SWK Holdings Corp (SWKH) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 KANA Software earnings conference call. My name is Eric and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) I would now like to turn your presentation over to your host for today's call, Mr. Mike Fields, Chief Executive Officer of KANA Software. Please proceed.

Thank you everyone for joining us today to discuss our third quarter 2007 financial results. With me today is our CFO, John Thompson, and I'll turn the call 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 benefits from our recent acquisition of eVergance , our long-term success, new hires, employee headcount, 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 most of our recent filings with the SEC, including recent reports on Form 10-Q and Form 10-K. No one should assume that the comments 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.

Now I'll turn the call back over to

Thanks, John, and good afternoon to everybody. Let me briefly overview our 2007 financial results and then look back on our efforts of this past year and looking forward, as well. 2007 total revenue came in at $60.8 million, which was within our guided range. The fourth quarter total revenue of $17.5 million was the highest quarterly total revenue that we've had in 19 quarters in the Company. Additionally, fourth quarter service revenue reached the highest level in seven years, driven by very strong performance within our eVergance professional services group. While our license revenues were down slightly from Q3. It's important to note that we still significantly increased our quarterly net profit on a non-GAAP basis in the fourth quarter, while we also improved the health of our balance sheet in the fourth quarter, with equity funding netting the Company approximately $8.9 million after fees and expenses. We believe that the initiatives we are implementing will accelerate growth in our revenue, profitability and cash flow and have laid foundations for sustained profitability.

I'll let John summarize the financials in more detail later, but first let me reflect on our business execution over the past year. During 2007 KANA demonstrated success with strong diversification across all our target markets. During the year we closed many meaningful transactions with numerous fortune 5000 companies and subsidiaries, as well as agencies across our vertical markets. Within the financial services we closed license transactions with Capital One, ING Postbank, Prudential and Wells Fargo. Within the federal government vertical we also saw success. Over the past year we were able to close two seven-figure federal government transactions. Specifically, we saw success in replacing an on-demand competitor at U.S. post office with our web self-service offering. We also began broad development of our e-mail response management system to serve all U.S. post office, field offices, and the 20,000 to 30,000 local post offices. We are looking to leverage our success here and to continue to win federal business in 2008 and beyond.

Within retail we closed significant deals with Best Buy, Canon, Carphone Warehouse, The Gap, Permes, Priceline.com and Tiffany Company, to name a few. Travel and leisure also met with a healthy mix of business for the Company from Delta Airlines, Icelandic Air, Jet Blue, Northwest Airlines, as well as in Best Western International and Starwood hotels. Health Care marked a very solid performance with wins at Optima Health, Virgin Life Care, Aetna and another very large North American leading healthcare insurance provider. And finally, the communications sector was very strong with wins at AT&T, 02, Telnet, Telnor, Telekom Austria, Time Warner Cable and Verizon. Additionally, during the year our partnership with IBM global services continued to deepen. For the fifth year in a row KANA exceeded IBM's quarter objective. On our last call I also touched upon a jointly leading generation campaign, the mystery shopper program, which IBM and KANA put in place to specifically target the 72 largest financial services companies in the U.S.

Today I'm pleased to tell you that we closed our first two transactions as a result of this program in the fourth quarter. Moreever -- moreover, excuse me, we have seen interest from many other U.S. institutions as a result of the program. Following the success in the U.S., IBM and KANA launched a similar program in Europe with prospects in the UK and Germany as our initial targets, as well as in Canada. Initial feedback has been promising and we anticipate our pipeline of possibilities will continue to grow in 2008. Our relationship with IBM continues to flourish. IBM and KANA continue to explore ways of bringing next generation customer service solutions to the market by combining the power of KANA's customer service solutions and IBM's full technology range.

We also continued to invest in our industry-leading products and technologies in 2007. In January we successfully launched KANA Enterprise OnDemand, offering customers' our industry-leading integrated multi-channel customer service suite as a hosted managed service offering. We believe that KANA's deployment strategy truly differentiates us in the market. Our solutions are flexible. We've tailored our solutions to meet our customers' requirements, their financial requirements, their technology requirements and their deployment requirements.

