SWK Holdings Corp (SWKH) 2004 Q3 法說會逐字稿

Good afternoon, everyone and welcome to the KANA report third quarter earnings teleconference. At this time, all lines have been placed on a listen-only mode, and the floor will be opened for questions and comments,t following the presentation.

I would like to turn the call over to your host, Mr. Chuck Bay. Sir, you may begin.

Thanks. Hi, this is Chuck. I'm here with John Thompson, our CFO and with Tim Angst, our Executive Vice President of World Wide Sales and Services, but before we start the call, John has a statement he would like to make for everyone.

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, our long-term success, our product and product development efforts, and/or characteristics ever our market segment. Actual events or results could differ materially from those described or anticipated in the forward-looking statements as a result of a number of factors, including risks associated with our efforts to grow sales, our reliance on large orders to meet our expected sales in a given period, our sales cycles, our ability to manage our expenses and finance our operations, our reliance on international development partners, competition, market acceptance of our products or services.

The effects of uncertain economic conditions on spending by our prospective customers and other factors described in our most recent filings with the SEC including statements in our forms 10-Q and 10-K. The forward-looking statements for this call speak only as of today, and no one should assume that the comments we provide today will still be valid later in the quarter.

Now, I will turn the call back over to Chuck.

Thanks. I hope that you all had an opportunity to review our press release issued earlier today. In a few minutes John is going to give some color and some details for our quarterly financials and then we'll open the call to questions.

First, I would like to apologize for the fact that this call was deferred a couple weeks beyond our normal range. You are all aware that we have new auditors this quarter and a new chief financial officer too. John made the decision to defer the call in order to give the new auditors some additional time get familiar with KANA and the KANA accounting policies and procedures. Everything went very well, with respect to the review of the books and financials. And (indiscernible) seemed completely comfortable and ready to begin year-end work for us in December. John can talk a little bit more about that later.

As you know from our preannouncement, we exceeded all expectations with respect to the September quarter. I must say though that the macro economic environment does not seem to have improved in a noticeable way, at least with respect to enterprise software. Tim's team did a terrific job into a difficult environment, and we are hopeful that we can continue this momentum into 2005. We believe that growth of 5 to 10% sequentially per quarter would be solid performance as we head out of 2004 and into 2005.

Some of the most exciting news here at KANA relates to the fact that we are all looking forward to the release of the new Service Resolution Management Application Suite. As most of you you already know, KANA has been focused on service resolution management for over a year now. Focused on, not only building an SRM application suite, but also focused on creating the category called service resolution management, which is a spinout and an adjacent space to CRM. Forester has recognized KANA as the leader in this space, and we're hopeful that Gartner will soon weigh into the picture with their view of KANA and of the service resolution management space as a whole.

Although our sales teams and technical fields teams have had their hands on the SRM code since July, our first general availability release comes just after the Thanksgiving holiday. I personally have been in many meetings with customers, sales prospects and integrators, and I can tell you that there's a tremendous excitement level among the people who have seen what these applications can do. The official product launch is later this quarter. And I'm sure that you will see a lot of this excitement over the coming months in the press surrounding the release. The fact that our product strategy teams and our engineering teams were able to go from start to general availability in 18 months with this new application suite, it is strong testament to our very difficult decision to move almost all of our development efforts to India.

Although the move was very challenging over the initial 12 months, now that we are 24 months into the outsourcing model, it is clearly shown to be a great asset. We have an outstanding lead in service resolution management product depth and breadth, and with our development outsourcing relationships with IBM in India, with Accenture in India, with HCL in India, and with BearingPoint in China, it certainly looks like we'll hold this lead or even extend it over the coming years. We also believe the fact that IBM, Accenture and BearingPoint were all closely involved in the design and the buildout of the SRM applications will help those organizations to understand and co-sell applications with KANA.

With respect to sales performance in Q3, we saw more strength in Europe than we did in the U.S.; although it is not clear as to why this macro environment exists, we see a lot of momentum building with IBM in the UK and on the continent in Europe. Most of this momentum would be starting to play out in the latter half of 2005, as you all understand we have very long sales cycles. Our U.S. relationship with IBM is continuing to grow. Both IBM and Accenture in the U.S. or excited about the new service resolution management application suite and there are several new initiatives with these partners designed around getting the SRM applications to market in the financial services and the communications sectors. Tim Angst and his field teams around the world deserve a hearty thanks for their efforts in Q3.

I think now we will move to some of the financial color.

