SWK Holdings Corp (SWKH) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first half second quarter 2008 KANA Software earnings conference call. My name is Amanda, and I'll be your coordinator for today. At this time all participants are in listen-only mode, and we will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the presentation over to your host, Mr. Mike Shannahan, the CFO. Please proceed, sir.

Thank you, and welcome to our earnings call this afternoon. I'm going to start with our brief Safe Harbor Statement. During the course of this call, we will reference historical non-GAAP financial measures. To supplement our financial results presented on a GAAP basis, we use the non-GAAP measures indicated in the table in our press release, which excludes certain expenses including stock-based compensation, amortization of intangibles, and restructuring expenses that we believe are helpful in understanding our past financial performance and our future results.

Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP measures. Our Management regularly uses our supplemental non-GAAP financial measures internally to understand, manage, and evaluate our business, and make operating decisions.

These non-GAAP measures are among the primary factors Management uses in planning for and forecasting future periods. Compensation of our executives is based in part on a performance of our business based on these non-GAAP measures.

Also, as a reminder, on this call we will be making forward-looking statements regarding anticipated events and future performance of KANA. This includes statements regarding our expected revenues, margins, expenses, profitability, cash, and cash flow, as well as expected growth, relationships with our customers and integrators, our long-term success, new hires, our product and product development efforts and characteristics of our market segments.

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. These include risks associated with our efforts to grow our sales, our reliance on large orders to meet our expected sales in a given period , our sales cycle, our ability to manage our expenses and finance our operations, competition, market acceptance of our product or services, the effects of uncertain economic conditions on spending by our perspective customers, and other factors described in our most recent filings with the SEC including recent reports on Form 10-Q, and Form 10-K.

The forward-looking statements for this call address our view of the situation today, and no one should assume that the comments we provided will still be valid later in the quarter. Now, I'll turn the call over to our CEO,

Well thanks, Mike, and thank all of you for joining us today. The first half of 2008 was a true milestone for KANA. At mid-year, we can report that we're executing well on our strategic plan as the first half and second quarter results that were reported today reflect.

KANA's significant year-over-year growth in the first half of 2008 demonstrates that the Company is emerging as a resurgent global leader in multi-channel Customer Service. We are on plan to meet our 2008 objectives, which include significant revenue growth, profitability, and a substantial expansion of our leap partnership with IBM. I mentioned that we're on plan for '08.

Now let's review the key objectives for the 2008 plan as I describe them publicly to you at the onset of the year. Goal one, was annual revenue between $69 million and $72 million, with measurable growth in license and services. Today, we are reporting first-half revenue of $34.9 million, up 32% from the same period last year, with license revenue up 36% and services up 31%.

Goal two, positive cash flow, five-plus% non-GAAP operating income, and a tightening focus on operating efficiencies. Today, we reported that we achieved 3% non-GAAP operating profit in the first half of 2008, with Q2 being our fourth straight quarter of positive non-GAAP operating income. Net income and EPS are much improved as well. Also, our OpEx is down significantly from Q1.

Goal three, an enhanced partnership with IBM and consistent delivery of technical innovation. In the first half of 2008 we expanded our premier level, Global Strategic Alliance agreement with IBM to jointly develop, market, sell and support a Next Generation solar-based Customer Service Solution.

As for innovation in the first half of the year, KANA received numerous honors from the likes of KM World Magazine , Customer Interaction Solutions Magazine and CRM Magazine. As you can see on all three of our key objectives, we are tracking very well.

This first-half performance helps us to ensure our Fiscal 2008 guidance of $69 million to $72 million in revenue, positive cash flow, at 5- plus% operating income. Mike Shannahan will give you the numbers in detail in a few minutes.

As you know, our focus on large customers makes year-over-year results much more meaningful than sequential quarterly snapshots. But however you look at it, KANA is demonstrating improved performance, significant growth in the path to consistent profitability. Clearly there's a lot more work ahead of us.

One half-year doesn't make a turnaround, but KANA continues to convert its recognized technical leadership in deepening relationships with large world-class enterprise customers around a wide range of industries. A more customer -- as more customer centric companies our customers are, the more likely they are to choose KANA. And once they choose KANA, they tend to order more from us.

Almost invariably, once KANA fulfills the first license order for a new customer, we quadruple that revenue in amounts in the follow-on licenses and professional services to that customer within three years. We fully intend to keep that momentum going. For example, the US Post Office continues to expand its KANA footprint with a seven-figure professional services transaction, and another seven-figure license transaction in the first half.

