SWK Holdings Corp (SWKH) 2002 Q1 法說會逐字稿

This is conferencing. Please stand by. Good day everyone, and welcome to the KANA Software first quarter financial results conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Chief Executive Officer, Mr. Chuck Bay. Please go ahead, sir.

Thanks. Hi, this is Chuck. Thanks for joining us this afternoon to discuss our just released Q1 results. Hopefully, everybody has had an opportunity to look at the press release KANA issued today at the close of the market. If you -- if you haven't seen it, you can get a copy at our www.kana.com. I'm here right now with Brett White, our CFO, and Brett would like to read a statement to you before we begin our discussion.

Thanks Chuck. Good afternoon everyone. On this call we will make forward-looking statements regarding anticipated events in the future performance of the company including statements regarding our expected revenues, expenses, profitability, cash flow, margins, product development and characteristics of our market segment.

Actual events or results could differ materially from those described or anticipated in these forward looking statements as a result of a number of factors including risks associated with slow and uncertain economic conditions, competition, market acceptance of our product, our ability to develop new products and enhancements to our existing products, retention of employees, and other factors described in our most recent filings with the SEC, including our most recent reports on form 10-Q, 10-K and our registration statements on forms S-3 and S-4.

In addition I want to emphasize these forward looking statements are based on judgments and that individual judgments may vary. Our company policy is to provide guidance once per quarter and we do not plan to update that guidance or any forward looking statements until the next scheduled call. The forward looking statements in this call is to be only as of today and no one should assume later in the quarter that comments we provide we provide today are still valid. I will turn the call back to Chuck.

Thanks Brett. We are very pleased that we put up our second consecutive profitable quarter. Brett is going to review some of the financial highlights in a few minutes. I ask to take this opportunity to thank all the KANA employees around the world for another quarter of hard work and significant accomplishments in helping us to reach our goal.

And I am sure you are all aware Q1 was another quarter of global economic uncertainly. However, KANA have put together a very nice quarter and we made progress on many fronts. For example on the product front, we were able to successfully get out contacts and our application on to the dot net platform this quarter. Our technical teams worked very closely with Microsoft engineers and we look forward to further expanding our eCRM application platforms. And if that next rose over the coming years, I think that we will see KANA expanding further and further into the Microsoft customer base.

Our iCARE suite of eCRM applications has again propelled us to a successful quarter. We got significant interest in the contacts and our application as well as the e-mail and knowledge management applications. We closed a very nice deal during the quarter with high mark which is an . We now have several very successful health care installations and we believe that we have barely begun to tap into the health care market.

In today's tough climate economically, our eCRM applications are garnering very significant interest in health care, in financial services, in communications, and in the government verticals. The strength of the iCARE suite is growing as we continue to develop the master piece in each of these vertical markets.

As our application suite evolves in the vertical market, our integrator partners are getting more and more excited about selling the KANA Solution to their clients and it feels like those can get more manageable even in these tough economic times.

We believe that a significant reason for the success of KANA and our solution is attributable to the fact that our products are producing significant turnout investment for our customers. This is a varied feedback. This enables our sales force and our integrator partners to aggressively market our solution even though economic conditions are going to remain uncertain. KANA's ability to demonstrate strong return investment to CIOs, the vice presidents of customer service continue to feel strong success.

In addition to the progress we've made with our products, we again made great progress working with our integrator partners. IBM, Accenture, CFC and KPMG, all increased their investment in their KANA practices in Q1. We working very closely with these partners and they are solidly behind our continued success. The integrators are operating in the same difficult economic environment as software companies are and they're successful in leveraging to the ROI that KANA products provide in selling integration services to their clients.

Our partners are putting their own credibility on the line any time they recommend KANA Solutions, and I believe our success will continue to increase with them as the number of satisfied customers continues to grow each quarter and each of our important verticals. Our integrators are also helping us to continually drive the average size of our deals upward each quarter. The joint selling process is working very well and we look forward to improving it further. Tom Doyle and his sales teams around the world are doing a great job of working with our partners and I believe this will be one of the most important factors in our continued growth.

Turning back to our operating results, I have to reiterate how proud we are to achieve our profitably goals. Our executive teams focuses incredibly hard on operating results and profitability and we'll continue to manage the company prudently and conservatively through these economic times.

