SWK Holdings Corp (SWKH) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 KANA Software earnings conference call. My name is Angela, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. And now I would like to turn the presentation over to your initial host for today's event, Mr. Michael Fields, Chairman and CEO. Please proceed, sir.

Thank you for joining us in today's discussion of our third quarter 2007 financial results. With me today is our CFO, John Thompson. I will turn the call over to John, who will give you the Safe Harbor provisions. John?

Thanks, Mike.

On this call we will be making forward-looking statements regarding anticipated events and the future performance of KANA, including statements regarding our expected revenues, margins, expenses, profitability, cash and cash flow, as well as expected growth, relationships with customers and integrators, restructuring anticipated benefits from our recent acquisition of eVergance, our long-term success, new hires, employee head count, our product and product-development efforts, and characteristics of our market segments. These forward-looking statements are subject to material risks and uncertainties described in our most recent filings with the SEC, including recent reports on Form 10-Q and Form 10-K.

No one should assume that the comments that we make today will still be valid later in the quarter, and we will undertake no obligation to update these statements as a result of future events.

Back to you, Mike.

Thanks, John. We are very pleased to report results which exceeded analysts' consensus and our preliminary [range] that we issued on October 12th. Total revenues were 16,800,000, an increase of 28% over a year-ago quarter and an increase of 26% over the prior quarter. Our licensed revenue increased 33% over the year ago quarter and 65% over the prior quarter. We are also very pleased to see a meaningful contribution from eVergance's strategic services team and our core services group that also performs in this quarter. Services revenue increased 25% over the year-ago quarter and 12% over the prior quarter. This is the seventh consecutive quarter-over-quarter growth in services revenue for KANA. Now with eVergance beginning to come up to speed, we expect this trend to continue into 2008.

KANA closed two large transactions in the third quarter, both with new customers. As you recall we recently created a new federal government vertical and we are pleased with the significant win within this vertical during Q3 with the U.S. post office. This was a seven-figure competitively placed transaction which we discussed in our second quarter call, and in fact KANA took the post office from order to conversion to deployment and to cash in just 40 days. We also closed a multi-million dollar transaction during the third quarter with one of the country's largest health care insurance providers. Many of you subsequently asked if this was the Cigna transaction and I am pleased to report no, it wasn't. It is an entirely different provider and we are very excited to have them join our customer base.

Last quarter, I talked about the potential of ten large opportunities. We closed two of these in the third quarter, and one of those opportunities now has changed to a long-term enterprise agreement which will mean smaller purchases over time but will yield substantially higher revenue over the next two years. We are still looking at several to close in the fourth quarter and as expected we have had several who have moved into 2008. Not surprisingly though, we also added an additional new large opportunity from the pipeline that could close in the fourth quarter.

On our second quarter investor call, we spoke about our efforts to realign our sales organization, capitalized on targeted opportunities. Our sales organization's reaction was a very focused matter -- had reacted in a very focused manner, and this has resulted in greater efficiencies and effectiveness from our sales and service team during the third quarter. This momentum is illustrated in our third quarter financial results. During Q3, we closed a total of 45 transactions, up from 40 a year ago. And as we have also discussed over the past nine months, one key objective that we set out is for KANA to reduce our dependency on large, seven-figure transactions and to focus on closing on [calls in] or how to [number reveals in our feed plot]. We continue to see good execution in this category, as evidenced by closing 13 licensed transactions in initial maintenance as well as our on demand transactions in the third quarter, up from just seven transactions from Q3 of 2006. As customary, John will dive into more of the financial issues in the call later.

As you may know, we completed our annual KANA customer user group conference in San Jose just two weeks ago. The customer feedback has been extremely positive. Participation by customers and partners alike was strong and we showcased several guest speakers from IBM Global Services, Sprint Customer Care Group, MetLIfe, Carphone Warehouse, Starwood Hotels and Resorts, as well as keynote from [Patty Cebo] of the [Patty Cebo] Group. [Eric Chester], who was the founder of Generation Y and John [Madville], Vice-President of Research from the Service and Support Professionals association. And we also awarded KANA's repeat performance and customer service award to Jet Blue Airlines for their significant use of KANA technology in Jet Blue's customer service area.

