SWK Holdings Corp (SWKH) 2003 Q2 法說會逐字稿

Good afternoon, everyone, welcome to the KANA software second quarter earnings conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. I would now like to turn the floor over to your host, Mr. Bay, Chief Executive Officer. Sir, the floor is yours.

Hi, this is Chuck. I'm joined on this call by Tom Doyle our President, and John Huyett our CFO. Before we get started, John has a statement he would like to make.

On this call, we will be making forward-looking statements regarding anticipated events on the future performance of the company, including statements regarding our expected revenues, expenses, profitability, cash flow, margins, operating results, EBITDA, our 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, reductions in prices, market acceptance of our products, retention of employees, inability to enhance or develop our products within budget and on schedule, slow economic conditions, as they effect spending by our perspective customers on ECRM and similar enterprise software products and other factors described in our most recent filings with the SCC, including recent reports on form 10-Q and 10-K.

In addition, I want to emphasize these forward-looking statements are based on judgments and that individual judgments may vary. The forward-looking statements for this call speak only as of today and no one should assume later in the quarter the comments we provide today are still valid. Chuck.

Thank you, John. As KANA announced in June, we fell short of our q 2 revenue goals. We closed some very good deals and we added some great customers, but too many of our largest deals failed to close for us to meet expectations.

As you know, the global economic environment remains very difficult. As a result of this, we're facing many customers who are choosing KANA products, but whose CFOs are not purchases within the timeline this. This continues to makes it difficult to accurately predict the timing and sequence of closing large deals.

On the positive side of things, our sales teams are working a robust pipeline of business, and our products continue to lead the ECRM space. In June, we announced the release of our K8 contact center application. This was a tremendous accomplishment. The release was a product of collaboration between KANA's, Accenture's and HCL's development teams in the US and India. Over the past five quarters, KANA's been working hard to transition application development in India. The June release was the first release under the new structure and it was released ahead of schedule. We believe this out source strategy will provide KANA with a momentum to retain our product and technology lead in the ECRM space for years to come.

KANA now retains 40 or 50 U.S.-based product experts, technology experts, product managers and architects. These people manage hundreds of developers in India and in China. These are KANA employees. We announced in Q2 that we're giantly developing products with BearingPoint in their global development center in China. Our work with Accenture and BearingPoint has strengthened our relationships with these integrated partners and has allowed KANA to tap directly into the considerable domain expertise within these integrators, U.S. and European practices.

On another positive note, we announced that Brian Kelly has rejoined KANA as our EBT of Product Strategy. Brian is recognized as one of the elite product architecture experts in the ECRM space. Brian will be working closely with Alan Hubbard, our EBP of Engineering, in managing our internal and external sources to help lead in the ECRM space.

Our pipeline deals with IBM, Accenture, BearingPoint and Business Edge remains robust and continues to grow. Our deals continue to be 100% integrated driven and we're committed to our business model and the strategy of working all deals with integrated partners and we believe the strong gross margins generated by this model will prove out in the long run. I'll turn things over to John now and then we'll open for questions.

Thanks. If you have seen our press release, you know our revenues for the quarter were over $12 million, total revenue declined 33% from the first quarter, but is in line with our preannouncement a few weeks ago. Loss per share was 43 cents, also in line with our preannouncement. We experienced a license revenue short fall, because three 7-figure deals didn't close by June 30 as expected.

Despite the license revenue short fall, we see several metrics pointing in the right direction. We had six new customers, including AT&T solutions and Key Bank. We booked five deals over $500,000 each. Our combined software license and software maintenance constituted 92% of our total revenue this quarter, resulting in an overall gross margin of 73%. Our maintenance revenues remain very strong demonstrating their large existing installed base, reaffirms the value of our software. In Q2, our maintenance renewal rate was approximately 90% in line with prior quarters.

Our loyal customer base was a fundamental strength of KANA and we believe is directly attributable to the quality of our software and our commitment to absolute customer satisfaction. Absolute customer satisfaction is not just a program at KANA, but one of our core values. Each quarter we measure our success by looking at repeat purchases, maintenance renewal rates, customer reference ability, and customer satisfaction survey. It's true what gets measured gets done. Our absolute customer satisfaction metrics have improved by 40% over the past 18 months. A further proof point is that existing customers regularly account for 75 to 80% of our licensed bookings.

During the second quarter, 75% of our revenue was from the U.S. with 25% coming from overseas. Our average transaction size was $320,000 compared to $531,000 last quarter, and this is a direct result of not closing any of the big deals. Our strongest verticals continue to be financial services, technology, and telecommunications.

Total operating expenses were 18.8 million, the same as in Q1. Our full-time head count today is about 250, down from about 368 at the beginning of the year. The effect of this and other expense reductions initiated in the first half of the year will begin to show up in Q3.

Moving over to the balance sheet, cash and cash equivalence, excluding restricted cash at the end of June, was 25.8 million. Cash decreased 5.9 million primarily as a result of our booking shortfall. DSOs at June 30 were 40 days, slightly up from the 34 days in the prior quarter, but better than our target of 45 days and still among the best in the industry. Our quick ratio defined as free cash investments and net receivables divided by current liabilities other than deferred revenue was 1.4 and our working capital, excluding deferred revenue, was 10.4 million. Deferred revenue at June 30 was 20.9 million, 1.7 times quarterly revenue.