On behalf of our 230-plus dedicated employees, who I might add, our headcount ranks have remained fairly even for the past year. W are laser-focused on maintaining our growth for the remainder of 2008 and beyond. We believe we've created an organizational structure that will allow us to efficiently scale the business.

Now we are aligning this structure with the right skill sets to fuel growth while keeping cost in line. We'll continue to selectively, very selectively add top talent to the organization, particularly in sales and engineering. This will ensure that we increase our competitive advantage and capitalize our market opportunity.

So as KANA enters the second half of 2008, let's quickly review some of the Company's attributes that helped us succeed in the first half. First, we have a comprehensive scalable, rich product portfolio that is widely recognized as the enterprise class meter in intelligent multi-channel customer service.

We have a large base of highly predictable and profitable renewal maintenance revenue, and we have unrivaled professional services, a strategic differentiator that adds significant added value to our customers.

Speaking of customers, how is a big, bold and blue chip? First half purchases include Aegon Insurance, Aetna, AT&T Mobility, Best Buy, Dell, Gap, Verizon, Walt Disney and Yahoo. We've got five of the top five banks, five of the top five general retailers and four of the top five telcos, and we keep them with 90-plus% customer loyalty. The IBM partnership, it's premier, very few companies have partner status that KANA has with IBM. We earned it . Over the past seven years, KANA and IBM have chalked up over 100 joint customers which account for 20% of our renewals and 40% of our new license deals over $1 million in the last three years. As discussed, we expanded this Global Strategic Alliance agreement with IBM to deliver the Next Generation Customer Service Solution.

When we talk to customers and prospects, we hear again and again that customer service is receiving increased attention in the executive suite. At KANA, we continue to fine-tune our organization to deliver superior customer service. In fact last week we announced the appointment of Charlie Isaacs as Chief Customer Service Officer.

Charlie will be responsible for end-to-end service experience for our customers worldwide, including overseeing our global customer support organization and our customer service experience teams. Charlie brings knowledge, experience, and passion to our customers and our technology having previously served as Chief Technology Officer. And as I've mentioned, we've increased our Management to make it continue to grow as a world-class entity with recent additions including our new CFO, Mike Shannahan, and former Gartner Analyst Estaban Kosi who is Vice President and Practice Leader in our professional services.

Speaking of Gartner, the analysts there project a $4 billion market for our sector within three years. That sounds like a good place to be when you're a premier multi-channel provider.

The current global economy means that all companies need to be more customer-focused than ever. And that's especially true of the largest enterprise with the highest number of interactions, the kinds of companies that have billions of interactions with millions of customers. This is an economic environment that values KANA's strengths, particularly among large customer-centric companies in industries such as financial services, telecommunications, retail, and other sectors where we have substantial incumbency with top tier global leaders.

These large players are relying more and more on KANA, as our first half results demonstrate. We provide them with unrivaled integrated solutions and professional services that enable these large corporations to deliver consistent service experience across all channels , whether it's e-mail, chat, call centers or web self-service. These global giants need the scalability that KANA provides. They also need results, and they get them from KANA.

KANA's 600 customers which include half of the largest 100 companies in the world, achieve unsurpassed results such as double-digit increases in customer satisfaction and an average 20% reduction in call volume. Now let's just take a look at one of them.

Consider TD Waterhouse, which everyone I suspect knows on this call. Among the improvements of TD Waterhouse we helped them achieve, full-time is down 23%, error is down 48%, and buybacks down 22%. First year savings totaled more than $3 million.

As results like these drive industry-leading companies to increasingly rely on KANA solutions and professional services, this was clearly in evidence in the first half of 2008, and we expect it to continue to be so for the rest of the year and beyond. With that I'd like to turn it over to Mike Shannahan for a more

Thanks, Mike. Starting with the Income Statement, as Mike mentioned earlier, KANA's total revenue for the first half of 2008 ended June 30, was $34.9 million, representing an increase of 32% over the year-ago period.

Total revenue for the quarter ended June 30, was $16.7 million , representing an increase of 25% over the year-ago quarter. License revenue for the first half of 2008 was $9.7 million, representing an increase of 36% over the year-ago period.

Included in the first half of 2008, are three seven-figure transactions compared to one such transaction in the year-ago period. License revenue for the quarter ended June 30 was $4 million, representing an increase of 13% over the year-ago quarter. Included in the Second Quarter of 2008, is one seven-figure transaction compared to none in the year-ago quarter.