Our global strategic partnership with IBM continues to be very strong. In fact, they were a premiere sponsor of our [yearly] conferences, which we are very pleased about. But our relationship goes much deeper than simply marketing events. On our last call we briefly mentioned to you a new generation program that KANA jointly developed jointly with IBM and called our "mystery shopper program". The response to this program has been very strong and I would like to take a moment to highlight how KANA and IBM are creatively targeting new opportunities specifically in the final services vertical.

IBM and KANA engaged a third quarter firm to conduct primary research on 72 of the largest financial services organizations in North America. This third-party research firm tested the effectiveness of online channels and asked [accounting] questions within three areas: web self-service, escalation to alternative channels and email self-service. OUr objective was to drive strategic discussions and clarify [leads] with senior financial service [executors around one of their most pressing problems today: customer defection and lost revenues due to poor customer experience. The finding of this mystery shopper was outlined in a detailed white paper which was available for download from our website.

This new generation program is underway and initial feedback is very positive. Thus far we have dozens of conversations and have a handful of opportunities already in the early-stage pipeline. The program has been so successful that KANA and IBM are repeating this effort in Europe and will coordinate with lead generation activities on a global -- in a geographic areas as well. Once completed, IBM and KANA will be implementing a similar lead generation program in Europe.

In closing, I am pleased to see [traction] as exhibited by our third quarter financial progress and new business activities. KANA strives to be flexible with respect to our customers' needs, with [deployment] strategy, technology requirements, implementation timelines and financial requirements. We have modeled our solutions to meet these various leads, and we believe that that differentiates KANA in the customer service market. The success of this business strategy has led to operating profitability in the third quarter and we expect to see growing operating profitability in the third quarter. I would now like to turn the call over to John for a more detailed discussion of our financials. John?

Thanks, Mike.

As Mike said ,in the third quarter we had total revenue of $16.8 million. That was the company's highest total quarterly revenue in the last 15 quarters. Total revenue grew 28% year over year and 26% quarter over quarter. Licensed revenue for the third quarter was 5.8 million, an increase of 33% of the year-ago quarter and an increase of 65% over the second quarter of '07. Service revenue was 11.1 million, an increase of $2.3 million and 25% over the year-ago quarter. Relative to second quarter service revenue, Q3 was $1.2 million higher and grew 12% quarter over quarter.

Looking at new orders for license and initial maintenance, what we call LIM, KANA closed 41 deals in the third quarter versus 33 deals in the year-ago quarter. As Mike mentioned, this included two 7-figure transactions. In terms of ASPs for third quarter WIM deals, or transactions above $100,000 and below $1 million, our ASP for the quarter was 267K. This compares to 269K for the last quarter and 295K from the third quarter of last year, and is well within the historic range.

Looking at our business geographically, the United States contributed approximately 78% total revenue in this quarter, this is higher than historical trends, as a result of the two large domestic deals that we closed during this quarter. KANA excludes non-cash items such as FAS 123-R stock option, compensation expenses, restructuring charges and amortization of acquired intangible assets for the purposes of internal recording. We believe these non-GAAP numbers provide a more accurate and meaningful basis for analyzing the company's current and historical performance. I will exclude the non-cash expenses from the following discussion.