However, we also remain very confident in our ability to grow KANA and increase profitability as our success continues. As our momentum with our integrator partner continues, I believe that our product expertise in our vertical markets will continue to deepen and it will become a great asset for KANA. Well, let's take a little -- let's take a minute for Brett to review some of the financial.

Thanks Chuck. Again to summarize, I hope all of you have seen the press release that summarizes the quarterly results. Revenue for the first quarter was 25.1 million with an EPS of 2 cents a share. Revenue in Q1 was 60 percent license, 40 percent service compared to a 55 to 45 mix last quarter.

This means license revenue grew 11 percent sequentially and we are very pleased with our early progress towards our long term revenue mix goal of 70 percent license. As you are probably all aware our consulting business is structured around supporting our integrated partners and subject mater experts and remains less than 10 percent of our revenue.

From the geographic perspective revenues from North America accounted for 60 percent of our total with international contributions remaining 40 percent. The uptake in international share of revenue this quarter was due to the recognition in Q1 with the first tranche of revenue on the big BT Cellnet deal that you have seen at the press release. Our long term goal for international is to contribute 25 percent of the total.

Gross margin was up again this quarter to 81 percent up to 77 percent last quarter and is the highest in the company's history. License growth margins of 94 percent and service margins increased to 61 percent from 55 percent last quarter. Revenue from new customers was up this quarter to over 30 percent. ASP for the first quarter was $930,000.

The growth here is the solid indicator of the size of deals resulting from our integrated sales models. We are seeing real tangible benefits here that when you work with integrators, the deals get bigger. Partner influenced revenue continues at the -- virtually the 100 percent level. Cash and cash equipments at the end of March was 51.2 million plus 10.9 million restricted cash which was right on our target.

Our collections performance was very good again this quarter with a DSO of 68 days. We continue to estimate a go forward range of 75 to 85 days DSO due to the traditional end of quarter buying patterns of our customers. KANA's full-time head count at the end March was 425 and we currently have 50 quota carrying reps on board.

We are very pleased with our financial performance this quarter. Our integrators strategy, our operating model is delivering tangible performance and permanence and we remain maniacally focused on operational profitability and cash managements. That concludes the financial highlights. I will turn it back to Chuck for his remarks. Chuck.

Let us open it up for questions. I think the one thing we need to point out, there are very, very few companies winning in today's' environment. KANA employees have made a lot of sacrifices and performed a lot of hard work. Our integrated partners are doing incredible job not only of helping us in the joint selling process but in ensuring that our customers really experience their turn on investments that they expected in the selling cycle. This creates great reference accounts then. Although it is incredibly difficult to sell in tough economic times, we are one of the few companies who has great products positioned very well for today's economy.

I think that we will -- we will say that we were comfortable with the current street guidance and we don't really have much more comments in that right now as I mentioned we have run the company very prudently and we're conservative management team, but we believe that there will be continued growth for us and continued profitability. Right now, we are going to -- we are going to stay with the current street guidance down the next three quarters. I believe that would turn over and -- for some questions.

Thank you Mr. Bay. The question and answer sessions will be conducted electronically today. If you would like to ask a question please do so by pressing the star key followed by the digit one on your touch-tone telephone. One on your touch tone telephone to ask a question. We will pause for just a moment to give everyone an opportunity to signal for questions. And our first question will come from Mr. from Morgan Stanley.

Hi, Chuck and Brett, congratulations on a good quarter in a very tough environment. Can you talk a little bit about the new business that you find in the quarter -- I believe last quarter, you noted -- done a new business of about seven percent. You got about 30 percent now and I noted that in the past you had commented especially on the contact center that you had seen particular interest in people who haven't chosen a solution. OK, you talked about that 30 percent are those people who don't have a solution like that or they are buying in addition to something that they already have or were any of those who have any kind of replacement.

Hi, this is Chuck. I think we can tell you to view our 1200 customers as an incredible asset to go back to, but there are a quite a few companies out there who don't have a KANA solution, so to qualify the new customer, it means you don't have e-mail from old KANA or analytics from old Broadbase or contact center from old Silknet.