Services revenue for the first half of 2008 was $25.2 million, representing an increase of 31% over the year-ago period. Services revenue was $12.7 million for the quarter ended June 30, an increase of 30% over the year-ago quarter.

Looking at our business by geographic region, the US contributed 76% of total revenue in the first half of 2008 and 74% in the quarter ended June 30, 2008, compared to 70% in the first half of 2007 and 69% in the year-ago quarter.

License margins were relatively consistent, 94% in the first half of 2008, 96% in the quarter ended June 30, 2008, and 93% in both the first half of last year and the year-ago quarter.

Service margins for the first half of 2008 were 58%, and 59% in the quarter ended June 30, 2008, compared to 66% in the first half of last year and 63% in the year-ago quarter.

This decline is attributable to a higher growth rate in our professional services revenue, which is due in part to our acquisition of [e-Virgins] at the end of June 2007, as compared to the maintenance revenue growth rate for the first half of 2008 and in the quarter ended June 30, 2008.

For the first half of 2008, Sales and Marketing expenses were $11.3 million compared to $12.9 million in the year-ago period, representing a decrease of 12%. For the quarter ended June 30, 2008, Sales and Marketing expenses were $5 million compared to$ 6.7 million in the year-ago quarter, represent thing a decrease of 25%.

As a percentage of revenue, Sales and Marketing represented 32% in the first half compared to 49% in the first half of 2007, and 30% in the quarter ended June 30, 2008, compared to 50% of revenue in the year-ago quarter.

For the first half of 2008, R & D expenses were $6.8 million compared to $6.7 million in the year-ago period, which represents an increase of 1%. For the quarter ended June 30, R & D expenses were $3.4 million compared to $3.1 million in the year-ago quarter, representing an increase of 10%.

As a percentage of revenue, R & D expenses represented 19% in the first half of 2008 compared to 25% in the first half of 2007, and 21% in the quarter ended June 30 compared to 23 % of revenue in the year-ago quarter.

For the first half of 2008, G&A expenses were $5.8 million compared to $6.6 million in the year-ago period, representing a decrease of 12%. For the quarter ended June 30, G&A expenses were $2.6 million compared to $3.1 million in the year-ago quarter, representing a decrease of 16%.

As a percentage of revenue, G&A expenses represented 17% in the first half of 2008 compared to 25% in the first half of 2007, and 16% in the quarter ended June 30, compared to 23% of revenue in the year-ago quarter.

The Company recorded non-GAAP net income of $676,000 for the first half of 2008 compared to a non-GAAP net loss of $5.8 million in the first half of 2007. For the quarter ended June 30, the Company reported non-GAAP net income of $551,000 compared to a non-GAAP net loss of $2.7million in the year-go quarter.

This marks the fourth consecutive quarter the Company has reported non-GAAP operating income and net income. For the first half of 2008, KANA reported a GAAP net loss of $216,000 compared to a GAAP net loss of $7.3 million for the year-ago period. For the quarter ended June 30, the Company reported a GAAP net loss of $137,000 compared to a GAAP net loss of $3.5 million in the year-ago period.

Turning to the Balance Sheet, unrestricted cash was $3.2 million at June 30, down from $4.3 million at December 31. And as a reminder, KANA has no exposure to the auction rate securities market.

During Q1, we renegotiated our $10 million credit facility with our bank to convert $2.1 million to a three-year term line, which is being used for Capital Expenditures. At June 30, 2008, the amount borrowed was $3.1 million, of which approximately $0.9 million is reflected as long term.

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 throughout the year without the need to raise additional capital. Accounts Receivable totaled $11.8 million at June 30, 2008 , compared to $10.2 million at December 31. We had 65 days of DSOs at June 30 compared to 66 days at June 30, 2007, and 53 days at December 31, 2007. At June 30, total deferred revenue was $15.8 million compared to $15.5 million at March 31, 2008, and $16.1 million at December 31, 2007.

Moving to headcount, at June 30 the Company had 234 full time employees, which is down one person from March 31, and up nine from December 31, 2007. Professional services and R&D account for the increases in headcount during the first half of 2008. We are focused on continuing to drive efficiency within our financial model.

We reported non-GAAP operating profit of 4% for the quarter ended June 30 and 3% for the first half of 2008. And now I'll turn the call

Thank you, Mike. So just to recap, KANA started this year with three key objectives. Goal one, annual revenue between $69 million to $72 million, with measurable growth in license and services.

Goal two, positive cash flow, 5- plus% non-GAAP operating income, and a tightened focus on operating efficiencies. And goal three, an enhanced partnership with IBM and consistent delivery of technical integration. In the first half of the year, we've made continuous progress in all three goals as we've discussed. And our pipeline continues to show a healthy growth, which gives us confidence in our outlook for the rest of 2008 and beyond.