During the year we also developed and released Version 10 of the KANA suite, which was released at the end of Q4. KANA Version 10 includes new proactive and interactive features designed to help organizations handle a rising volume of customer interactions across every ser -- and that across every service channel. KANA V10 establishes -- or enables organizations to engage proactively with customers before, during and after the service experience to avert escalations and other activities that reduce customer satisfaction. V10 also adds new features that enable our customers to capture the voice of customers to learn from explicit and implicit feedback and then take action on those insights. The initial response has been great and it bodes well for additional up-sell and cross-sell in 2008.

Our service organization was a critical component of our success over the past year. Spotlighted by our acquisition of eVergance in May, this acquisition doubled the size of our professional services team and enhanced our core offering and service experience with our customer deployment support requirements. During the year we successfully leveraged eVergance 's specific domain experience with our sales cyc -- within our sales cycle and witnessed several prospects being converted to become KANA customers in part as a direct result of eVergance's capabilities. As our financial results reflect, this acquisition has shown immediate financial benefit as we posted the highest quarterly service revenue in Q4 since 2001. Professional services through our eVergance subsidiary continues to show great performance through service transactions with RIM, Adobe, Sprint, as well as CIGNA, and during the fourth quarter we closed a mid-six figure professional services transaction with Bank of America. B of A is an existing KANA customer, and under this service transaction eVergance will be working with the bank to roll out our web self-service solution to over 60,000 of the bank's branch office representatives.

Finally we made significant new additions to our management team throughout the year, with Mark Angel spearheading corporate development strategy, Sham Chotai heading up our engineering team, Danny Turano leading our worldwide field operations, and Chad Wolf leading our global services organization. And just this month, Esteban Kolsky, formerly a senior analyst and research director at Gartner -- as you know, one of the industry's foremost leaders in multichannel customer service -- he comes to us as the -- a significant leader in the multichannel customer service area and he joins KANA to become Vice President and practice leader at our eVergance subsidiary.

Today we announced that John Thompson will be retiring. On behalf of everybody at KANA we thank John for his contributions to the Company over the past three-plus years. John has been an integral part in our turnaround efforts and has done a great job in managing the Company's financial organization, the result of which led to our positive operating performance and return to profitability in the third and fourth quarters. Replacing John is Mike Shannahan. The one person on this planet best suited to be John's replacement is Mike Shannahan. Mike has been a board member and KANA's audit chair for over 2.5 years, has over 30 years of financial and accounting experience -- including CFO roles at several public companies -- has deep knowledge of our Company, our industry, our financials and our prospects make him an ideal fit. John will remain with KANA for the next few months and work closely with Mike during the transition.

Mike, would you like to say a few words?

Sure. I'm very happy to join. As Mike said, I've been involved with the Company for over 2.5 years and I've actually known John for about 15 years, so having John decide to retire and then be able to work with me in the transition will make things go much smoother and I'm really looking forward to this opportunity.

Thank you, Mike. In conclusion, 2007 marked a critical year for KANA. It was our turnaround year. We implemented a strategic focus, implemented new processes, filled out our management team, invested in our products and services so that we can drive growth to the next level. As we look into 2008, we are crossing the chasm, positioning ourselves for meaningful revenue growth with improved operating leverage. I'll discuss our future plans and guidance later, but first let me turn the call to John for a discussion of financials. John?

Thanks, Mike. Looking at new orders, relicense and initial maintenance, what we call WIM, KANA closed 39 transactions in the fourth quarter. Excluding the smaller, typically follow-on additional seat transactions, the average selling price on new WIM orders over $100,000 was $513,000. This ASP calculation includes two transactions over $1 million, one from a new customer and another from an existing KANA customer in a cross-sell transaction. The ASP on WIM orders from $100,000 to $1 million was $306,000, the highest ASP in nine quarters. This year our renewal maintenance team achieved the highest quarterly growth orders in at least three years given their Q4 performance.