In closing, I would like to remind everyone over the preceding three quarters, KANA was one of the few software application vendors to have met their financial performance targets and that every department of KANA is committed to returning to growth and achieving GAAP profitability. At this time I'll turn the call back to Chuck for concluding remarks and q and a.

Thanks, we'll open things up for questions first, then we'll wrap things up with closing remarks.

Thank you, the floor is open for questions and comments. If you have a question or comment, press the numbers one followed by 4 on your phones at this time. Please hold while we poll for questions. Thank you, the first question comes from Karen Haus. Please ask your question.

Thank you very much. Just a couple of quick questions here. As far as the restructuring that you guys, have all of those actions been completed or are there still some changes that need to be made there?

You mean with the transition to the outsource model?

Yes.

All the costs associated with that were showing up through the past four quarters, so it's all done.

Okay. In terms of just a low watermark for cash, I guess it's probably a better question for John is -- is sort of the low 20s a reasonable level for that going forward?

Karen, you know, we're not getting any guidance, and we never have given guidance on cash. It depends on the timings and bookings more than anything else.

Great, one more quick question. Do you guys have any color about some of the status of the deals? What do you think needs to happen in order for some of those things to get closed. I realized that those circumstances are beyond your control but what do you think needs to happen before CIOs get comfortable with opening their checkbooks.

Karen, this is Tom Doyle. We alluded to three transactions that we had in our forecast last quarter that didn't close by quarter end. Two of those three are with very large existing KANA customers, and we have a very accurate beat on both of those and although the timing had slipped, the probability of closure we think is the same, and we're very close on concluding the transactions on those. The third transaction was a new account that could be pushed out a little bit farther.

Great, thanks very much.

Thank you, the next question comes from Patrick Mason. Please pose your question.

Yeah, just give a little more flavor on the two of the three that you think, obviously, have a better ability to be close, I mean are those, you know, like a $1 million-type deal or are they higher than that?

Well, we characterized on last quarter, and I think even today a seven-figure transactions. All three of them were seven-figure transactions originally and they remain to be in that size.

Okay. All right. Thanks a lot.

Again, if anyone does have a question or comment, please press the numbers one followed by 4 on your phones at this time. Please hold while we poll for questions. The next question comes from Wendell Ladley. Please pose your question.

Yes, I'm wondering if you can provide any guidance for Q3, I didn't catch that.

No, Wendell, no guidance in the press release or on this call.

Okay in, terms of your operating assumption in terms of some of those large deals there, they have the ability to swing in the quarter what, kind of probability do you sign to those closing either one or all three?

Wendell, this is Tom. I believe that -- I'll put it this way. I'm certain of two of the three transactions we are very close to concluding those transactions. The third would be in a new account, not having experience with their procurement process, I'm not ready to announce that it's done yet.

Two of the three have a reasonably high probabilities closing in Q3 time frame?

Yes.

What would you estimate the value of those to be from a perspective.

Um, --

they fit our typical profile of 70 to 80%.

What I'm trying to get a sense for is what those two that you have high sense of confidence in, what the ballpark might equate to in terms of license revenue.

I think we better wait until they're closed.

Maybe put differently, the original assumption is that you do $10 million for the quarter. So you're 7 million shy. I divide that evenly amongst three deals, you can assume about 2 1/2 each. So, if two of them represented somewhere in the ballpark of $5 million, is that a safe assumption on my part, hypothetically?

Hypothetically, I think you're in the right range.

Okay, thanks.

Thank you, gentlemen. We have no further questions at this time.

Okay, this is Chuck again. You know, as we move forward, I think there are three things that are very important that are going on. Number one, no excuse for failure is good enough, none are going to be offered. We have an incredible amount of support for our sales teams. We let down shareholders and employees, that's inexcusable. We didn't need layoffs or organizations. We have a very high degree of faith in our sales management that they will get back on track, they'll fight through the difficult times, they'll close deals the way they're expected to.

On the incredibly positive side, KANA is now the first CRM, ECRM company to be India outsourced, China outsourced. We have got incredible amount of flexibility now on getting products out faster, getting more people on projects than ever possible before, and the whole time that we do that, we can also save some money. So, India's not about saving money. India's about getting more people, really talented, hard-working people, on projects to get products faster, and we are in the lead with respect to ECRM products and technology. We intend to hold that lead, and we think that the strategy of using IBM in India, Accenture in India, BearingPoint in China and HCL in India, is going to prove to have long-term value.

We also remain to our business model working with integrators and we think the gross margins produced by that model will, over the long haul, prove much more valuable than our kin who tend to focus on doing consulting project management implementation stuff, all which has very small gross margin compared to what KANA can produce. So, we'll talk again in October, and we fully intend to have better results. Thanks.

Thank you, everyone, this does conclude today's teleconference, you may disconnect all lines and have a wonderful day.