Now therefore, we are reaffirming our 2008 revenue guidance of $69 million to $72 million, representing a growth rate of 15% to 18% year-over-year. We continue to be committed to posting a non-GAAP operating profit of at least 5% and generating positive cash flow for the year. Additionally, we are very comfortable that we can grow our business at double-digit annual rates over the next couple of years. We based that on the strength of our pipeline follow-on orders that we're seeing from new customers and the up-sell and cross-sell opportunities from existing customers. As we've already discussed, we have a keen focus on controlling costs and significantly increasing our profits as we grow.

You can see the progress we've already made with the significant year-over-year decline in expenses as a percentage of revenue. Given our expected revenue growth, our focus on controlling cost, and leveraging our fixed cost, we expect our non-GAAP operating income to approach double digits in 2009. We also expect a significant increase in non-GAAP operating income as we reach $100 million revenue run rate. At this point I'd like to highlight that Mike Shannahan and I intend to be proactive in telling the KANA story to the investment community. This month we'll be presenting at two investor conferences. Tomorrow, actually at 1:30, Mike and I will be presenting at the RBC technology media and communications conference at the Seasons Hotel in San Francisco.

On August 18 at 10:00, we will be presenting at the SRA Capitals, fourth annual summer Technology Conference at the Omni Hotel, also in San Francisco. A live webcast of each presentation can be accessed on the Investor Relations portion of our website at www.KANA.com. A replay of each presentation will be available in about 30 days. I should also like to note that we will have another analyst track at our 2008 KANA Customer Summit,which takes place on October 19-22 at the Deutsche Hayes Mansion in San Jose, California. Each year, the KANA Customer Summit brings together KANA customers worldwide for three invigorating days of learning, networking and discussions. The theme of this year's event is working together to master the service experience.

More details about the investor-oriented portion of this summit will be forthcoming. And now, I'd like to turn the call over to the Operator for questions. Operator?

Your first question comes from the line of Nathan Schneiderman with Roth Capital Partners. Please proceed.

Hi. Thanks very much. Hi Mike and Mike.

Hi, Nate.

Good job on the cost controls for the quarter.

Thank you.

I have a handful of questions here. In your press release, there was a sentence I was hoping that you could clarify that said that you expect to achieve solid sequential growth in the second half of the year and beyond. And I was hoping you could clarify that. Are you suggesting through the comment that the second half is going to be a stronger revenue performance than the first half or are you suggesting that Q3 is going to be sequentially up from Q2? Just could you clarify that comment in the press release?

We meant that the second half will be higher than the first half.

Higher in terms of what?

Total revenue and profitability.

Okay. So should we interpret that as you're effectively taking up guidance to the upper end of the range, given that you achieved $35 million of the revenue in the first half?

No, but you guys are just about all at the high end of the range, so I don't think we're (inaudible) at all.

Okay. I was hoping you could discuss the decline and the sequential decline in Sales and Marketing, down about $1 million sequential, and just what was driving that decline. Can you give us the number of quota reps and then what's your outlook for Sales and Marketing spending going forward?

Sure. There are two components and I think we set the stage with our conference call after the first quarter. We indicated that in the first quarter, we have some unique expenses in that quarter. Specifically in Sales and Marketing, we have the Quota Club, and then we have a Company meeting, which gets spread among the departments based on headcount. But I think the other thing to mention in the second quarter is that we did control discretionary marketing spending, and so it was a combination of not having the Quota Club, the Company meeting, and putting a little more controls over discretionary spending and marketing is what provided the quarter-over-quarter decline.

Okay. Can you clarify just on the sales rep count where you ended? Last quarter I had you at 21 reps, and if you included sales management, 26?

Yes. And we ended the first half with 20 and 23 including management.

Okay, and where do you see that going by year-end?

That's probably about the level we will maintain.

Okay. My next question, the DSOs were up substantially on a sequential basis?

Yes.

65 versus 42. Can you explain what was going on there?

Sure. I think a lot of it has to do with the timing of the transactions. In Q1, we had indicated that there were some transactions that carried over from Q4 of the prior year. We were able to close them and collect them in the quarter. This quarter, a lot of the business closed in the last month, and didn't provide us the ability to collect the cash. So I think that although 65 looks high, compared to the prior quarter, it's in line with what we did in the year before and I also think it's in line with most enterprise software companies, Nate.

