note 1, Organization and Summary of Significant Accounting Policies, of our consolidated financial statements contained elsewhere in this Annual Report.
We recognize revenue in accordance with the provisions of The American Institute of Certified Public Accountants Statement of Position (â€śSOPâ€ť) 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions , as well as Technical Practice Aids issued from time to time by the AICPA, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (â€śSABâ€ť) No. 104, Revenue Recognition .
We derive revenues from three primary sources, or elements: software license fees for our products; maintenance and support for those products; and consulting services, including training, related to those products. A typical sales agreement includes both software licenses and maintenance and may also include consulting services, including training.
Software License Fee Revenues: For sales arrangements involving multiple elements where the software does not require significant modification or customization, we recognize software license fee revenues using the residual method as described in SOP 98-9 because to date we have not established vendor specific objective evidence (â€śVSOEâ€ť) of fair value for the license element. Under the residual method, we allocate revenue to, and defer recognition of, undelivered elements based on their VSOE of fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue for the delivered elements. The objectively determined fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately. Our typical undelivered elements (maintenance and consulting services) are priced consistently at stated amounts in a high percentage of our arrangements such that VSOE generally exists for undelivered elements of our arrangements.
If VSOE exists to allow the allocation of a portion of the total fee to undelivered elements of the arrangement, the residual amount in the arrangement allocated to software license fee is recognized as revenue when all of the following are met:
Persuasive evidence of an arrangement exists. It is our practice to require a contract signed by both the customer and Deltek or an accepted purchase order for existing customers.
Delivery has occurred. We deliver software by both physical and secure electronic means. Both means of delivery transfer title and risk to the customer. Shipping terms are generally FOB shipping point.
The license fee is fixed and determinable. We recognize revenue for the license component of multiple element arrangements only when the fair value of any undelivered elements is known, any uncertainties surrounding customer acceptance are resolved and there are no refund, return or cancellation rights associated with the delivered elements. License fees are generally considered fixed and determinable when payment terms are less than six months.
Collectibility is probable. Amounts receivable must be collectible. For license arrangements that do not meet our collectibility standards, revenue is recognized as cash is received.
Consulting Services Revenues: Our consulting services revenues, which include software implementation, training and other consulting services, are generally billed based on hourly rates plus reimbursable out-of-pocket expenses.
These services are generally not essential to the functionality of our software and are usually completed in three to six months, though larger implementations may take longer. We generally recognize revenues for these services as they are performed. In rare situations in which the services are deemed essential to the functionality of our software in the customerâ€™s environment, we recognize the software and services revenue together in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (â€śSOP 81-1â€ť).
We sell training at a fixed rate for each specific class, at a per attendee price, or at a packaged price for several attendees, and revenue is recognized only when the customer attends and completes the training. We also provide training services at a standard rate per hour at our customersâ€™ sites. To the extent that our customers pay for the training services in advance of delivery, the amounts are recorded in deferred revenue until such time as the training is provided.
Maintenance and Support Services Revenues: Maintenance revenues include fees for software updates on a when-and-if-available basis, telephone, online and web-based support and software defect fixes or patches. Maintenance revenues are recognized ratably over the term of the customer maintenance and support agreement.
The significant judgments and estimates for revenue recognition typically relate to the timing of and amount recognized for software license revenue, including whether collectibility is deemed probable, fees are fixed and determinable and services are essential to the functionality of the software. Changes to these assumptions would generally impact the timing and amount of revenue recognized for software license fee revenues versus other revenue categories.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Software License Fees
Our software applications are generally licensed to end-user customers under perpetual license agreements. We sell our software applications to end-user customers mainly through our direct sales force as well as indirectly through our network of alliance partners and resellers. The timing of the sales cycle for our products varies in length based upon a variety of factors, including the size of the customer, the product being sold and whether the customer is a new or existing customer. We primarily compete on product features, functionality and the needs of our customers within our served markets, with price generally a lesser consideration in competing for new customers. The pricing for our products has remained stable, requiring infrequent changes in our pricing strategies.