A reconciliation of the GAAP and non-GAAP numbers appears in today's press release. Our overall gross margins were 73% in the third quarter ended September 30th, versus 75% in the third quarter 2006 and 71% in the prior quarter. Services expenses in the fourth quarter are expected to increase with some additional head count in support and more head count in consulting as consulting revenue grows. I will next discuss our Q3 operating expense line expense items. As we discussed during the last quarter's call, we began initiating expense reductions in July. These actions are almost all complete and the vast majority of costs savings are being realized. At the same time, we made deliberate decisions to increase some Q3 expenses to pursue growth opportunities. We believe this will help accelerate our growth. Sales and marketing expense was $6.2 million, down slightly from $6.4 million in the prior quarter. Savings from our July cost-cutting actions were partially offset by high sales commissions, due to 65% higher licensed revenue as well as expense from the eVergance sales and marketing in Q3. Note that in the fourth quarter, sales and marketing expenses are expected to increase from Q3 due to somewhat higher sales commissions and the expense of our October worldwide customer summit event that some of you attended.

R&D expenses were $2.9 million, down signi -- insignificantly from the $3 million in the prior quarter. R&D expense could increase slightly with the addition of a few new employees. G&A expenses were $2.6 million, down from the $2.8 million in the second quarter., primarily as a result of reversing bad debt expense. Q4 G&A expense should stay relatively flat versus the Q2 expense level. The Q3 restructuring charge was $568,000. It was comprised of charges related to the Q3 terminations and our [MARLO] UK office lease. We negotiated a buyout of this lease that would normally have expired in September 2010. The incremental impact is $300,000 more in restructuring. However, this means that this large future obligation is over and we are going to use the deposit for the lease of around $2 million to settle the buyout agreement. The company recorded a third quarter non-GAAP net income of $154,000, or break event EPS, as compared to a non-GAAP net income of $1.7 million or$0.05 per share in the third quarter of 2006.

As a reminder, KANA does not pay income tax and carries a substantial federal net operating loss forward, totaling over $440 million. In January of 2006, we adopted a shareholder rights plan in order to reserve these NOLs for tax purposes, as the company believes that these NOLs constitute a substantial asset. Any investor is currently limited to ownership of no more than 4.9%, except for our investors who already have more than a 5% ownership, who may purchase up to 1% more. Day sales outstanding for the third quarter ending September 30th was 53 days, down 14 days from the prior quarter and it compares to 51 days at the end of September 30th, 2006.

Turning to the balance sheet, there are several items that benefit from explanations of the Q3 versus Q2 numbers. Unrestricted cash was $1.4 million at September 30th, compared to $4.4 million the end of the prior quarter. The decrease is primarily due to an expected seasonal quarterly decrease of oer $3 million in the renewal maintenance orders, along with the reduction of over $2 million in payables, accruals and restructuring, and over $700,000 in fixed asset purchases offset in part by quarter to quarter net reductions in receivables of approximately of $1.1 million and net increase in borrowing of $1.8 billion. Even though Q3 revenue was 3.4 million higher than in the prior quarter, accounts receivable was basically flat quarter over quarter, as Q3 is a traditionally low quarter for maintenance agreements coming up for renewal. Most of the changes to short-term and long-term restricted cash prepaid and other current assets, other assets, restructuring current and long-term, relate to an agreement to buy out most of -- to buyout KANA's lease in the [MARLO] U.K. office, which had been continued to extend to September 2010.

Equipment assets increased approximately $500,000 as we improved our own infrastructure and began to build out hosting environments in response to our customers' requests for managed services. OUr line of credit increased by $1.8 million due to working capital needs, a payment to eVergance and fixed asset purchases. The notes payable represents the current portion of the payments still due the eVergance partners related to KANA's acquisition of eVergance. Accounts payable decreased $1.6 million, which is offset with a decrease in cash. Total current and long term deferred revenue was $16 million, a decrease of $2.1 million in the prior quarter. As mentioned above, Q3 is a low quarter for maintenance renewals, but there is more deferred revenue moving to the maintenance revenue line on the P&L from the deferred revenue than there is new renewal [mains] agreements being signed this quarter. At the same time, we are still seeing very high maintenance renewals on the customer base and are actually running ahead of plan.

