SWK Holdings Corp (SWKH) 2002 Q3 法說會逐字稿

Please stand by. Thank you for standing by. Good day everyone, and welcome to this KANA Software third quarter financial results conference call. Today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Chief Executive Officer, Mr. Chuck Bay. Please go ahead.

Thanks. Hi, this is Chuck Bay. I'm here with John Huyett, our CFO. I hope you've all had, uh, a chance to review our press release. But before we start the discussion of our September quarter, John has a statement he'd like to make.

Thanks Chuck, and good afternoon everyone. As you can see in our press release, we're very pleased to have beaten consensus this quarter in what has been a highly difficult environment. If you've not seen a copy of our press release, you can get one from our website, at www.kana.com. On this call, we will be making forward-looking statements regarding anticipated events and the future performance of the company. Including statements regarding our expected revenues, expenses, profitability, cash flow, margins, operating results, IBIDA, and long-term success, product development and characteristics of our market segments.

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 the effect of economic trends and uncertainties. Competition, market acceptance of our products, retention of employees, changes in kind of market capitalization, and other factors described in our most recent filings with the SCC, including our most recent reports on form 10Q and 10K.

In addition, I want to emphasize, excuse me, that 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 other forward-looking statements until the next scheduled call. The forward-looking statements for this call speak only as of today, and no one should assume later in the quarter that the comments we provide today are still valid. Chuck.

Thanks John. As you can see from our release, KANA had very a good quarter. Our license revenue grew. Our total revenue grew. Our cash balances came in right on target. Our margins improved very significantly. We exceeded our goals with respect to IBIDA earnings, and our average deal size remains the highest average deal size in our market space.

Although the economic environment remained difficult through the quarter, we were able to perform well. Our sales pipeline grew, and again this quarter, 100 percent of our deals were integrator assisted. We had new deals with IBM, with Asenture and with KPMG Consulting, which is now called Faring Point. We are also seeing increased activity with CFC and with Aloyt Consulting. We continue to see very large deals coming in through our sales pipeline through the integrator partners. Our traction with IBM and the number of deals currently being worked on with IBM were proved again, improved again this quarter.

This activity is increasing in the U.S. and Europe and Asia as well with IBM. We also saw increased pipeline levels with Asenture and with KPMG Faring Point. Our integrator partners are telling us that KANA's ability to provide very rapid return on investment, and the breadth of our integrated products suite are the keys to their continued success with their inaudible clients.

We believe the predictability of our sales pipeline is continuing to improve as our integrator partners continue to pro-actively help us close deals. In Q3 we closed deals in the Telco sector, the health care sector, the automotive sector, the consumer goods sector, the government sector, and also in the financial services sector. In each of these sectors, the common thread seemed to be KANA's ability to demonstrate and rapidly deliver cost savings and return on investment.

Fortune 500 CFOs continue to very carefully scrutinize deals and ROI calculations, and we do not see this trend changing in the near future. Although most CRM companies continue to search for strategies to use through these tough economic times, KANA's strategy remains clear, and seems to be succeeding as you see from our results. The customer service applications in our iCare Suite continue to dominate our bookings in Q3. Our marketing and analytic applications remained at roughly ten percent of bookings as they have over the past four quarters. Our maintenance revenue remains strong, and our maintenance renewal rate of over 90 percent reflects a strong customer satisfaction metric.

Roughly 65 percent of our licensed bookings came from our install base in Q3. And we believe that this also reflects strong customer satisfaction with our products. The competitive landscape has not changed significantly over the past quarter. KANA remains focused upon enabling our customers to move away from expensive telephone-centric customer support and communication, and into blended channels of support with strong deflection of customer support and communication to the web.

Our ability to leverage the J2EE, the com, and the dot net platforms positions KANA uniquely as the ECRM leader, and this continues to improve our levels of integrator support. Tom Doyle, our COO, continues to make progress in building our league sales teams. The average quota for our sales reps continues to increase, and this again is made possible by our large average deal size. This leverage has enabled KANA to increase our profitability goals.

As you can see from our results, KANA has made very significant progress with respect to growth and operating margins. This has directly improved our ability to reach cash flow break even, and we've set our Q4 goal for cash flow at the break even point. At this point, let's turn to John, and he'll focus on the financial aspects of the quarter in detail.

Thanks. Our revenues for the quarter were just over 18 million dollars. Compared to 17.2 million in the second quarter, an increase of five percent. License revenue increased 5.7 percent to 8.8 million compared to 8.3 million in the second quarter. On the bottom line, we reported a gap net loss of 30 cents per share, based on roughly 22.8 million shares outstanding. Our IBIDA loss was 1.4 million, or six cents per share. Significantly ahead of our guidance, which was nine to eleven cents per share.

I'm also happy to report that there were no one time charges in the third quarter. Now some details. Importantly, our license revenue, which constitutes 49 percent of total revenue grew nearly six percent sequentially, and over 300 percent year over year. 65 percent of our revenue was domestic, and 35 percent international. Europe was particularly strong, closing new deals with Daimler Chrysler, Seaman's, UK Inland Revenue, and Action Insurance.