Turning the in -- turning to the income statement, KANA's total revenue for the quarter ended December 31, 2007 was $17.5 million, an increase of 18% over the year-ago quarter. License revenue for the fourth quarter of 2007 was $5.2 million, a decrease of 14% over the year-ago quarter. Services revenue for the fourth quarter was $12.4 million, an increase of 39% over the year-ago quarter. KANA's total revenue for 2007 was $60.8 million, an increase of 13% over 2006. License revenue for the year was $18.1 million, a decrease of 5% from 2006. Services revenue for 2007 was $42.7 million, an increase of 22% over 2006. As a reminder, please note that KANA excludes certain non-cash items for purposes of internal recording. Management believes these non-GAAP financial measures provide a more accurate and meaningful basis for analyzing the Company's current performance and also relative to prior historic performance. Specifically, while in our GAAP presentation the cost of revenues, as well as sales, marketing, R&D and G&A expenses, they currently include the non-cash FAS 123(R) stock-option compensation expenses, I will exclude these non-cash compensation expenses in the following non-GAAP commentary.

Turning to non-GAAP gross margins, the overall gross margins were 70% in the fourth quarter compared to 73% in the prior quarter and 76% in the year-ago quarter. The decrease in gross margins is attributable to the relatively higher services proportion of total revenue. License margins were very consistent; 94% in the fourth quarter and 93% in both the prior quarter and the year-ago quarter. Services margins for the fourth quarter were 60% compared to 62% in the prior quarter and 65% in the year-ago quarter. This decline is attributable to the fact that consulting, training and on-demand managed services are growing at a faster rate than maintenance in what we group together as services.

Next, turning to the non-GAAP operating expense lines, I'm pleased to report our efforts to align our costs and reallocate where we spend our resources are continuing to yield substantial results. For the fourth quarter of 2007, sales and marketing expenses decreased to $5.8 million compared to $6.2 million in the prior quarter and down also from the $6.1 million in the fourth quarter 2006. The absolute dollar decrease in sales and marketing expenses in the fourth quarter versus the third quarter was due primarily to lower employee-related expenses, after the headcount reduction we had in July, offset by slightly-higher discretionary marketing costs due to our worldwide users group meeting occurring in the fourth quarter. As a percentage of revenue, sales and marketing representing 33% in the fourth quarter of 2007 versus 37% in the prior quarter and 41% of revenue in the fourth quarter of 2006.

For the fourth quarter of 2007 R&D expenses were $2.7 million, a decrease from $3 million in the prior quarter and down from the $3.2 million of R&D expense in the fourth quarter of '06. The decrease in R&D expenses from the prior year reflects the net affect of decreasing outside contractors offset by hiring more engineers as employees. R&D expense was 15% of total revenue in the fourth quarter of 2007 compared to 18% in the prior quarter and 21% of revenue in the fourth quarter of 2006. For the fourth quarter of 2007 G&A expenses were $2.4 million as compared to $2.3 million in the prior quarter and $2.6 million in the quarter a year ago, As a percentage of revenue G&A was 13% in the fourth quarter of 2007 as compared to 14% in the prior quarter and 18% of revenue in the fourth quarter of 2006. As a reminder, every first quarter we show additional operating expenses for our audit, tax and SOX expenses, as well as a sales Quota Club and a worldwide employee meeting. In 2008, these may amount to approximately $1.4 million, so please keep this in mind if you forecast our Q1 expenses.

The Company recorded fourth quarter 2007 non-GAAP net profit of $1.4 million for a non-GAAP net profit of 8%, compared to a non-GAAP net profit of $154,000 in the prior quarter, or a non-GAAP net profit of 1%, and a non-GAAP net loss of $627,000 in the fourth quarter of 2007(Sic.. See press release). These numbers are calculated by taking KANA's GAAP net profit and adding back the applicable non-cash accounting expenses for stock-based compensation expense measured in accordance with FAS 123(R), restructuring and amortization. For the fourth quarter of 2007, KANA reported a GAAP net profit of $539,000 or a totally diluted profit of $0.01 a share. This compares to a GAAP net loss of $1.3 million for the prior quarter and a GAAP net loss of $2 million for the fourth quarter of 2007(Sic... See press release). We are pleased with these improvements within our operating model and are going forward -- and going forward we will continue to focus on showing additional leverage within our operating model.