Moving to Q3-ending head count, the company had, a 231 full time employees, a decrease of 13 from the 244 employees that we had at the end of the prior quarter. KANA had 25 quota-carrying sales at September 30th, down from 30 at the end of the second quarter, as a result of the previously discussed realignment within our sales team.

Now I will turn the call back over to Mike.

Thanks, John.

Looking ahead, KANA's Q4 pipeline of opportunities remains very strong. We are maintaining our guidance for the full year of 2007 but the total revenue is expected to be between $60 million and $64 million, which equates to fourth quarter revenues between 16.7 and $20.7 million. As you look ahead to 2008, we expect substantial revenue growth and continued operating profitability of at least 5%. When we achieve revenue levels at the $100 million level, this profitability will increase to at least 10%. And I will be providing 2008 revenue guidance during our call for ending 2007 call.

In closing, I am very optimistic about our future and capabilities to execute. Our investment in eVergance has already bore tremendous fruit to the company. I believe that we have built a very solid foundation and we are well-positioned for future growth, and we feel that this is supported by the opportunities KANA enjoys within the customer service and support market. I am confident in our ability to innovate, execute and grow through Q4 and into 2008 and beyond.

Operator, let's turn the call over for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Gentlemen, your first question will come from the line of Nathan Schneiderman with Roth Capital Partners. Please proceed, sir.

Hi, thanks very much. Hi, Mike, hi John. Congrats on the good job for the quarter. Nice to see that. Mike, I was hoping you could give us a little more detail on some of the comments that you made on the pipeline. When you look at the pipeline of seven-figure deal opportunities, should we take away from your comments that it is remaining pretty stable or has it actually grown? And if it is grown, could you characterize that growth?

Well, first let me clarify one thing. When I talk about the pipeline of opportunity, it is in reference to the discussion I had at the end of Q2 stating that we had going into the fourth quarter -- going into the third and fourth quarter, that is, a number of large transactions in our pipeline that had the opportunity to close in 2007. So, when we talk about 10 opportunities or thereabouts, and those that have moved or stayed, that does not constitute the total number of seven-figure plus transaction opportunities that we have in our pipeline. I have only referred thus far to those opportunities that have an opportunity to close in -- now in the fourth quarter. We are seeing continued growth in our pipeline for large opportunities as well -- as well as the core opportunities that I mentioned between the 100 to 800K. We are seeing growth even in the opportunities that are below 500K and we are finding that the efforts of our inside sales organization that now has been with us for a year and continues to perform tremendously in building lead generation opportunities as well as selling directly business opportunities for the company is growing. So across all sectors of our business opportunities, we are seeing growth in our pipeline.

And to drill down there, if you look at the growth rate in those three different segments, would you say they are all growing at about -- posting at about the same amount of increase year-over-year or is one kind of taking the lead there?

Interesting question. I believe that what we are seeing is, certainly not in numbers of opportunities, over the seven-figure number, you know, there are as many as individual opportunities there as we are seeing in the spot between 100 and 800K. But the value seems to be growing substantively also, it is almost a connection between those transactions that we are closing between 200K to 500K that we are fining a number of them that we close late last year, and even in the first half of this year, are now becoming pipeline opportunities for seven-figure transactions. So, the pipeline build is pretty consistent across the different areas.

Okay. And of those two larger deals that you referenced, were any of them 10% customers? From a revenue perspective?

10% customers? I am not following you.

Yes, the multi-million dollar one was, Nate.

Just that one?

Yes.

Okay. And I was wondering if you, on the eVergance business, could you share with us the number of current projects that are ongoing and then how many new projects did you book during the quarter on the eVergance side and maybe by comparison, what was that last quarter?

Well, we haven't released those kinds of numbers before. And you know, within the context of this call we wouldn't. But suffice it to say, the eVergance opportunity base is growing substantially and it is also not only building with eVergance's core capability of offering strategic services and [packet] services, but it is also having a very positive effect on the more traditional KANA professional services because we are finding that by establishing the right relationship for strategic requirements with our customers and our prospects leads to that customer and prospect wanting more directed deployment and implementation services from KANA. And so the eVergance strategy is growing both traditional implementation services as well as having a major impact on strategic services that we offer our client.