Thanks, Chuck. Summarizing from our press release, total revenues for the third quarter were $12.4 million, an increase of 29%, from the $9.6 million in the second quarter. On a GAAP basis, net loss was $3.4 million or 12 cents a share. Basic and diluted weighted average shares outstanding at September 30th, 2004 were 29 million 31 thousand. Earnings before interest, taxes, depreciation, amortization, EBITDA was a loss of $1.6 million, which equates to 6 cents per share. We believe that EBITDA provides a good measurement of KANA financial performance. In terms of revenue breakdown, license revenue was $3.8 million and 31% of total revenue. Maintenance revenue was $7.6 million, and 62% of total revenue. Professional services revenue was $900,000 and 8% of total revenue. License and maintenance revenues comprised 92% of our total revenue this quarter. Resulting in a gross profit of approximately $10 million, which provided an overall gross margin of 81%.

Thanks to our integrator partnering strategy we continue to believe that KANA maintains one of the highest overall gross margins in the CRM industry. Our maintenance revenue remains strong, a testament to our large, existing installed base. During the quarter, maintenance revenue renewal was over 90%. Existing customers accounted for the majority of our license orders. Important new customer wins including companies from the credit card, insurance and government sectors. Almost 60% of our third quarter revenue came through the United States with the remainder coming from overseas. The average transaction deal size was 407,000, up from 136,000 in the second quarter and $258,000 in the first quarter. Our strongest verticals continue to be financial services and communications. Major orders during that third quarter continue to show strong demand for our ITU and response products.

Moving to our expenses for the third quarter, sales and marketing expense was $6.5 million, or 53% of total revenue, this was up $600,000 from the prior quarter, primarily reflecting increased commissions, due to the larger license revenues, as well as a one-time payment related to Tom Doyle's departure. R&D expense, representing 39% of revenue at $4.8 million was slightly below the prior quarter. G&A expense, representing 13% of revenue, was $1.6 million, down almost $600,000 from the second quarter, due to a favorable legal settlement benefit and reduced head count during the search for a new CFO. We are pleased to see the results of our internal efforts at scaling back operating expenses. During the third quarter, the sum of sales and marketing, R&D and G&A expenses was less than $13 million. The lowest point in the last four years. This expense reduction over the past few years has been the result of internal cost controls and offshore efficiencies.

Amortization of intangibles and stock-based compensation for the quarter was $341,000. Looking ahead, we expect it to be approximately $100,000 in the fourth quarter. Our September ending full-time head count was 187, including a total of 14 quota-carrying sales reps. Annualized revenue per employee was $265,000 for the quarter, an improvement of 42% over the prior quarter.

Moving to the balance sheet, cash and cash equivalents at the end of September was $24.2 million [Company corrected from 29.2 originally stated on conference call], a reduction of $2.9 million from the prior quarter. Due to a large order being shipped and paid for within the third quarter, the accounts receivable was down by $1.1 million for the second quarter, this resulted in a DSO at September 30th of 19, significantly better than our usual target of 45 days. Our quick ratio, defined as free cash and investments and net receivables, divided by current receivable -- excuse me, divided by current liabilities other than deferred revenue was 1.5. Our working capital, excluding deferred revenue was $11.6 million. Total deferred revenue at September 30th, was $19.3 million, up from $19 million at June 30th, 2004, mainly due to the timing of maintenance renewals. This concludes the financial highlights.

I will turn the call back to Chuck for concluding remarks and Q&A.

Thanks, John. Before we go to Q&A, a couple of things I could note, one, on the competitive front, the biggest change in our space has been the departures of Primus from our world. They are now the commerce site search module for art technologies commerce platform, and, although they retain their knowledge prior capabilities, it appears it will be quite a while before we see them again.

On the service resolution management application front, currently there are no significantly sized companies with SRM applications yet. There are a couple small private companies moving into the space, primarily led by Iphrase on the East Coast, Inquira on the West Coast and a small French company call Quadara, on the continent. At the mid-market level we sometimes see E-gain and or Rightnow in knowledge-type e-service deals, but we have very few mid-market deals at KANA because it's not a sweet spot for our integrator partners, and KANA is not in the business of implementation or integration services, so we tend to see large fortune 2000 deals, not departmental or mid-market deal. And as of yet neither E-gain nor Rightnow offers anything in the service resolution management space.

Let's open up for questions now, and then we can have some concluding remarks.

Thank you. (Operator instructions) The first question comes Patrick Mason of Pacific Growth equity. Please, pose your question.