Okay and final question, an area for you. Just on the deal metrics, I was hoping you could give us a little more information on what was going on in the deal side. The only thing I really heard was that you had one deal that was seven-figure.In the past you'd given us deal metrics for the number of deals over $100,000, below $100,000, ASPs etc, So anything you can provide that would be helpful in the deal metrics I'd appreciate that. That's my last question.

Yes, we talked about that last quarter, Nate. That was something that John had done, but I elected not to do that. Although I do think I can share that the average selling price was still in the range. I think we had always disclosed that it was in the 250 to 260 range, and we were consistent in that, and both a little lower than that in Q1, but right on that in Q2.

Thank you.

Our next question comes from the line of Atul Baga with Thinkpanmure. Please proceed.

Hi, there, thank you for taking my call. So, Mike, you guys mentioned in the last quarter call that you were seeing lessening of sales cycle. I just want to touch upon that and if you're seeing change or if things are still continuing.

You know, if I could kind of reiterate what we were saying is that if you break the sales cycle into two major components, one being at the time -- from the time it takes from the time you have an interesting opportunity until the prospect says yes we want to buy your product. And then the next major block is from then until you actually have the contract. The time difference is on the second half. The time it's taking to get the contract. We're actually seeing a lot more opportunities coming into the pipeline, and we're not seeing discernible change in the time it takes to convince a client that our solution's better than someone else's, based on the budget requirements that they've outlined.

But we are still seeing the pressure in organizations about -- from their finance and their purchasing organizations on how long it takes to actually get the agreement. So although the business unit has the budget, as we know in the macro climate we're living in today, having a budget is one thing, having the cash is something different. And a lot of these large corporations are looking for significant return on investment in order to make a decision in order to buy about anything. So we've been doing some things to mitigate this problem. One is our service experience assessment that we do during the sale process, where we help the customer understand the value proposition and how they would see and when they would see the return on investment through the implementation of our technology. And that document that we create in concert with the customer is very helpful as the business unit directors of that client take it to their finance people saying listen, we're expecting this return if we implement this technical solution. But we're still seeing it. I wouldn't suggest that it's increasing, but I also would suggest to you that it's getting better as we can tell globally as far as the macro climate is concerned.

Makes sense. And on IBM partnership you touched upon in your prepared remarks. Just want to see what percentage of your pipeline is now coming from IBM partnership versus how it has been trending in the past.

Well, the way we look at our relationship with IBM is not specifically about the parts of IBM that resells our product directly. It's a combination of things. It's the BPO organizations that will actually resell the product in their engagements. And we've been successful with them, even up until we did a substantive transaction in the fourth quarter, which was like that. And we have a couple that we're working right now that are substantive size. But I think the other side of this, is the partnering and relationship we have at IBM indicative by the mystery shopper program, where we jointly maintained a market research firm that went out and took a look at how some of the largest financial services companies are handling their customer service, rated them, and then jointly with IBM went to those customers with what their ratings were with a game plan on how collectively the two companies could help resolve that. So that's a lot of co-selling that we do with them, which is a major component that we have.

They continue to be involved at different levels in a lot of our transactions, either because at the same time they may be selling some of their products, or because we have a great relationship with them and that customer has a significant IBM -- IBM has a significant presence with the customer and their sales team will bring us in. Now, that's growing now with a new OEM relationship, so our support now in the software group is also growing significantly, where we're teaming with them on a number of activities and doing joint industry-oriented presentations with IBM, which of course has an effect on deals.

Makes sense. Maybe if you can talk a little bit about with IBM, how they've been adding -- ramping headcounts. What's your focus on the KANA practice? How many people who are working with KANA now versus in the past?

At IBM?

Right.

Well, first of all, there were and there there still are a couple of people who are sales people whose responsibility is to sell the IBM products to the -- sell the KANA products within IBM. And they have actually an IBM quota. There are five of them now who carry quotas for IBM. But also, we have IBM architects and engineers working very closely with us for the development of this Next Generation product. And they're here supporting our efforts to deliver a new service experience management technology. And the marketing efforts we talked about has great cooperation there. So it's tough to put a figure on it because the numbers change. But I think we have a lot of attention within IBM, particularly in the scope of interest around service experience.

Makes sense. Makes sense. And in terms of during second quarter, was there any area of disappointment for you guys, any vertical or any segment of the market, or geographically, was there any disappointment or any surprise that you were not expecting?