Okay. Final question for you. You referenced the goal of getting to a 10% plus margin at 100 million of revenue. Do you see that revenue goal as a 2009 goal or more like a 2010 goal?

Well, we obviously are very confident about our revenue goal guidance that we gave for 2007 at $60-64 million. And, you know, as we develop what we believe our growth strategy will be for 2008, it is certainly conceivable, as we continue to execute and see growth in our business, that we can get close to that $100 million number, certainly the $100 million run rate in 2009.

Okay. Thank you very much.

Your next question comes from the line of Michael Huang with ThinkEquity Partners. Please proceed, sir.

Hi, guys. So, in terms of the large deals that still have a shot at getting done in Q4, can you give some color in terms of what verticals they are in, and is there anything in particular that gives you confidence that these could get done by the end of the year? And similarly, in terms of some of the deals that had a shot to get done by end of '07 that are into next year, were these in any particular vertical?

You know, we continue to see success coming from the financial services verticals, and you know, even though there is -- you know, there are growth issues within the financial services sector because of, you know, some of the issues that we see in the global markets today, that doesn't seem to be affecting us at all, and it may clearly have to do with the fact that the technology focus we have around customer experience and customer service is so important to these companies that they see through the other issues they are facing, where we are seeing substantive growth, as you know, in the federal government market, and which we think we will see some things continue to happen over the coming quarters there and it has represented one of the transactions we did in this quarter. But, you know, there is a convergence across other markets now as well, in manufacturing, retail and high tech, that we are confident that we are going to see represent -- in telecommunications, I might add, and we are confident that we are going to see substantive returns from in the large transaction area.

Mike, just to clarify, in terms of your guidance for Q4, I guess would you expect to see a similar number of large deals close in Q4 versus Q3, and are a couple of these large deals outside of financial services?

Oh, yes.

Okay. Then moving on to eVergance and, you know, it is showing some nice progress out of the gate. Could you talk a little bit about how you think eVergance could impact win rates and close rates and perhaps even the size of deals through next year? And I know that you had alluded to the fact before that eVergance actually helped out with some of the large-deal activity in Q3. Does eVergance -- is that one of the factors that gives you confidence on large-deal activity in Q4?

No question eVergance gives great confidence for our business opportunities in Q4 and in the future. And I would suggest that the mean reason why is that companies will make decisions about this technology when they can truly understand the business value that will be gained in their firm from the implementation of these products. And what eVergance does better than any opportunity out there is to articulate how strategically the business value can add the turns back into those organizations, and they far exceed the cost of this limitation and deployment. So what happens, and this happened to us in one -- with one of the large transactions we closed this quarter, we believe that what eVergance was able to do was to really prove to the client that it was not only a compelling reason to buy, but a need to do it quickly because every day they waited, it was actually costing them business value. So we are using that model around the world with the eVergance resources in conjunction with our account management pool. And we, you know, when we made the decision to require eVergance, we knew that one of the strengths was the ability to articulate business value around customer service and customer experience.

Great. My last question for you. In terms of the user conference that you had talked about, so what would you say was the biggest unexpected takeaway from the user conference, if you had to characterize one, and in terms of your confidence and in product direction, how do you feel post the event? Thanks very much.

Well, the biggest takeaway for me was how we have found many new ways of cooperating with our strategic business partner, IBM, you know, towards the benefit of our mutual customers. You know, we have found through a number of discussions we had with IBM, and with some of our customers, how the combination of the technology we offer, the services we have in our professional services organization to eVergance, and the major transformation services that IBM brings to the market, very compelling, large-scale opportunities for us and I was personally surprised to see how that [acceptance] is defined. The other major takeaway for me was we -- and we will be talking more about this at the end of the year, but we are focused on our next generation technologies and how, you know, we build the proper platform for our customers in order to ensure a cohesive ability for our clients -- our clients to be able to operate across all channels with all kinds of critical data they have in the environment and our move a [seller-based] architecture for our technology has won overwhelming acceptance by our customer base, and that was very exciting because sometimes when you request the customers about change there is reticence about that, but they seem very excited about our future plans.