Turning to the balance sheet, unrestricted cash, net of loans, increased to a positive $3.1 million in December 31, '07, up from a negative unrestricted cash position of $5 million at the end of the prior quarter. At December 31, 2007 KANA had utilized $1.2 million of its $2 million bank facility for the purchase of capital assets. At year end KANA had the entire $8 million bank line of credit available for use. The notes payable include additional payments related to the purchase of eVergance and a small note for purchased software. Based on our current 2008 plan, our existing cash and cash equivalents are sufficient to meet our working capital and capital expenditure requirements for operations through the year without any additional sales of shares in our shelf offering. Day sales outstanding for the fourth quarter was 54 days compared to 53 days for the prior quarter. At December 31, 2007 the deferred revenue was $16.1 million, an increase from the $16 million reported for the prior quarter. As we indicated in the past, deferred revenue is primarily comprised of maintenance. Moving to headcount, at December 31st the Company had 225 full-time employees, a decrease of six from the 231 employees we had at September 30th.

Finally, there are a few things in my personal life which necessitate my retiring. I'm pleased that this is able to occur after we've completed the November financing, our 2007 annual report 10-K, and that our plan for 2008 shows us being non-GAAP profitable and cash flow positive. I'm particularly delighted that Mike Shannahan, KANA's audit committee chairman, will be joining KANA to become its CFO. As Mike already mentioned, we've known each other for a long time and he is a superb addition to the KANA's executive team. I'll work with Mike on the transition and do everything I can to support him over the next several months as I phase out of the working life.

Back to you, Mike.

Thanks, John. Before I turn to guidance, I want to address a topic which we receive frequent questions from analysts and investors regarding our CIGNA transactions. As we've publicly discussed, KANA's implementation will follow CIGNA's initial desktop implementation with another vendor, therefore we have no control over when our software will be fully implemented and we're not incorporating this transaction in our forward-looking guidance. However, I have some good news. We've started the initial work of our technology and services within CIGNA with a small group of users. Based on the current pace of this rollout, though, we don't believe that the bulk of CIGNA license revenue will happen at any time before 2009.

Turning to guidance, our pipeline remains healthy. We've not seen any deterioration in our pipeline opportunities, only growth. However, given the current macro economics climate, we think it prudent for us to take a conservative stance with respect to our top line, while continuing to be able to focus on operating disciplines with respect to our bottom line. Our current estimate for 2008 revenue is $69 million to $72 million, representing 13% to 18% growth year over year. In addition, we're committed to posting a non-GAAP operating profit margin at least 5% and to generate positive cash flow for the year. While interquartile fluctuations may arise, our focus is to be cash flow positive from operations for each quarter of 2008. As the Company continues to grow and build critical mass, we believe we should be able to generate non-profit -- non-GAAP operating profits of 10% or more once we've realized -- once we've reached our annualized revenue run rate of approximately $100 million.

As you can see from the actions we took last year, our performance in the fourth quarter, our board of directors and management team understand the importance of increasing profitability and generating positive cash and we're committed to this. While we took important steps last year, we know that we have more to do -- that we can do. Therefore we have a number of initiatives under way which should help us become more efficient and effective, which should also increase our profitability and cash flow. I think it's important for you to know that the board has tied senior management's bonuses to operating profitability and we have to do better than guidance in order to earn our full bonus.

While we don't give quarterly guidance, I'd like to update you on a few items regarding the first quarter. As John mentioned, although we have approximately $1.4 million of one-time expenses that will impact the first quarter, we still expect to generate non-GAAP operating profitability for the quarter. These expenses are consistent with past Q1 expenses, but they -- the effect of them will not affect our ability to reach profitability. And the second item is that our team has been very busy and productive in the first quarter. We already booked substantial license revenue and service revenue and we have a couple of significant large transactions that we expect to close very shortly. As most of you know, the first quarter is usually a slow quarter, so we're pleased with our activity in our quarter to date.

That said, as we've discussed many times in the past, it's difficult to predict the exact timing or when large transactions are going to close. The transactions that we have positioned to close in the first quarter we've been working on for some time. We have many more transactions that we've been working on and because of this, we believe that with solid execution and hard work, we'll have a good start to the year. We're making solid progress for this throughout the year as well. But just remember, before anybody gets too excited about the first quarter, it's generally a slower quarter seasonality-wise.