Well, I wouldn't say from a market standpoint. We're pretty diverse. We've been successful not just in financial services, but telco, retail, travel and leisure, government, and over the first half we were successful in virtually all of those categories. We're finding our mix of revenue is coming more from the US than it is from Europe, and we're expecting to see the European team pick that up in the second half of the year.

Makes sense. Okay. And the last question, and this is a follow-up on the question about expense control. So, is this -- would you say that your expense control, is it at the full scene now or should we expect to see further reduction in expenses going forward in Q3 and Q4?

Well, I think we can say that we certainly aren't going to spend much more in total. I think the allocation might change because of what we're doing in the R&D. So we do have planned increased expenditures in R&D, and those planned expenses should be able to be provided through reductions in the other department spend.

And that is mainly -- is it mainly going to be Sales and Marketing or is it both spread across Sales and Marketing and G&A?

It's across everything. The one thing that I will try -- and we've already talked about it, but the Customer Summit that we have in Q4 in October is obviously an increased Marketing expense.

Okay. Perfect. Thank you.

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

Hi, guys. Nice job on the operating margin side as well.

Derrick, you have a big echo on your -- I don't know if you're on a speaker or something?

Can you hear me better now?

Yes, a little better. Sounds like you're in a hole.

I'm trying to get out of this noise in this conference, is this better, can you hear me?

Yes, that's fine, go ahead.

Okay, so nice job on the operating margin side, of course. But just curious, last quarter you said you had a record pipeline. I was just curious if that was still the case. And if you look at the last few quarters, you had license revenue over $5 million, and it dropped to about $4 million this quarter. Was there, -- I know you guys were a little bit more lumpy than a traditional software Company, but was there any change in [winterage] or sales productivity or the economy that caused that?

Derrick, what you're hitting on is the reason why we give annual guidance. And particularly in this world, where we run into the problem of the time and effort it takes after we've been selected to actually get the paper. Our the pipeline, particularly given the second quarter license, our pipeline is stronger than it was. We're not in the business of losing many deals, and we're seeing that continue to grow. The opportunity size is growing as well, as we're finding a lot more companies are interested trying to find solutions for this, this market issue. And we are very confident in our ability to meet our guidance for the year, but there's a reason why we've given it just for the year.

Okay. Well, I'm not sure if you'll answer this as a follow-up, but I was just kind of curious about Q3 seasonality, and if you guys qualitatively, I mean is that something that you'll -- you expect to see or is there something in your pipeline that could take away some of that normal Q3 seasonality?

We expect to do $69 million to $72 million this year. And we expect of course to have a substantive piece of it done in both quarters. But we just know how it is right now. There's tough judgments both ways, but we know we have more than enough opportunity in our pipeline in order to hit our committment.

And Derrick, I think as you recall, license revenue in Q3 was actually higher than in Q4 last year.

Sure. Okay. What was the maintenance revenue in the quarter?

We don't actually disclose. We're still evaluating whether or not we're going to break out maintenance in our total services line.

Okay. And then I guess on the competition front, has there been any change in competition or has it been pretty steady?

Frankly, it's been fairly steady I would say. We're starting to see -- I think a better understanding of the differences between our product environment at that kind of highly-scaled, deep functionality requirement. And maybe it's also us. I mean, we are focused much more on those opportunities, whereas maybe in the past we were kind of scattered and thinking we could compete in the SMB world. So we really move to the challenge that the large complex organizations have in solving this complex problem. So when the prospect has a highly scaled environment, then they've got millions of customers and billions of interactions, they have deep functional requirements necessary. They do a tremendous amount of B to C activity, with significant integration with their ERP systems. When those things are on the table, our products and services are really unparalleled, and that's where we focus. And it just happens to be a whole lot of them that way. So we're seeing in some cases some different competition. As you know, there's been kind of a real focus on some of the SMB softwares and service solutions in this market, and they certainly have a place, but we're finding that where we focus, we don't see them much at all.

All right last question, just around e-Virgins. Just curious if they continue to gain traction and helping bring in more deal flow into the KANA license base and in a quicker time frame. That has been the trend for the last couple of quarters. So are you happy with that trend?

Oh, absolutely. Their deep domain expertise in the service experience world has added a considerable amount to that effort. I mean, they do a lot of the service experience assessments that we do, particularly with how our existing customers -- where that is used for some of the more -- larger up-sell, cross-sell activities that we are involved in. But they are involved today with a number of customers -- a number of companies who are anywhere from six to 12 months away from making a product decision for the technology to support customer service. And they're doing a great job helping those companies with the strategic requirements that they need in order to have an effective service experience. And of course, that leads those companies to the KANA product line. So we continue to expect great things from e-Virgins and their connectivity to the KANA license business. I might add their management is of course paid based on the success of the whole Company.