Great, thanks very much guys.

Your next question comes from the line of Edward Hemmelgarn with Shaker Investments.

I was just having a little trouble hearing your original comments regarding the 10 deals that you had talked about and -- for larger deals that could close in the second half of the year. What is the -- I am assuming that the two larger deals enclosed were part of those 10. And then, have you had any additions or deletions to potential deals -- larger deals for the fourth quarter?

Yes, and as I mentioned, it was -- the transactions that we are talking about don't represent all of our pipeline of large transactions.

No, I understand.

Okay, good.

I was just trying to understand -- I was having trouble hearing it at the beginning, so I didn't quite understand exactly.

So, we have had some that have moved out into '08. We haven't lost but the potential of them closing for us in '07 isn't here. We still have a number of them that are still significant opportunities for us in the fourth quarter and we expect to get some of those in this quarter. And we have also had a couple of new ones that we have added that, you know, we believe that we might be able to close in this quarter as well. So, you know, as I said when I talked about this, this is a fungible number but it is one that we spend a lot of time thinking about and positioning for. We'd love to get them all. Frankly, over time I would expect to get them all. But, you know, when you try to plan on these larger transactions you don't know exactly when they are going to happen, but we feel very confident that we will see some of them here in the fourth quarter as we meet the guidance numbers that we have given the market.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Gentlemen, the next question will come from the line of Derrick Wood with Pacific Growth Equities. Please proceed.

Thanks, how are you guys doing? Nice quarter.

Thank you.

Of course I am going to ask this question. Can you give us an update on the expected timing of Cigna deployment? Has that changed at all? And is it in your guidance by any means?

Let me answer two ways. We still have every confidence about Cigna being part of our 2007 business plan but I would also say to you that if, for whatever reason, we can't see it at the moment, but if for whatever reason Cigna moves to 2008, I would not change our guidance.

Perfect, thanks. And in terms of the mystery shopper initiative that you did, I wonder if you could elaborate a little more. When did you initiate this study and, you know, have you generated any leads from it already? I am not sure if you mentioned that. And I know it is in the financial services vertical that you are going after. Do you see more with new customers that you haven't penetrated yet or is it an opportunity to come back to existing customers that you otherwise haven't had success cross-selling into?

Well, it was in the program with 72 large financial services organizations in North America. We are now implementing the same process in Europe with about 50, as I understand. Of the 72, a good third of them have responded positively to our suggestion that their customer service experience that their customers have with their automated systems and stand for substantive improvement. And we are now involved in several large pursuit strategies with IBM on how we bring those customers, you know, to buying products and technology from both companies. So, it has been a very successful program and, you know, usually when you have such a targeted focus you don't get near the response that we have gotten. Now, clearly having IBM as a partner on this has worked wonders because we are able to position our discussion initially and C-level executives at these companies. So we're -- you know, any one of them, I'm sure they have internal statistics that show they are doing a great job from a customer service standpoint. What they normally don't see is a comparable statistic that says how do they fit versus other companies in the market. So, we think it is going to lead to some sort of business opportunity for us in 2008.

Aside from that, are there any other signs that IBM is moving towards working more strategically with you or -- are they training more reps or more professional services people for the kind of deployments, any other signs that that partnership is growing?

You know, in a true partnership it requires investment on both sides of the partnership, and IBM has always been stepping up to meet those goals and now, you know, we are positioning ourselves to match that. And one of the opportunities of bringing eVergance into the company has given us the ability now to participate in a number of IBM -- large transaction opportunities for them, I might add. And we are -- you know, our ability to bring strategic services to those discussions was not nearly as great as it is today. IBM, because of that, are beginning to make -- to grow their internal knowledge of our products and technology, and they are doing training of some IBM consultants on our products. They added to the team that supports the partnership, that is focused on the development of [counter] revenue. We are having subsequent discussions with IBM's technology group about some of the technology initiatives we have going forward. So the relationship continues to grow, mainly because it has been successful.