Hi, this is Derrick Wood for Pat. Just a question on the new auditors, do you expect to incur some increased fees in Q4 with them, and can you just spell that out? And then maybe anything with Sarbanes-Oxley as well? I mean I know you are under $75 million, but do you expect to have any expenses around that?

The new auditors will cost us a little bit more than PriceWaterhouse Coopers, because they have to go back, and this is part of the reason why it took so long. They had to go back and audit the beginning balance sheet and the prior quarters and get caught up to understand what KANA was all about. In -- now that they are there, it might be slightly more in the fourth quarter, but not -- not by any material amount. 2005 is where we'll start to pick up someone additional costs because that's where we need to become Sarbanes-Oxley compliant to finish that process, basically, so there will be additional cost in G&A in 2005, probably along the lines of what other companies our size have to go through.

So. do you not have to be Sarbanes-Oxley compliant for this year?

That's correct.

Okay. And then just on the operating expense front, you are at $13 million. Do you -- is this a good run rate going forward, or do you expect to have some more efficiencies that could lower costs even more?

We're looking at some additional efficiencies. We expected it to pretty much hold its own through the next quarter, and then we'll have a better idea about going forward in 2005, when we have this call next quarter.

This is Chuck. One of the great advantages of our outsourcing development model is that when we get through these -- this very significant release of service resolution management applications, we could, if we choose, turn the knobs down a little bit, and carve off maybe half a million a quarter in R&D. I think we might have a little -- for sure we'll know exactly where we are going when we talk to you again in January. But, if there's a development on that front, we'll let you know.

Okay. And, I guess on the big deal pipeline, you had four deals that slipped out of Q2 that you said could close in Q3. Did any of those close, and how many $1 million deals do you have?

This is Tim Angst. Let me jump in and respond to that. There was one significant deal that closed in Q3 that we had kind of moved from Q2, but that was -- out of that grouping, that was the one that closed in Q3. Obviously, we -- we carry a number of large deals at any given point in time in the pipeline. They mature at different rates, and we -- we haven't lost any significant transaction of the pipeline, but, you know, we see them, you know, maturing over the next three, six, nine, twelve months.

Great. Last question. What was cash flow from operations in the quarter?

Well, we lost $2.9 million for the quarter. The cash burn was $2.9 million.

Once again, if anyone does have a question or comment, please press star one on your phones at this time. Once again, that's star one on your touch-tone phones. Please hold while we poll for questions. Once again, please hold while we poll for questions. Thank you. The next question comes from Greg Spicer of FEQR.

Hey, how are you doing.

Please pose your question.

Could you give us any details on your backlog for Q4, any kind of metrics on size, geography, vertical, whatever it may be?

Yes, this is Chuck. If you mean pipeline, which is deals not yet signed, the pipeline grew -- you know, we signed a very small piece of one of the larger deals. You know, in June we had pushed out four pretty enormous deals. One closed all of it -- all in Q3. One we got about a half mill with the great bulk of it probably going to be spread between maybe Q1 and Q2, so, the pipeline looks great. IBM momentum is biggest amongst the integrators, pretty significantly margined they are the biggest. With respect to deals closed, you know, deferred revenue, all of that disclosure is in our filings, and we don't talk very much on calls about that, but I think you can get it out of the filings.

Okay. Is there any type of SRM backlog yet versus legacy, legacy and CRM product pipeline?

You know, there's -- there's some movement with respect to some of the CRM products shifting in the -- in the sales pipeline to include the SRM applications. And there's some early adoptors. I think that Brian Kelly has the products launch in three weeks, we'll talk about some of the early adopter programs, and some of the very large companies that we've doing joint work with on early testing and positioning. So, it looks good. The integrators are very excited. It gives them a new thing to sell. Everyone knows that PeopleSoft and Siebel license revenue has been declining quarterly. Everyone knows their service revenue are going up, and you know that that adds up to IBM and Accenture being hungry for new solutions, and they really have attached now and helped us develop the service resolution management, messaging and the applications themselves, they helped and design and build. I think you will see a lot of the pipeline converting, but right now in the plan we don't -- it will be six months before we start forecasting SRM application revenue.

All right. Thank you.

Thank you, Mr. Bay we have no further questions at this time.

Great. Great. That's -- it's a very clear quarter. In closing, I would say that our integrator relationships remain strong. The pipeline is still growing. Our ability to forecast closure rates and closure timetables is improving, and our new service resolution management application suite is generating a lot of buzz with integrators, with current customers and with pipeline prospects. Our teams around the world are working very hard and they are very focused. We like the current landscape for KANA quite a bit. I will speak to you all again in January. Thanks and good-bye.

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