License fee revenues decreased $2.8 million, or 14%, to $17.0 million for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. During the first quarter of 2008, license fee revenues from our Vision product family decreased $1.7 million compared with the first quarter of 2007, while license fee revenues from our Costpoint and GCS Premier product families decreased by $1.7 million for the same periods. The decrease in revenues from our Vision product family was primarily the result of lengthened sales cycles for both new license sales and conversion sales resulting from the changing economic environment. The decrease in revenues from our Costpoint and GCS Premier product families were primarily driven by several large Costpoint sales in the first quarter of 2007 with fewer comparable size sales in 2008. License fee revenues from our enterprise project management (â€śEPMâ€ť) products increased by $0.6 million during the first quarter of 2008 compared to the first quarter of 2007.
Our consulting services revenues are generated from implementation, project management, data conversion, training, education and other consulting services associated with our software applications and are typically provided on a time-and-materials basis. Our overall consulting services revenues increase and decrease principally as the number and size of customer engagements change and customers engage our resources as a result of our license sales.
Consulting services revenues increased $5.8 million, or 31%, to $24.3 million for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The increase was the result of a $5.5 million increase in software implementation related services revenue and a $0.3 million increase in training and education related services revenue during the first quarter of 2008 compared with the first quarter of 2007. The $5.5 million increase in total software implementation related services includes $1.5 million of revenue associated with our acquisition of AIM in April 2007. Excluding revenue associated with the AIM acquisition, our services revenue increased $4.0 million, or 23%, driven by demand for services from new and existing customers. The first quarter of 2008 also included a non-recurring success fee of approximately $0.5 million earned by the Company during the first quarter on a customer implementation.
Our software implementation related services account for 93% of consulting services revenues for both the three month period ended March 31, 2008 and March 31, 2007.
Our training and education related services accounted for $1.7 million of consulting services revenues during the three months ended March 31, 2008 compared to $1.4 million during the three months ended March 31, 2007. Overall training and education accounted for 7% of consulting services revenue in both periods.
Maintenance and Support Services
Our maintenance and support revenues are comprised of fees derived from new maintenance contracts associated with new software license sales and annual renewals of existing maintenance contracts. These contracts typically allow our customers to obtain online, telephone and internet-based support, as well as unspecified periodic upgrades or enhancements to our software on an as available basis. Maintenance services are typically billed on a quarterly basis and generally represent between 15% and 25% of the list price of the underlying software applications at the time of sale. Maintenance fees are generally subject to contractually permitted annual rate increases.
Maintenance revenues increased $4.1 million, or 17%, to $28.1 million for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. Maintenance revenues from our Vision product family increased by $1.7 million, and maintenance revenues from our Costpoint and GCS Premier product families increased by $1.6 million. Maintenance revenues from our project portfolio management products increased by $0.8 million. These increases are driven by our sales of new software licenses and renewals of maintenance agreements in our installed base of customers, plus the annual price escalations for our maintenance services. These increases are reduced by the impact of customer cancellations.
Our other revenues consist of sales of third-party hardware and software as well as fees collected for our annual user conference, which is typically held in the second quarter of the year. For the three months ended March 31, 2008, other revenues decreased to $16,000 from $197,000 for the three months ended March 31, 2007 as a result of lower sales of third-party hardware and software in the current period.
Cost of Software License Fees
Our cost of software license fees consists of third-party software royalties, costs of product fulfillment, amortization of acquired technology and amortization of capitalized software.
Cost of software license fees decreased by $0.6 million to $1.6 million for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The decrease was primarily the result of a decrease of $0.5 million in royalty expense resulting from lower license sales in the first quarter of 2008. In addition, there was a decrease of $0.1 million in amortization of capitalized software during the first three months of 2008 as a result of previously capitalized software products becoming fully amortized in the prior year, resulting in no current period expense.
