William S. Ortwein | Direct Dial: 404-881-7936 | E-mail: scott.ortwein@alston.com |
| Re: | Indus International, Inc. | |
| Form 10-K for Fiscal Year Ended March 31, 2005 | ||
| Filed June 13, 2005 | ||
| Form 10-Q for Fiscal Quarter Ended December 31, 2005 | ||
| Filed February 9, 2006 | ||
| Form 8-K Filed May 5, 2006 | ||
| File No. 005-51511 |
| 1. | We note your response to our previous comment no. 3 where you indicate that during fiscal 2005 and for the nine months ended December 31, 2005, the Company did not have an agreement where revenues had to be deferred due to VSOE not existing. Your disclosures in Note 1 indicate that VSOE is based on the price “generally charged when an element is sold separately.” Please explain what you mean by this disclosure. For instance, describe the process you use to evaluate the various factors that affect your VSOE (e.g. purchase volume, |
| Bank of America Plaza 101 South Tryon Street, Suite 4000 Charlotte, NC 28280-4000 704-444-1000 Fax: 704-444-1111 | 90 Park Avenue New York, NY 10016 212-210-9400 Fax: 212-210-9444 | 3201 Beechleaf Court, Suite 600 Raleigh, NC 27604-1062 919-862-2200 Fax: 919-862-2260 | The Atlantic Building 950 F Street, NW Washington, DC 2004-1404 202-756-3300 Fax: 202-756-3333 |
| competitive pricing, duration of the arrangement, region, distribution channel and specific requirements of the order). Does the price charged for the individual elements vary from customer to customer? If so, please explain how the Company determined that they can reasonably estimate fair value of each undelivered element. Tell us how you considered the guidance in paragraphs 10 and 57 of SOP 97-2. |
| 1) | When determining whether we have VSOE of fair value for implementation services, we evaluate all implementation services projects sold to all customers in the prior 12 months to determine whether 80% of separate arrangements for such services fees fall within +/- 15% of the median rate charged for the resource used on the project. The Company reviews its professional services data by region and then further by product area. Within each product area, the rates charged for individual resource types are reviewed. We include the majority of professional services transactions, only excluding those transactions that are unique, such as early adopter programs, joint development efforts, or special scoping arrangements, which are not similar to the services that are typically sold with our license arrangement. We perform this analysis because the rate we charge may vary from one customer to another. We believe the threshold of 80% within a +/- 15% band shows that more than a majority of our customers pay a price that is essentially the same for the same type of service. We believe the 15% discount rate from a median price charged is a reasonable range of discounts for professional services. Thus, our tests to date have met these thresholds and VSOE of fair value for our implementation services has been established. |
| 2) | When determining whether we can establish VSOE of fair value for customer support services, we evaluate all renewals for such support services during the prior 12 months. Our business practice is to charge customers for support services based on a percentage of the license paid. According to TPA 5100.55, the renewal rate provided for in the contract based on a consistent percentage of license fees paid can be used to establish VSOE of fair value for the service. In addition, TPA 5100.44 discusses the fair value of PCS with varying renewal rates. At the time of the initial license contract, we compare the price charged to our standard prices to ensure that it is consistent with this price. If it is not, we defer a portion of the license fee based on the difference in the price charged and the normal percentage of license fee we charge other customers. Our agreements generally allow for an increase in the support services fee each year. Our current policy is that such |
| increases are based on the Consumer Price Index (CPI). We perform a test each quarter to ensure that 80% of the price increases made during the last 12 months fall with +/-15% of the rate we would have charged if only the consumer price index was charged. If our test passes these requirements, we have established the fair value for customer support services. Our quarterly testing has resulted in a positive outcome in each instance. |
| 2. | You also indicate that when an element has not yet been sold separately, VSOE may be based on the price established by authorized management, if it is probable that the price, once established, will not change once the element is sold separately. Please describe the situations in which the Company has established VSOE based on this method and tell us if the price established for purposes of establishing VSOE varied at all from the actual price charged in separate sales. Also, tell us if the prices charged in separate sales varied from customer to customer and if so, tell us how you determined that such prices supported management’s determination of VSOE prior to the Company actually having separate sales. | |
| Response:A situation where an element had not been sold separately was a hosting arrangement for a customer who purchased our Quick Start services, which are IT services to install the software in a hosted environment on a temporary basis. Since this situation had not arisen before, management set the price for this customer by looking at market information and our costs to provide such services. This initial customer contracted for three different Quick Start projects, all three of which were priced consistently in accordance with the standard pricing set by management. Since this first instance, a second customer has contracted for this same Quick Start services and was quoted the same pricing as the original customer. After discussion, this customer was given a 14.8% discount, which falls within the Company’s guideline for VSOE compliance (i.e. 80% of the customers pay a fee within +/- 15% of the median price paid by all customers). These Quick Start services are for a short term of generally less than 6 months and are immaterial, representing approximately 2% of total recurring revenues or less than 1% of total revenues. |
| 3. | We note your use of non-GAAP measures under Item 9.01 of the Form 8-K noted above which excludes recurring items for “restructuring and settlement (benefits)/expenses. Tell us how you considered Question 8 of Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures to include the following disclosures for your non-GAAP measures: |
| • | the manner in which management uses the non-GAAP measure to conduct or evaluate its business; |
| • | the economic substance behind management’s decision to use such a measure; | ||
| • | the material limitations associated with use of the non-GAAP financial measure as compared to the use of the most directly comparable GAAP financial measure; | ||
| • | the manner in which management compensates for these limitations when using the non-GAAP financial measure; and | ||
| • | the substantive reasons why management believes the non-GAAP financial measure provides useful information to investors. |
| In this regard, we believe you should further enhance your disclosures to comply with Item 10(e)(1)(i)(C) and (D) of Regulation S-K and Question 8 of the related FAQ to demonstrate the usefulness of your non-GAAP financial measures which excludes recurring items, especially since these measures appear to be used to evaluate performance. Your current disclosures regarding the reasons for presenting these non-GAAP measures appear overly broad considering that companies and investors may differ as to which items warrant adjustment and what constitutes core operating results. |
| • | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | ||
| • | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and | ||
| • | the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
| cc: | April Coleman (SEC) Gregory J. Dukat (Indus) Patrick M. Henn (Indus) Adam V. Battani (Indus) |