All right thanks for the color.

Your next question comes from the line of [Edward Andrews] of [Shaker Investments]. Please proceed.

Hi, how are you guys? I'd like you to address -- we haven't talked about it before, but with the dollar stock and $1 million dollars or so, maybe $1 million to $2 million of net cash, what extent are customers delaying orders because they're worried about your financing?

No, and, I mean, we're not seeing that effect at all. And I think the main reason for that is whether or not they're teaming with us on a deal. You know, IBM is -- we see that more often than not, where a prospective client looks at our size -- and also understand most clients don't look at -- I haven't had a client say to me, what about your stock price? But they will say, well, you know, you're an under-$100 million Company and can you sustain the requirements we have for handling my $10 billion business? And when they see the relationship we have with IBM, even if they're an Oracle customer, they come away from that saying wow, these guys if they are meeting that requirement, then they certainly have great sustainability.

Thank you. Your next question comes from the line of Edward Andrews of Shaker Investments..

Yes, hi, Mike. You know, now that you've been at the Company a fair while, can you just get back to the whole issue of trying to size what is the potential for the Company? What do you view right now as the number of companies out there that you view as your target market in terms of average license sale, or the number of companies, and then what you would view as the size of the market in terms of overall people buying CRM license revenue on a yearly basis? And if so, can you also talk a little bit about what do you have to do to start gaining a larger share of that, or do you have a large share and it just isn't a very big market? So if you could talk about that a little bit.

Sure. A couple of things. First of all, we think that this is a very large market. We think that if you think of the Global 2000, those companies are our target market. And of course, those companies have major divisions as well, so it becomes larger than that to some extent. Gartner has defined the overall market, including I might add, services. But they've defined that by 2011, they expect it to be a full billion dollar marketplace. Now, there's a lot of currently installed market base from companies such as [Seabolds] Contact Center Technology clarifies products that were put in. A lot of that stuff was put in four, five, six, seven years ago, and they are re-going through this refresh mode. And that's why we think we're going to see -- and the industry analysts are thinking there's going to be a major refreshment over the next few years, which gives us a great opportunity to take up these new opportunities and grow our market share. Now, what we're doing is getting focused so that we can better get more than our fair share of this market dynamic. We're focused around our ability to deliver services and technology. We think that's a very important tie-together. That allows us to position ourselves with our clients as a trusted supplier. And it doesn't hurt us as we do this with our great partnership with IBM because we subcontracted them for the kind of services that need to be deployed around these very specific strategic service entities for service experience management.

We also are focused on specific markets. Rather than saying let's go out to every single market and build marketing campaigns and programs around it, we're really defining ourselves going forward around six specific markets that we think meet the market dynamics of being big B to C requirements, heavy knowledge requirements, millions of customers, billions of interactions, great significant inter action required amongst their ERP systems and others, so we then have that focus for our sales force as well as our professional service deliveries. And I might add that last night -- that we're building our Next Generation technology which we believe moves in the direction of this market of service experience management, taking account all of the touch points offering this integrated multi-channel solution with a great flexibility for our customers to be able to tune it to their particular requirements and doing that in concert with our relationship with IBM. So we think we're putting all of the underpinnings in place to take a significant portion of this market going forward. We think we can be the segment leader for service experience management.

But don't you, I mean you talk about 2000 largest companies worldwide, you have 20 sales people. Realistically, for a large -- you might argue that you could have one sales person covering one company for large companies. How many -- what is your real target market right now? Given the fact that you only have 20 sales people -- is being able to really focus? Otherwise I think you end up with a group of sales people that are shallow but could never dig deep enough to do a good job.

Well, no. We have a named account focus with two things. First of all, we have a named account focus with our sales reps so we have targeted each one of our reps to have about 40 to 50 accounts that they work on rather than just the geographical territory, going into any particular company here. We do a lot of pre-planned analysis on the opportunities we have. We take a look at accounts and how they fit the model that would be best for us to win in so that we reduce the amount of effort we're spending, time and opportunities that were probably not best suited for us at this time. And I don't want to under-emphasize the global reach we get through IBM.