Cost of Consulting Services
Our cost of consulting services is comprised of the salaries, benefits, incentive compensation and stock-based compensation expense of services-related employees as well as third-party contractor expenses, travel and reimbursable expenses and classroom rentals. Cost of services also includes an allocation of our facilities and other costs incurred for providing implementation, training and other consulting services to our customers.
Cost of consulting services increased $4.7 million, or 30%, to $20.2 million for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The primary driver of this increase was labor, related benefits, bonus, and stock-based compensation expense, which together grew by $4.1 million. This increase was associated with higher headcount as we expanded the number of consultants to meet demand for our services. At March 31, 2008 our ending services headcount was 350, compared to 284 at March 31, 2007, an increase of 66 people compared to the first quarter of 2007. The increase in headcount is the result of newly recruited and hired employees, and also includes employees from the 2007 AIM acquisition. The remaining increase is primarily associated with $0.5 million in additional travel costs in the current period driven by higher revenues and associated increases in headcount, and smaller increases in other costs related to our overall services organization.
The increase in services margins for the first quarter of 2008 compared to the same period in 2007 reflects the successful deployment of newly hired employees who have received training on our products and processes and subsequently became billable, as well as the non-recurring success fee of approximately $0.5 million recognized in the first quarter of 2008 with no corresponding direct expenses.
Cost of Maintenance and Support Services
Our cost of maintenance and support services is primarily comprised of salaries, benefits, stock-based compensation, incentive compensation and third-party contractor expenses, as well as facilities and other expenses incurred in providing support to our customers.
Cost of maintenance services increased $1.7 million, or 44%, to $5.6 million for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The increase was driven by additional support headcount, required to meet the greater demand for maintenance services, and related benefits and stock-based compensation expense, which together increased by $1.5 million. At March 31, 2008 our ending maintenance services headcount was 167, compared to 137 at March 31, 2007.
Cost of Other Revenues
Our cost of other revenues includes the cost of third-party equipment and software purchased for customers as well as the cost associated with our annual user conference. Cost of other revenues remained flat for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007.
Research and Development
Our product development expenses consist primarily of salaries, benefits, stock-based compensation, incentive compensation and related expenses, including third-party contractor expenses, and other expenses associated with the design, development and testing of our software applications.
Research and development expenses increased by $1.2 million, or 12%, to $11.4 million for the three month period ended March 31, 2008 compared to the same period in 2007. The principal driver was an increase of $1.6 million in labor, related benefits, and stock-based compensation expense to support new product release development. Partially offsetting these increases was a decrease of $0.4 million in third-party costs to support new release development.
Sales and Marketing
Our sales and marketing expenses consist primarily of salaries and related costs, plus commissions paid to our sales team and the cost of marketing programs (including our demand generation efforts, advertising, events, marketing and corporate communications, field marketing and product marketing) and other expenses associated with our sales and marketing activities. Sales and marketing expenses also include amortization expense for acquired intangible assets associated with customer relationships.
Sales and marketing expenses increased by $1.8 million, or 17%, to $12.3 million for the three month period ended March 31, 2008 compared to the three month period ended March 31, 2007. The increase was driven by additional labor, related benefits costs and stock-based compensation expense of $1.5 million associated with increased headcount in our sales force from the first quarter of 2007 to the first quarter of 2008. At March 31, 2008, our ending sales and marketing headcount was 187, compared to 154 at March 31, 2007.
General and Administrative
Our general and administrative expenses consist primarily of salaries and related costs for general corporate functions, including executive, finance, accounting, legal and human resources. General and administrative costs also include New Mountain Capital advisory fees, insurance premiums and third-party legal and other professional services fees, facilities and other expenses associated with our administrative activities.
Joining me here today are Deltekâ€™s CEO Kevin Parker and Jim Reagan, our CFO. I want to welcome you to today's conference call announcing Deltek's financial results for our first quarter ended March 31, 2008. The Press Release we issued this afternoon containing our financial results for the quarter is available on our Web site at www.deltek.com.