In conclusion, our efforts are squarely focused on accelerating growth of revenue, profitability and cash flow in 2008. With a methodical plan and right team in place, we believe that we have created a recipe for success. For 2008 our focus will be on ensuring that all of our groups are achieving growth. Our top objectives for '08 are: Number one, to continue to build upon our technology innovation; number two, to build upon our strong relationship with IBM; number three, to post growth within both license and services, and number four, to continue to realize operational efficiencies; and number five, to generate positive cash from operations and positive non-GAAP profitability in a consistent, sustainable manner.

With that, I'd like to turn the call over to you for questions. Operator?

(OPERATOR INSTRUCTIONS) your first question is from Nathan Schneiderman with Roth Capital. Please proceed.

Hi Mike. Congrats to Mike -- the other Mike for the position. Sorry to see you leave, John. Question for you -- I can only ask a couple because I have to break off to our conference, which is ongoing -- but Mike, I was hoping you could address the CIGNA situation in a little bit more detail. I was under the impression that there were contractual obligations on the license so that you would get that -- at least a part of that in Q4, which didn't happen, so I was hoping you could explain what's going on there, and then what do you think are reasonable expectations for CIGNA license revenue flow in 2008 even though I understood your comment that you expect the bulk of it in 2009?

CIGNA, as you know, is something we've had on our plate discussing for a long time and we continue to be in constant discussion with the company and with our partner. There are a number of changes that have taken place within CIGNA in terms of their rollout timing of their initial technologies. And when -- when we look at that, I just concluded that, in our opinion, we really can't plan on this in 2008. We do have contractual relationships, that's true, but we also want very much to have a great relationship with -- a continued great relationship with IBM and CIGNA. There's been every effort in our discussions that they fully intend to take up our technology, but their business strategy is to finish their desktop deployment first and I just see that the pace of that expending a lot longer than -- than is being articulated, so that's why we're saying it's not 2009.

So to clarify on the guidance, you're expecting what, less than $1 million of license revenue for CIGNA in 08 or more than --?

I'm sorry, significantly less than that. It's now not --

So really immaterial in 2008 on the license side?

Absolutely.

Okay, and then you would expect all of it then in 2009?

Yes. Yes. I mean I think that's a --

Okay. Wha --

-- fair perspective on this. This a major project for them involving tens of thousands of people at CIGNA, as well as significant efforts on the part of all the partners involved. We've started some professional services work there already, but I just look at this and say that even their internal planning, I think, is aggressive.

Assuming that you're going to be close to that $100 million level in 2010, do you think you get halfway to your operating margin goal in '09, or do you see it as more back-end loaded?

I would -- we're really -- and I'd hope you'd see that in our performance in the fourth quarter -- we're really focused on how we continue to grow the top line, but do it in a very efficient -- an efficient manner, and we have a number of other efficiencies for the year. It's fully my intention that we continue that process, regardless of what fluctuating success from the top line we might have in 2008. The way this market is today, we think that it's in our customers' best interest and, of course, our investors' best interest that we focus on both ends of the spectrum. So we think that as we do that, our ability to improve our profitability grows a lot as our revenue grows, so I think the exit plan on 2008 is to look at '09 with more efficiency and stronger operating margins.

Okay, all right. And then -- let me see, the consulting versus maintenance mix, if you can decompose the services revenue, the $12.4 million for us?

We haven't done that before, Nate, and we're still debating whether or not we start doing that in 2008.

Okay, final question for you. What was your ending headcount in terms of quota reps and where do you see that going to in -- by the end of 2008? Thank you very much.

Reps and first-line managers.

Our sales reps, first-line manager total at the end of the year was about 26. We will have some growth in 2008, but not significant growth. We believe that with sales reps a lot of it has to do with not just with the numbers, but also the level of expertise, experience they have, and we are going into 2008 with a much more seasoned sales force, whereas we started 2007 and somewhere around one-third of the sales force had been here a year. We're going into 2008 with substantively more than that with the experience about our products, our Company, our technology and their customers, s we don't think we need to see any significant sales force growth in 2008 in order to achieve our guidance.