Major orders in the U.S. include Sony Consumer Electronics, Washington Mutual, Microsoft, Medtronic, and World Wrestling Entertainment. AFPs on transactions over 100 thousand dollars were over a half million for the third quarter in a row. We booked one new deal over a million dollars, and had more in the 500 thousand to one million dollar range than we've had in any quarter this year.

Revenue per employee increased 14 percent over last quarter, and is up over 50 percent from the year ago period. Maintenance revenue contributed nearly eight million dollars, up from seven and a half million dollars last quarter. Even during these difficult times, our maintenance renewal rate continues to exceed 90 percent. Our large installed customer base provides us not only with a significant maintenance stream, but new license opportunities as well. About 68 percent of our license bookings were generated from existing companies, and 32 percent from new names.

Combined, software license and software maintenance constituted 93 percent of our total revenue this quarter. The portion of revenue consisting of license and maintenance has increased every single quarter since the Conner Broad base Combination. And we expect this trend to continue. Our gross margin in Q3 was 14.7 million, or 81 percent of total revenue. In the year ago quarter, our combined revenues were 18.2 million, about the same as this quarter. But because professional services accounted for over 40 percent of revenue back then, our gross margin was a negative 3.3.

This was a favorable swing of 18 million dollars in margin and 18 million in sales, further validation of our strategy to discontinue Pro-Serve, and to partner instead with World Class Integrators.

Regarding expenses, I'm proud to say we have not had a layoff in over 12 months. And I'm proud to say we were able to reduce ongoing operating expenses by over 10 percent in just one quarter. Sales and marketing expense was 8.7 million, or 48 percent of revenue, compared to 60 percent of revenue in the second quarter, and 106 percent of revenue in the year ago quarter. The reduction in sales and marketing expense results from better cost controls, and the leverage we receive from our integrator partner model.

R&D was relatively flat, at 6.4 million compared to 6.5 million in Q2. But was down to 35 percent of revenue compared to 38 percent in the second quarter, and 56 percent of revenue in the year ago period. GNA increased slightly from the second quarter and is too high at 3.5 million dollars. I'll be working to reduce this in the fourth quarter. Amortization of stock based compensation and tangibles decreased a million dollars this quarter, from 4.2 million in Q2, to 3.2 million in Q3.

Moving over to the balance sheet. On July 18th we announced an 18.7 million dollar charge related to a long-term project entered into by prior management. Between the time of the announcement and the filing of our second quarter form 10Q, the issue was settled for substantially less than the estimated loss we announced in July. The major terms in effect on our financials were disclosed in the second quarter 10Q, which Chuck and I certified. Compared to the Q2 financial press release, which we issued on July 18th, accrued liabilities at June 30 were reduced by 7.3 million. Deferred revenue increased by four million, and our net loss for Q2 was reduced by 3.1 million, or 13 cents per share. I'm glad this is finally behind us.

Cash and cash equivalence, excluding restricted cash at the end of September, was 35.1 million dollars, giving us plenty of liquidity for the foreseeable future. We reduced accounts payable and accrued liabilities by over 13 million dollars during the quarter. Our inaudible ratio, defines as free cash, investments, and net receivables, divided by accounts payable, accrued liabilities and current notes payable, is now better than two to one.

Working capital, excluding deferred revenue is more that 22 million dollars. BSOs at September 30th were 61 days down from 96 days at June 30. As you may know, in July I set an objective to cut our DSOs in half by the middle of next year. Primarily by building backlog and improving our visibility. We've made great strides towards that goal in Q3.

Deferred revenue at September 30 was approximately 28 million dollars, more than one and a half times quarterly revenue. This takes me to our guidance. Looking ahead to Q4, we don't believe it's prudent for us to foresee the market improving in the near term, assuming that the current market conditions do not change. We also are not buying into the train of thought that Q4 will exhibit any type of budget flush or IP spending. Therefore we believe that Q4 will be roughly in line with Q3 revenues, with a modest increase in license revenue. Our number one objective is to turn profitable, and we're committed to reach IBIDA break even in Q4.

This concludes the financial highlights. I'll turn the call back to Chuck for concluding remarks and Q&A.

Yeah, let's move, uh, into the Q&A, and see what you want to talk about.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question you may signal us by pressing the star key, followed by the number one on your telephone. Once again, if you would like to ask a question, please press star one. And we'll pause for a moment.

And we'll take our first question from Karen Haus with RBC Capital Markets.

Thanks very much, and congratulations on a, some solid results in what's a tough market out there. Um, I was just wondering if you guys could give us a little more color on your pipeline. Um, specifically, um, by vertical. What are you guys, where are the interest levels out there?

Um, you know the strongest activity we're seeing today is coming in, uh, health care and government. Uh, but we're also seeing a lot of continued activity in Telco. Uh, if you look at the places where customer support and customer communication is, uh, is crucial, and you're talking of millions of customers, that's where we do really well. We think the financial sector is starting to heat up a little bit. We're seeing a lot of activity with the integrators there, so, uh, I think we can do some, do some business there in the next two quarters.