This call is being recorded and will be available for replay on Deltek's Web site or by dialing the following numbers: 1-800-642-1687 or 1-706-645-9291. The access code for the replay is 43441906. The conference call replay is available through May 15, 2008.
During the course of this conference call we may make forward-looking statements that involve substantial risks and uncertainties. You can identify forward-looking statements by words such as anticipate, believe, estimate, expect, or similar words. Actual outcomes and results may differ materially from what is expressed in these forward-looking statements for many reasons.
Any forward-looking statement in this conference call speaks only on the date on which it is made. We are under take no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise except as required by law. Please refer to our earnings release for more information on forward-looking statements and for explanations on the use of non-GAAP financial information. You can also obtain more information about Deltek including reviewing our FCC filings and press releases by visiting www.deltek.com.
And with that I'll turn today's call over to Kevin.
Kevin T. Parker
Before turning it over to Jim for a detailed review of our financial results and our outlook for Q2, I want to give you an overview of our results, discuss the overall state of the markets we serve, as well as tell you what we're working on inside the company.
From a license perspective it was obviously a challenging quarter. As the quarter ended we saw an increasingly turbulent US economic environment which, while maybe not impacting many of our customers directly, certainly saw them pause to consider their options. We saw lengthening of sales cycles and delays in deal closings at the end of the quarter, particularly in the A&E and professional services markets.
The good news is that virtually all of the deals that slipped out of the quarter are still in play and many should close in the near term as customers begin to move forward with their business plans. In an uncertain economic environment like this one, many of our customers turn their attention to their internal operations as they look to successfully manage their business, lower their costs, and improve their profitability. Even in the more challenging times, the unique nature of our applications provides important capabilities for decision-makers as they work to manage their portfolio of projects more effectively and more profitably.
While we clearly saw significant challenges in the A&E and professional services markets, our total license revenue from our government contracting business exceeded our internal targets. Our Q1 government contracting business was driven by the strength we experienced in our EPM products and as customers continue to purchase our Costpoint and GCS applications.
In addition to the macroeconomic issues we also experienced some challenges internally getting the year off to a strong start. Q1 is always an extremely busy time as we realign our resources and launch programs across the company to meet the opportunities and challenges of the coming year. In a few cases we didn't complete those programs or activities as quickly as we planned or needed to and as a result lost some of the very strong momentum we had exiting Q4. I believe we've rapidly diagnosed those issues and we have the right solutions in place and they're already there, including the realignment of resources and the re-establishment of some of the upgrade incentives that expired at the end of 2007.
Looking at the numbers, on a year-over-year basis we saw our total Q1 revenues increase 11% to $69.4 million. This increase was driven by record maintenance and consulting revenues which grew 17% and 31% respectively. License revenue for the quarter was $17 million which is down 14% from the prior year period and below our expectations for the quarter. While I'm clearly disappointed with our Q1 licensed revenue results, the favorable results in our maintenance and consulting services businesses combined with our continued focus on profitability enable us to report earnings in EPS that met our guidance range that we provided on our last call.
While there were challenges in the quarter that impacted our license revenues, the quarter was not without some very significant successes and milestones. We're very pleased with our Q1 EPM results. In Q1 we closed a greater than million dollar sale for our WInsight application with a large aerospace and defense contractor. This significant transaction occurred with an existing Deltek customer and is driven by their company-wide standardization on our WInsight application as an integral component of their project management methodology. This existing Deltek customer needed a common database for analysis and reporting on hundreds of projects across their enterprise so they could monitor project health and identify troubled projects faster. They also needed to implement an enterprise-wide application that will significantly enhance their ability to monitor and comply with government reporting and audit requirements.
We remain very excited about the future of our government contracting business due to the many positive factors influencing this market. The government contracting business is constantly evolving with over 5,000 new organizations added to the DCAA audit list in the last two years alone and one of the areas experiencing fastest growth and greatest potential for future growth is earned value management.