Great. That's a good summary. One last question. You know, in terms of your sales reps and productivity levels, how are you feeling with a lot of them having been there for over 9 months, is there still room for enhancements in productivity or are you feeling pretty good with kind of how the pipelines are maturing with the a lot of the reps and do you have any plans to hire any new reps or do you feel good at the level you have right now? Thanks.

Well, of course, since I am sure there are a number of our sales reps who are listening on this call, so I certainly don't want to tell them their productivity is 100%. We can always improve and be better. But I am very pleased with things I have seen. And I mentioned our inside sales organization. I mentioned our inside sales organization. They have only been with us a year but they've proved to be stellar participants in productivity growth for our -- you know, our smaller and mid-sized transactions, a small team that -- you know, one year we know will be many. And I have been very pleased with what we have seen with the individuals who have been focusing on our financial services sector. As you know, we have created a financial services vertical, and the success that is starting to come from that vertical has been quite significant and growing. Our reorganization of our commercial field organizations are now beginning to show the level of consistency that we wanted to see come from some of those groups. And our federal group, they have performed admirably, you know, to -- from starting it and in well less than a year bringing in a very large, competitive transaction and replacement of one of our competitors, you know, it is quite an accomplishment for such a small team in a big market. So, I have been pleased with the progress that we have seen in this third quarter and we look to that growing in the coming quarters substantively.

Great, thanks, gentlemen.

(OPERATOR INSTRUCTIONS) Gentlemen, you have a follow up question from the lean of Edward Hemmelgarn with Shaker Investments.

Just on a financial note, what are the terms of the note payable or the line of credit, I guess, that you've got, not a note payable.

Before I let John answer that, I left out a group that sometimes I do by mistake and never want to do because they are the heart of this company from a sales standpoint. That's our renewal maintenance sales group. We have been running over a 90% renewal rate, and that's attributed not only to our technology and the entire company and its focus on our customers, but a lot of it is attributable to the strength of our renewal maintenance team that has not only continued to maintain the high renewal rate, but have actually through their discussions with customers who would come off of maintenance been able to bring some of them back. I failed to mention that in my previous statement and I didn't want to leave them out. They are a great bunch of guys and gals. John, maybe you can answer his question.

Sure. Ed, the note payable has to do with our purchase of eVergance, and there is small amount of moneys in there for software note that we signed to acquire some Microsoft software, but the vast majority of it is a note that we have to pay the people who own eVergance, and that is payable over four more payments, quarterly. The first one is in November and then every three months after that -- for more three more quarters after that.

Okay.

Equal payments.

What about your line of credit? What is the size of that?

Line of credit is $10 million.

Okay. Does it, you know, just on my model as I look at this now. You have done a good job obviously of growing the business in here and I was just thinking is that, the closing of the Cigna deal would, I guess, give you a lot more financial flexibility. Is that a fair assumption?

Yes, it is.

Okay. Does that -- I will just let it go at that. Thanks, bye.

Okay.

Gentlemen, at this time that concludes the Q&A session. I would now like to turn the presentation back over to Mr. Michael Fields, Chairman and CEO, for the closing comments.

Thank you, Operator, and thank you all for joining today's call. We are excited about the future and excited about Q4, and the team is working diligently to insure our success going forward. I really believe that I am starting to see that core business model for us to launch future success from, and you will be hearing about some of our new initiatives and market positioning that we hope to start expressing going into 2008. Thank you for attending and we look forward to talking to you all again. Bye now.

Ladies and gentlemen, we appreciate your participation in today's conference. This does conclude your presentation. You may now disconnect. Have a wonderful day.