And to clarify, the 26 compares to 32 in the quarter before of reps plus management?

Correct.

Okay, thanks very much. I'll talk to you all later, bye.

The next question comes from the line of Michael Wang with Zinc Equity. Please proceed.

Thank you very much. Hey, guys, a couple questions for you. So first of all, so in terms of the revenue performance in the quarter and license revenue performance, you were $4 million below the higher end of guidance, but you had strength in services, so I'm assuming that the license performance was impacted by CIGNA, but just wanted to clarify, was there anything else besides that? And as for the early activity in Q1, are these primarily Q4 slips?

We had -- as I had said in Q4 -- or at the end of Q3 in the last call, I had said that our guidance was $60 million to $64 million and I wouldn't change it whether -- even if we knew that CIGNA wasn't going to happen, which, of course, we didn't know at that time, so that's what we did. Now, of course, I also mentioned that we had a number of transactions that we were focused on getting, we've got a couple of them. And we had a couple that moved out of the quarter into Q1, and we're very confident about them, primarily because two of them that are large transactions come from our existing customer-base that are looking at additional seats of our products and some new product areas that they didn't have before, so it's not like it's a competitive situation. And I might add, neither of them are in the financial services world, so we're -- we feel real good about that, but we would have like to have gotten in Q4, certainly.

So in terms of close rates -- and I think you just talked on win rates -- so in terms of close rates on deals in Q4, how did that compare to previous quarters and what would you expect close rates to trend through '08?

Well, when you use the term close rate, Michael, that means a lot of different things to different people, so let me try to define it the way I would define it. A close rate to me is based on the amount of the numbers of transactions that you are working on as a sales rep within your territory, that you expect to close, what percentage of them actually close. We feel that our close rate is pretty good. We tend to close, I would say -- and I don't think I have a statistic on this particularly, but it's got to be somewhere in the 70 percentile in terms of the deals that we're working on. For example, we closed about 43 transactions in the quarter of Q4, and we think on an average we probably were involved on about 60, so that's about right. So we think our close rates continue to be strong. Now a lot of that have to do with the qualification process. That's not the pipeline. Those are the transactions that we believed would close within the period and the pipeline is much larger than that. You want to go into a quarter with a pipeline that's three or four times the size of the number that you actually need. So, we think our close rate has been operating pretty successfully.

Got you, but in terms of your guidance for '08 and some of the conservatism that might be there, is it fair to assume that close rates are dialed back a little bit with respect to how the macro impacts your ability to get deals across the finish line?

I think it's more fair to say that we look at the -- we look at the time it takes to close. Is lengthening that a little bit, and it's lengthening because customers go through a longer process in making decisions. We're not being -- we don't find a major impact in getting a decision made because of the business value that the technology brings, but we are noticing that the process that they go through -- and I do the same thing here. There's now a process about spending money and the approval cycle that the individuals who run major departments within KANA now is a little longer. So our -- the companies that we sell to are experiencing the same thing. So what we're doing is getting a better handle on that now. We understand the process better.

I think what's going to really help us is something that I've said for a couple of years and that is, our ability to penetrate our existing customers is still very strong. We have great cross-sell, up-sell potential within our customer base and we're leveraging that. We have a couple of customers, one in particular that's looking at our technology now and we know from the internal discussions that we are having with them that they're planning a significant layoff, but they're going to spend a significant amount of money with us. Now the reason why is that our technology will help them better manage their customer relationships with less people. So we've been learning how to sell in this particular climate that we're all facing, but I would suggest that -- I would say that they -- that the time is taking a little longer and we'll find a way to manage that as our -- as our sales force figures it out.

Great. And so in terms of product area, so as you look across e-service, self-service, desktop, on-demand, any of these areas seem to be more easily sold in this environment and perhaps compare that to six months ago?

Well, interestingly enough, the e-mail customers tend to look to buy more in order to make their e-mail channel more productive. New customers are almost entirely focused on knowledge around the contact center and web self-service, so we find ourselves spending a lot of time with new customers in those areas. So it really depends on the customer, their previous relationship with us, if they were existing customers or if they were using our products in a different channel and are now looking to expand. So there's no specific answer to that that I would say would be the same across all of the opportunities.