Earned value management will continue to be an important driver of growth in this vertical market segment and a great complement to our cross-point and GCS products. We believe we're the market leader in this space and our comprehensive suite of EPM products and we continue to expand our capabilities. We also believe that the current environment in which our government contracting customers operate is very strong and largely unaffected by the current economic issues in the US.
In Q1 we added more than 100 new customers to the Deltek and installed base, an increase of over 11% from Q1 of the prior year and completed over 1,000 license transactions in the quarter. From our view, new customers are an important measure of our progress and our ability to consistently win new customers is a key metric. I think we've made good progress on that objective in Q1 and expect to continue that trend in the future.
Year-to-date we've added more 20 new partners to our reseller network to complement our direct sales efforts. These new additions are an important milestone under our plan to expand our reseller channel with partners that have strong reputations within their respective industries and in the size and market reach to have a meaningful impact on our revenues going forward. Each of these new partners also brings an experienced view of the software marketplace. Most of them come to us from either Microsoft or Sage's reseller network and all are excited to be adding Deltek's applications to their business plans. They're already engaged in the sales process and we expect their contributions to impact our results in the coming quarters.
In Q1 we launched the consulting edition of our Vision application suite and we're very excited about the initial reception we've gotten from prospects, customers, and industry analysts. Building on the industry-leading project focus capabilities of Vision, we've added inter-specific functionality such as enhanced resource planning and work force optimization to meet the unique needs of the consulting industry. Extending our reach into this marketplace for new project focus verticals is a key strategic objective for us and the successful introduction of consulting addition of Vision is an important milestone in reaching that goal. Our pipeline of potential customers for the Vision consulting addition is growing and I'm excited about the early traction we're getting in this new vertical. The addition of new project focus vertical markets to our customer base is a great opportunity for us and I think we're making great progress with the launch of the consulting addition of Vision.
In Q1 we also announced the additional product launches including new versions of GovWin, Time & Expense, and the latest release of Costpoint. Each of these releases brings to market exciting new functionalities specifically to meet the needs of our project oriented customers and will help them manage their costs, increase their profitability, and win new business. In the coming quarters we have a strong pipeline of new product announcements in the works including new versions of GCS Premier, Vision, and our EPM products. We're continuing to expand our functionality for vertical markets and we're targeting to build on our leadership position.
In Q1 we saw a very strong performance in both our maintenance and consulting revenues as both grew significantly from the prior year and delivered record results for the quarter. As we left Q4 we had stated an objective of improving the margins of our services businesses and saw the results of that effort in Q1 as margins increased to nearly 17% for the quarter. In addition our maintenance renewal rates remain very high and our customer satisfaction for our support services remains very strong. As we worked through the quarter we kept a very close eye on our expenses and as a result were able to maintain our operating margins at 20% and deliver EPS in line with our stated goals for the quarter.
As I look back on Q1 it's clear that the changing of the US economy impacted our ability to close some deals. At the same time we need to do a much better job internally with our programs and activities and quite frankly, we didn't do all that we needed to do to start the year. Many of the factors that are influencing our growth are largely under our control. Since the quarter ended we've spent a lot of time reviewing our results and the necessary actions to respond are already underway including our incentives to customers to upgrade to Deltek Vision and the addition of the 20 new reseller partners I mentioned. In the coming weeks we'll be hosting Insight 2008 our largest ever customer conference with nearly 3,000 attendees and we're looking forward to talking with them and sharing our vision for the future.
While our Q1 results were below our objectives, in my view it's too early to change our outlook for the full year. Certainly the economic environment is more challenging. At the same time our outlook for Q2 is strong and we see a lot of things that we consider to be positives for the business going forward.
With that I'll turn it over to Jim so he can give you a detailed review of our financial results.
In Q1 we reported license revenue of $17 million a decrease of $2.8 million or 14% over a year ago and as Kevin noted several factors contributed to this decrease. First, our momentum slowed in our Vision business with the expiration of sales incentives aimed at generating license revenues from customers upgrading to our Vision product from the Legacy Deltek product. Second, we lost some sales momentum in our partner channel primarily in connection with the decline in our Vision upgrade sales.