A lot of figuring out we have to do when we try to counter new customer, but in the health care vertical especially we are seeing a very, very fertile green field to go after because health care typically over the past four years was not focusing strongly on the web or web architected products and now they are really waking up to the fact that there is incredible operational savings if you can just service to the web.

Competitively, we still not have a competitor who can scale through a quarter million customers -- current users or half million current users and that's very important for the companies who are trying to save money, and trying to deflect service to the web. You need a partner and a vendor who can provide incredible amounts of scalability, so head-to-head there is a little company in U.K. called Pegasystems that we see once in a while, but nothing in the U.S. We just to see a company that will come in and try to scale behind even 7000 or 7500.

So, I think you will see this number bounce around quite a bit, 7 percent last quarter, 3 percent this quarter -- 30 percent this quarter, you know it could be anywhere between their next quarter because so may of our existing customers are really right for us, so -- so it is always easier to sell to current customers.

OK -- and then -- there was, you know some chatter during this quarter that perhaps there -- there may not have been a lot of new sales of marketing out, but maybe a little bit more interest in that, does that continue to be the case or are you still kind of commenting that people really aren't willing to spend money to make money in this environment.

Yeah it -- it remains a small portion of our revenue we see internationally, especially in Europe, we see a lot of interest in the marketing system. In the -- Europe -- Europe skipped a lot of the frenzy of the bubble a couple of years ago and so as the web is beginning to take hold there more companies are needing the marketing piece, but the marketing space is already getting a little bit more competitive too, I mean you see -- you see little companies in the U.S. going after deals and -- and they are willing to drop prices incredibly low and receive some European companies like , Siebel's has got a module now, so marketing is not a strong piece of today's economy and its getting, you know a little bit more competitive each quarter so, we are not looking for big off takes in the marketing.

And then just one comment on the guidance, I know -- I know you're sticking with guidance. So, last quarter you mentioned that you planned on being cash operations positive in Q2, is that still the case or is still the hope.

Well, we think cash flow -- cash in the second quarter would probably come out in the mid 40s. We have turned in a couple of quarters of profitability now, we think we are operationally cash flow break-even in the second quarter, but we have still got a bit of restructure rents that we pay, and then we have got timings just around collections and outflows, so we think it will come in -- plus we have got some cap ex that we would probably spent and make some investments in the second quarter. So, operationally things will break -- it will be cash flow break-even, and you know hope to come out in the mid 40's overall -- ending cash balance.

Thanks.

And our next question will come from Mr. Steve Paul from Goldman Sachs.

Hi this is Chris Taylor for Steve, nice quarter guys. I -- I guess my first question maybe, if -- if you guys could provide a little bit more color on the -- the BT Cellnet deal maybe and if you disclose how much revenue in the quarter came from -- came from that deal in particular.

We had not talked about that deal, but that was a deal signed in Q4, but there recently was a press release from BT, and IBM, and KANA, the total deal size for us, we've told people it was around $10 million, and during Q1, we took a little over a third of it. I was over in the U.K. about a month ago, sat down with the BT people, they accelerated their implementation schedule, so we're holding a little more revenue than we thought we were going from that deal. It's great news though, that we are accelerating and we think they ask you to come back and buy some more product within the next 90 days, so about a third -- a little over a third of that contract came in Q1, showing revenue in other words.

OK. And then I guess, on the -- on the ASP, it looks like it's almost you know up by -- almost double by, I guess, sequentially, wondering you know how many -- just will be the total number of new customers you guys had this quarter -- total number of deals if -- if you just will -

Total number of new customers, well, we -- you know for Chuck's -- Chuck, was telling you about how we had to kind of dig around, and figure out and who has response from previous transactions, so it's kind of tough, gets. We know we have 200 -- about 200 transaction, I'd say you know 10 or so maybe new customers.

. OK. And then I guess my last question is sort of more on the macro economy if you noticed --

Well, the quarter was unusually linear because of the nice deal we got the health care deals early in the quarter. We do not look for that as a pattern, but this will be repeated very often. We pay the guys who are out in the fields fighting the back end bookings don't disrupt, you know what we're trying to accomplish here. So, certainly things did not get any easier although we said in January we did not see the improved economy that some people were saying they saw, it was tough, we thought it would be tough, comes these guys are tough guys, and they're going to go out there and we think they're going to beat their numbers and we think we're going to do really well in this environment, especially because in each of the verticals now the integrator is getting better and better at showing that there is a big return on investment associated with the scalability of our products.