Great. And last question for you, just in terms of the strength in eVergance , what is the typical type of work going on here and is this a -- is this a strategic sales cycle in a sense, and is it the leading indicator for license performance through '08? Thanks very

eVergance owns the responsibility, of course, for the consulting and training of new customers, so in that case it's your more typical training and consulting service. They, though, also have this, two major capabilities. One in the area of best practices, so a lot of our existing customers they will approach to talk about how to get maximum utilization out of our technology. But because of their cross technology skills, they've done that successfully with companies that aren't our customers where they need those kinds of best practice and strategic services applied in ways to make their organization more productive. We think that overtime that can lead to more license revenue opportunities for KANA. But, we think it's also important that eVergance maintain a separate -- somewhat of a separate identity through this subsidiary relationship so they can work with comfortably with companies that aren't using our technology at the moment. They continue to work very closely with some of the largest firms in the world in assisting them in leveraging their customer service capabilities to grow their relationship with their customer.

Thanks very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Derrick Wood with Pacific Growth Equities. Please proceed.

Thanks. It was good working with you, John, good luck in retirement. And Mike Shannahan, looking forward to working with you again.

Me too.

Just want to step back a little bit and as you're looking at the year and you saw license revenue for the full year decline slightly, and yet, it seemed like you had hired quite a bit of new sales reps and sales managers towards the end of '06 and in the first half of '07 and maybe you saw attrition going in the back half there, can you help me walk through how the whole, I guess, productivity and sales force front looks like at this point in time? Maybe you got a little ahead of yourself in terms of sales hiring and now do you feel like you've got the right sales force and right comp structure? And then just with respect to Q4, obviously a seasonally strong Q4, typically, yet it was down sequentially. Can you just help walk through that? You did have two deals over $1 million, both in Q3 and Q4.

Yes, getting the dial -- all the dials right on your sales force is not something, unfortunately, that happens overnight in the enterprise software business and we went through making some substantive changes to planning that we had before. We made some personnel changes, as I've mentioned. And we -- we really feel that the changes in the model that we've made and the personnel and the compensation strategy, all these things, they were different dials that we had to turn over the last year. It's been -- it was only two years ago that there were five sales people in this Company, so it's not like there's a long history of this. As we grew it, for the first time in a long time, we had to adjust and that adjustment was done in a number of ways. The good news that came out of the fourth quarter for us in the sales force was that in the fourth quarter, every sales person who sells in the Company, sold something. Now, sure we'd have liked them to sell more, but everybody sells something. Everybody got a win.

The other thing was really getting a sales force that really knows how to manage to a named target account. We had a lot of success with that with the financial services group. I'd add all of them went to Quota Club. But importantly, the named account strategy is new for the Company, but it really allows us to target and be a lot more efficient on how we focus our efforts, and we're starting to see that success begin to filter into the organization now. So, I feel that we've got a great team right now. We've got great leadership in that team. We don't have a whole lot of different layers from the -- from Danny Turano. He's got one person between him and the reps and in some cases no one. He has a few reps who report directly to him. So we're really focused on staying close to the opportunities that are out there and getting this model right in terms of our sales force. I think we've made a lot of progress on it right now.

Okay. And I know one of the focuses was to drive a little bit more visibility quarter to quarter and get some growth in the mid-sized deals. Do you feel like you've got the right comp package in that? And I didn't actually get the number for the quarter, if you could give that, the $100,000 to $800,000 deals?

Number of transactions this quarter in $100,000 to $800,000 was eight.

Okay. So that was -- that was down pretty materially quarter over quarter. Was there some deal slippage there, or are you back to focusing on some of the bigger deals? Can you help explain what caused that to come down so dramatically in Q4?

You should also note that while it came down, the average ASP per deal went up fairly dramatically also. They were smaller, but they were bigger.

Okay.

We're still seeing good success. We see that in our pipeline with our $100,000 to $800,000 size transactions. We still have a significant business focus on that. We think that baseline helps us grow. We've done, and we will continue to do them throughout -- throughout 2008. As John mentioned, the measurement in Q4 went more towards how the deal sizing grew a bit for us amongst that particular size, but I think you'll start to see some more -- continued strength coming from the $100,000 to $800,000 deals. The plan of getting every sales rep once a quarter for selling $300,000 or $400,000 is still in place.