For the quarter our indirect sales comprise 9% of license revenue compared to 4% in Q1 of last year and 14% in Q4 of last year. Our international results were also impacted by the decline in Vision upgrade sales. In Q1 our international license sales were 5% of license revenue compared with 3% in the first quarter a year ago and 8% in Q4 of 2007. Earlier Kevin described what we're doing to regain sales momentum as well as the progress we're making in signing up new reseller partners to continue gaining share in the lower end of the market. As we said earlier we're undoubtedly subject to stronger head winds now due to the state of the North American economy. However, most of our execution successes are clearly within our control and we remain firmly committed to double digit growth in 2008.
Our margin license sales increased to 90.7% from 88% a year ago. This margin typically fluctuates within the 88% to 91% range based on the level of royalties we pay on products that are resold or embedded with our own. The increase in the margin in Q1 was driven by a reduced level of third-party royalties. Our consulting services revenue reached another record in Q1 totaling $24.3 million. This growth was driven by our strong license sales in Q4 of 2007. Our consulting services gross margin increased to 16.8% in Q1 compared to 11.3% in Q4 of 2007 and 16.2% for Q1 of 2007. This increase was driven by our growth in license revenue as well as the non-recurring success fee we earned on a customer implementation and a lower level of incentive compensation expense in Q1 of 2008. Over the next couple of quarters we expect our consulting services margins to be in the mid-teens.
We're also quite pleased with our revenue results in maintenance and support services which reached $28.1 million in the quarter. Our revenue growth in this area reflects the full quarter impact of our strong Q4 license results as well as the success we have experienced in effectively managing customer retention. Our gross margin of 80% is slightly lower than Q4 and reflects the full quarter impact of hires made in Q4 which are aimed at servicing our growing customer base and maintaining our strong customer support levels for both our domestic and our new international customers. We expect that going forward our maintenance margins will continue in the low 80s.
Now I'll turn to operating expenses. Our research and development expense in Q1 2008 increased by $1.2 million to $11.4 million or 11.3% over the same period in 2007. This increase was primarily driven by a 16% increase in headcount compared to a year ago offset by a reduction to incentive compensation expense. As a percentage of total revenue R&D was 16.4% in the first quarter of both 2007 and 2008. Our R&D headcount now totals approximately 400 compared to about 340 a year ago with almost all of this increase occurring in our international locations.
Our sales and marketing costs in the quarter were up 17% over a year ago to $12.3 million driven primarily by increased salaries and related costs for our higher level of sales and marketing headcount. As a percentage of total revenue sales and marketing increased from 16.9% to 17.7% of total revenue on a year-over-year basis. Our increased sales and marketing headcount is aimed at driving higher lead generation and sales success across all of our markets but particularly in our consulting services vertical, our indirect sales channel and in the UK. On a sequential basis sales and marketing expense declined 6% from Q4 of last year primarily on lower commission costs.
Our G&A costs increased 6.2% over Q1 of 2007 to $7.6 million in the current quarter. This year-over-year increase of half a million dollars was the result of increased labor costs and professional fees offset by a reduced bad debt expense and SOX related consulting costs. As a percentage of total revenue our G&A costs have decreased from 11.4% to 10.9% of revenue year-over-year.
Our Q1 non-GAAP operating income was $14 million which was at the upper end of the guidance range we provide in our last earnings conference call. We were able to achieve the high end of our guidance range due to our strong consulting service and maintenance revenues while taking a prudent approach to managing our operating expenses. Our net interest expense is lower than both Q1 and Q4 of 2007 due to lower outstanding borrowings after our IPO as well as the impact of lower LIBOR rates on our borrowings in Q1 of the current year.
In Q1 we experienced a higher than expected tax rate of 44.5%. This was because our revenues in the UK were lower than expected resulting in a loss for tax purposes that we cannot offset against our US taxable income. While this results in future loss carry-overs that can be applied to future UK taxable income, we cannot currently recognize those benefits. We expect that with higher profitability in the UK we will experience a reduction in our tax rate later in the year. At this point we expect that our full year tax rate will be about 42%.