Great. Thanks guys, nice quarter.

Thanks.

And then our next question will come from Mr. from RBC Capital Markets.

Thanks very much. Chuck, I know -- in the last nine months, it's been really tough to forecast contact center business. Any improvement there, are you getting a sense just in the pipeline that you're better able to forecast when some of these larger deals are going to be able to close?

We are. The difference is that when KANA and Broadbase merged, the integrator support of the KANA contact center was not that strong and it strengthened considerably each quarter since last June when we and what that means is that you get more contact center deals in the integrator pipelines where we're jointly selling. So, we have probably 20 times as much involved, the deals are bigger, they get a little bit more predictable, they tend to take a little longer.

So, I would say the pipeline although is much, much better, it still takes a long time to sell a contact center as you got to know in this economy nobody is throwing away unamortized software. So, you have to get accustomed when the timing is right if they have a current call center system that's coming up fully amortized and they're looking to either upgrade it or replace it, and you know, what you're trying to do is -- what you're trying to do is move service to the web as almost any integrator can tell you now, you need KANA.

And Chuck, just finally one last question. You got to spend a little bit more on RND this quarter than you had, than we had modeled. Did you add headcount there or is there any initiatives in place that are going on there that would have added additional expense?

Yeah, we did add some headcount in development. You know, we got some -- we got a little bit better at running the GNAPs and some of the consulting pieces and we wanted to continue to invest in the product line. We've got -- we've got such an incredible lead over the next best company on the product front. We want to maintain that lead. So, almost any time we have room, we will invest in products.

Great. Thanks and congratulations.

Thanks, .

And Mr, John Ederer from Pacific Growth will have our next question.

Hi. Thank you. Just a couple of follow-up questions. First on the -- on the BT Cellnet deal, if you were to -- is it possible to strip that out when you take a look at your ASPs and try and see where -- get a sense about where they came out in Q1 relative to Q4?

You mean strip BT out of Q4?

All right. I'm sorry. If you -- I'm assuming that BT Cellnet ...

BT was booked in Q4.

OK.

So, ASP is derived from computing the average size of bookings in the quarter, not of revenue. BT was booked in Q4, it was a big deal, but there were a lot more transactions in Q4. There were more big transactions in Q1 than in Q4.

OK, so it's more a matter of the next year in the first quarter?

Right, exactly.

OK. And then secondly, I just wanted to clarify, you were talking about being comfortable with the guidance, I'm showing consensus around the 100 million for '02 and EPS of 17 cents, is that your understanding as well?

Yeah, that's what we look at as well.

OK. Thanks guys.

And as a reminder, if you do have a question or if you have a follow-up question, please press star, one to signal. We will take our next question from Ms. from .

You know quarter response is staying strong. Are you saying, you know there is a lot of companies out there talking about demand for analytics picking up, is this -- is this something that you're seeing as well?

You know analytics is a space that's really commoditizing that -- what we would have called low-end competitors a year ago are making -- have made great strides with their technology and their products. There are companies like Informatica, Business Objects, Brio are really getting competitive now.

So, I think those are the people who are saying they are seeing increased demand for analytics. We really don't with stand-alone analytics because most of those deals turn into back-end middle-ware of data deals and there's plenty of companies that want to do that back-end middle-ware piece value added application. There's a lot more competitors. The prices are commoditizing. We don't see that as a place for us to go in the future. So, no I don't see demand increasing there. I think it is a steady demand with a lot more competitors.

All right that makes us -- just one more quick question for Brett. Share count went up a little thought. Is that primarily due to year-end bonuses or ...

Share count, no. Share count went up because of the financing. We added 2.9 million shares in the first quarter, you know, before we were just -- total shares outstanding now, we've got to take that and then we had the CCB warrants which show up in the share count as well.

OK. That's what I missed. All right, thank you very much.

Sure.

It appears that that are no further questions at this time. Mr. Bay, I'd like to turn the conference back over to you for any additional or closing remarks.

Thanks. I'd just like to thank everybody for listening in and talking about our quarter with us. We look forward to talking to everyone again in July.

And that ... this concludes today's conference. Thank you for your participation.

Thank you.