Okay. Just shifting gears then, I guess, you have a nice job on profitability and reducing costs over the last couple of quarters. Is there any risk that you're reducing cost so much that it could impact your ability to drive strong revenue growth? Or is it just you feel like you've == you've figured out the right components and the right sales force and the right level of investments at this point that you're very comfortable with the cost structure and your ability to continue to drive growth?

I frankly think it's more about cost efficiencies than it is about cost reductions. We made a -- we did make a cost reduction at the turn, at the mid-year, and we found that from an efficiency standpoint we could operate pretty successfully at that level. So our headcount has stayed fairly flat, it's not like we had major reductions in costs. We just had a more substantive reductions in what I would call non-essential costs or elective costs that we -- there were just better ways of doing things. We were spending money in areas that we didn't need to for the health of the business. So we've taken a hard look at those efficiencies. We have not had some substantive change in personnel, nor do we plan to. It's really about how do we get maximum utilization out of our organization. We're hiring now, so --

Okay.

-- but, we're doing it prudently around those things where there is important value being added to the Company.

All right, well nice job on the efficiencies there. I guess the last question, more around the --your guidance again. You said you've taken more of a conservative approach given the economy. Does that mean your pipeline could, as you look at it today, suggest higher revenue numbers, but that you just wanted to discount it more or take more conservative assumptions? How can we reconcile that -- the verbiage you set around the guidance that you set?

Should I take credit for that.

Yes, go ahead, Mike. (LAUGHTER)

Yes.

My take is having been a board member, setting what we'd believe are realistic expectations, and I think the thing that Mike brought up earlier is that the pipeline still looks good, but there is this additional process that we go through and I think a significant portion of this conservatism has to do with how long it takes to get the final sign-offs and rather than set expectations that we may not meet, I just prefer to set expectations that I think that we're all very confident that we can achieve.

Okay. And just in terms of what you see in the, in the economy and longer sales cycles potentially, is that coming from across all verticals or are you namely talking about financial services?

No, I think it's all verticals. What is happening is these companies are putting their budgets together and then before the funds are actually released, so like Mike has said, the organizations within the company that we are talking to, they can certainly justify this investment. But, the people within the headquarters are looking to see, just because they have the budget, are they going to free the funds up and if so, when? There might be additional hoops you have to jump through, but at the end of the day, I think that our offering is compelling. So, it just takes a little more time because it isn't -- it isn't left to the department that we're talking to to go ahead and spend their budget.

And what we're doing about it in order to manage for that, is that we're working now on a number of -- of solution packets. We've created something we call the BDW, or the business development workshop, where we go in to an account early with professional services and really work through the value prop with them. Usually they pay for this, I might add, but we go -- understand their business, create the value proposition for them, so we get ahead of that cycle. So where in the past, a senior executive might have been able to shout out, I want to do this, now they have to have a definitive plan on what the results are going to be. Well, you don't just want to leave that in the hands of your prospects. You want to help them create that so it best reflects our ability to execute and of their needs for business value. So, there's ways to bring that timeframe in, but first you've got to recognize that it exists and that's where we are now. We know it exists.

Okay, all right thanks. Can you just give us the current diluted shares outstanding as of the end of the year?

For the year or for the quarter?

Well, where it stood on December 31st versus what the average was on -- that was reported?

Okay. For December 31st for the quarter, the diluted shares were 39.967 million.

But that's an average for the quarter, right, and in between there were some shares raised, so I'm just curious, were shares issued? I'm just curious what the current shares outstanding.

It's a little over 40 million. I don't have the exact number, Derrick.

Okay.

I can supply it later.

Okay thanks guys.

Thank you.

We're showing no more questions in queue. I would to turn the call over to Mike Fields for closing remarks.

Thank you very much to everyone. We're diligently focused on success for '08, success for this quarter, and ensuring that we do it with the right operational exposure. So thank you all for joining us and look forward to talking to you next time. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.