But, uh, Telco, health care, and government, probably are our strongest areas. And, uh, you know, we follow the integrators into those spaces. Uh, and, and we see that's where they're making the most tracks right now.

Okay, and then just one quick follow up. Um, you mentioned that your goal is to be, you know, cash flow, uh, neutral for the Q4. Does that, um, imply that 35 million will be the low water mark for you guys?

Yeah we'd like to hold cash, definitely above 30 million. Um, we, we think that it's not overly aggressive to try to break even this quarter, and that would hold us flat, yeah.

Okay, great. Thanks and, uh, good job on the quarter.

Thanks.

Thank you.

Our next question will come from Ryan Rathman with Morgan Stanley.

Hey guys. Um, a couple of questions, kind of dovetailing up the previous question, um, and your comments on government. Did you see any up tick with the government fiscal year end? Or was it just kind of status quo with the deals coming in?

Um, no, these were deals that had been in the pipeline for three quarters. Uh, just came to a natural conclusion that it was time to close them. But the good thing about government deals is, although they're large, uh, they're just the beginning of, uh, what will be years of continued business with these entities. Uh, not one of the government deals we've done so far has been a complete deal. It's usually just phase one of a much larger government project.

Okay, and then, um, given, you know, you've commented on some of the bigger deals in the health care sector in the past. Um, and the fact that you had some pretty good visibility in some of those revenues. Can you comment on when, linearity this quarter, and what it may look like, uh, right now as it stands with the current quarter.

Linearity in revenue or bookings?

Uh, either way you want to tackle it.

Linearity in revenue, is, is, uh, something that's easier to manage. Uh, in bookings we've pay our sales guys quarterly, and they perform quarterly. So we're anticipating that December will be a large bookings month for us. Typically we do some, uh, European bookings in the first month of a quarter, but most North American bookings come in at the end of the quarter. Uh, maintenance as you know, uh, advertises off the balance sheet. Service is, is very level and so it's license revenue, uh, some of which comes off the backlog, some of which comes out of, uh, new shippings, and some of which comes out of, uh, new orders. Um, tends to be a little bit bumpier, uh, but we do our best to smooth it. And as John said, uh, we've made a lot of progress on the balance sheet and the DSOs, and we hope to see continued improvement there.

Um, last question, just, you just mentioned maintenance, and with the good maintenance renewal rate, are you seeing any, uh, pricing pressure on maintenance?

Well yeah, I mean, it's a negotiation. Every renewal is a negotiation, but, uh, we're not seeing incredible pressure. Um, I think that, uh, our maintenance renewal group is doing a great job. And, uh, you know, once in a while you see a customer, in, industries that are under duress in these economic times, pushing hard on us to try to give them a break. And, and sometimes we will for a strategic partner.

Alright, thanks a lot.

Sure.

Our next question will come from Patrick Mason with Pacific Growth.

Uh, yeah, I'm just trying to get a little clarity on, uh, your guidance. Uh, it says revenue's roughly flat going into Q4. And, uh, I guess it's counter intuitive when you, you talk about all the activity with your systems integrators and those kind of partners. Uh, could you talk a little bit about that. And then, uh, lastly, you are looking, you shoot to be break even, uh, where, where are the cuts coming from? Sales and marketing, R&D, to get there based on roughly the same revenue number.

Um, I don't think I said revenue's flat, I said, uh, modest increase in license revenue. And roughly the same revenue. So, we are, you know, we're expecting a modest increase in revenue. Um, the, uh, and I mentioned that we were going to work hard to try to reduce GNA expenses this quarter.

Alright, okay. So, I want to follow, just a follow up question on the, uh, uh, seasonality, I guess, in Europe is over. Do you expect to see a higher percentage of revenue, uh, from Europe? You seem to think that was, that was doing okay for you, uh, in Q4.

Well we, we did well in Europe in Q3. We traditionally are around 20 percent international or a little better. And, and we saw that again in Q3. Um, yeah, Q3, some of the bookings that we'd hoped for in June spilled into July, and, uh, I think this quarter we'll see some of the, a couple deals that we would have hoped to have closed in September will flow into October. Um, but we, we have, we don't really see any significant shift in the ratio of business between U.S. and Europe from quarter to quarter.

Okay. Alright, well good.

And that concludes the question and answer session. Mr. Bay, I'll turn the conference back over to you for any additional or closing remarks.

Um, I'd like to say that we will be at the RBC Software Conference in San Francisco in a couple weeks if, uh, people are interested in following up with us in person. Uh, and if there are detailed questions with respect to the financials, uh, please feel free to e-mail or call John directly, uh, to follow up. Um, we've made great strides in the business, and the balance sheet is, is so significantly stronger that I think, uh, it'll be unanimously agreed that John's done a great job since he started in June. He's only been here about 100 days, and we can already tell the difference.

Um, we hope to be, uh, talking to you again in January with more good news.

That concludes today's conference. Thank you for your participation.