Non-GAAP income for the quarter was $6.1 million or $0.14 per diluted share. Although we reported non-GAAP operating income at the high end of our range our non-GAAP EPS was at the low end of our guidance range primarily due to our higher tax rate. On a GAAP basis our net income was $4 million or $0.09 per diluted share which was also at the low end of our guidance range.
Now I'll turn to a review of our cash flow and balance sheet. Over the quarter our cash position has grown substantially to $35.4 million on March 31. Net cash provided by operating activities for the quarter was $20.2 million compared to $7.4 million for the comparable quarter last year and $19.1 million for all of 2007. Our net cash provided by operations was strong in the quarter primarily due to aggressive collection of receivables in Q1 and to a lesser extent, advanced payments of $2.9 million in user conference registration fees. Our collections on receivables drove a reduction in our net accounts receivable by $8.3 million reducing our DSO from 65 days at December 31 to 61 days at March 31.
Purchases of capital equipment and lease improvements were $2.1 million in the quarter to support the expansion of our IT capabilities and network and our facilities in the Philippines. The build-out of our Philippines facility is now complete. We've previously said that we expect full year cap ex to be in the $6 million to $8 million range for the full year and we remain comfortable with that estimate. Our DSO in Q1 declined to 61 from 65 days at the end of Q4 and in our last call I mentioned that in early Q1 we had already seen significant collections in January and this certainly carried out through the quarter. Our improvement resulted from increased focus on the collections process and assigning clear accountability for the DSO of each of our revenue streams.
In summary, Q1 was a challenging quarter. But while our license revenue results were disappointing we delivered strong cash flows from operations, record services, and maintenance revenues, and improved consulting services margins.
Now let me take a minute to discuss our outlook for the coming quarter. While our customers continue to express confidence in their outlook for their own businesses in 2008, some of our professional services customers have adopted a more cautious stance when it comes to making capital commitments thus lengthening sales cycles.
In Q2 we've taken several measures to realign our cost structure and protect our profit margins without sacrificing the ongoing spending we need to make in sales and marketing to continue lead generation and sales growth. In Q2 we're expecting to spend more on sales and marketing programs to ensure that we capture the significant marketing opportunity that exists within the government contracting and professional services markets. This cost realignment means that we will right size other areas of our business in order to maintain certain levels of profitability. Therefore, in Q2 we will be taking a restructuring charge of approximately $1.4 million related to severance costs and other related charges in connection with this action.
Now let's turn our attention to the details of our guidance for Q2. In Q2 we expect to report license revenue of between $19 and $21 million and total revenue between $75.5 million and $77.5 million. Our total revenue guidance includes approximately $4.5 million of revenue for Insight, our annual user conference held in the second quarter each year. We expect our non-GAAP operating income to be in the range of $14 to $16 million. This figure excludes the impact of approximately $2.5 million of stock-based compensation expense, approximately $1 million of intangible amortization expense and approximately $1.4 million in restructuring charges.
Our Q2 GAAP earnings per share is expected to be in the range of $0.09 to $0.10 per diluted share. On a non-GAAP basis we expect our diluted earnings per share to be in the range of $0.15 to $0.16 per share. Our Q2 GAAP and non-GAAP earnings per diluted share expectations assume a weighted average share count of approximately 45 million shares and an effective tax rate of approximately 43%.
In thinking about our outlook for the full year we continue to see a strong sales pipeline ahead for the foreseeable future and while the drum beat of adverse economic news has muted the urgency of some customers to upgrade their financial and project management infrastructure, we believe that these impacts are temporary and that our outlook remains strong. This early into the second quarter, however, we consider it premature to revise our full year guidance but plan on revisiting our full year guidance after the completion of the second quarter. At that point we'll have a much clearer view of purchasing momentum across all of our verticals in geographies.