That's been a very important criteria for us, even when they're not driving the deal directly. But partnering with them has allowed us to stay focused around these large accounts that have the basic criteria we're looking for. And we will grow our sales force as we see growth in our top line. We feel we're sized right now. Mike mentioned earlier that we think our sales force is fairly well sized going into the second half of the year, and we will grow it. We think also that we can get more productivity out of the sales force size we have today, and you'll see that grow as we see our business opportunity improve and our technologies come to market. We also have within our sales force, an inside sales organization that's doing not only direct sales -- but some of our particular existing customers -- but also helping with generating new opportunities within our Global 2000 base. So we think we're well- tuned for our size, but you should expect that as we grow, that we'll invest in our Sales and Marketing in order to keep up with the pace of opportunity we see out there.

Well I guess I'm still grappling with the issue -- I struggle -- You described this market as a huge market, and your license revenues -- it's running $20 million a year or something. What percentage -- the overall target market which sounds like you're describing is very big and you guys are getting a very small microscopic percentage of it, so it's like --

Well it's a transition market at the moment as I said because of the fact that there were a lot of large market players particularly in the Contact Center that we had not played in significantly. That's changing with our new technology, and those transactions are much larger in value. We expect to see a substantive increase in our average sales in 2009, because of the second half of the year, I might add , because of the delivery of our new products which puts us more in line with offering this integrated Solution not just as KM and eService, but also integrated with -- and that's where the larger transaction values

Yes.

So when Mike mentioned earlier that our -- we've been averaging about $250,000 to $260,000 on a transaction basis, we expect to see that be significantly greater this time next year.

Can you point to any vertical that where you really think that you've become the leader, that where you can say is of the opportunities throughout there, you're getting the lion's share of them?

Well, you have to keep in mind that the markets have been pretty siloed. If f you take the eService or e-mail market and then you take the call center or contact market, they've been pretty siloed. And what's happening now, is they're coming together. So if you look at the way it's been, we've been probably the most prolific technology in the telco market for eService or e-mail response applications, and we've also done very well there in the retail marketplace, but there's been a lot in telco. So now we're taking that capability and looking at how we broaden it when we go across all of the service experience segments.

Okay.

Your next question comes from the line of Greg Speecher with Moss Creek.

Hi, guys, I just wanted to see -- and I may have missed it -- did you talk about financial services as a vertical in the quarter? How was the spending? Was it on target?

No, we didn't talk about it.

Yes, we don't really talk about specific verticals, but we had business in the financial services market, and you know, but we're not defined by it. Financial services over the last year has represented less than 20% of our business. So, and I'd suspect not now. I should ask though, when you say that, are you including insurance in financial services, are you thinking of banking and capital markets?

Well I was thinking of banking but if you have something to talk about insurance that's fine too.

No, insurance we've been doing quite well in. As well, we had a number of transactions in the insurance market. We mentioned one, Aegon.I mentioned a list of companies that's in our press release that was new also for us, and then banking. We've also closed business in the first half of the year as well. I mean, it's just that we have six target markets that we're focused on, financial services, banking and capital markets is one of them, and we think there's still substantive opportunity there. They still have millions of customers, they still have billions of interactions that they need to do and they're finding that to stay competitive, they better do it right. So some of the companies that have recently -- a lot has been cancelled, but we haven't cancelled this project.

Well very interesting. I'm hearing some of them saying there are other vendors. They just maybe didn't buy in Q2 but plan to maybe later this year perhaps.

Yes. And it's tougher with them when it comes to actually getting it closed after you won the technical evaluation.

Yes right. Well and last question. How would you characterize the conversations in the last couple of weeks in the quarter? And I know you're not particularly quarter-to-quarter focused, so maybe you just said all right, let's continue discussing it if they're asking for discounts. Or were they just saying we're delaying the project? How would you characterize it.

I think my experience in the negotiations that were ongoing, there is a lot of demand to discount at levels that we just didn't do.

Right.

With the expectation that we believe that it is in their best interest to make a selection,and I think they have selected us. It's just a matter of grinding down to get the contract signed at a reasonable rate. And we did have a couple of those situations in the quarter.

Okay. Sounds good. Thanks a lot.

Your next question comes from the line of John Luber with ILH. Please proceed.

Hi, guys, how you doing today?

Good.

I wanted to try to get a better understanding. It sounds like from the conference call and press release that things are going according to plan fairly well, yet the stock price seems to be very low, at $1.10. Do you guys have any sense why that is, or any good ideas?

I probably shouldn't say this, but I'm going to anyway, because I know the last year and a half hasn't been as smooth as anybody would like. But we've made materially, tremendous progress in the business. We've grown revenue significantly over the last three years. We've been profitable now for four straight quarters. We can't control the crazy spirits of the Market, but we're flabbergasted by how we're being valued in the Market. At this point, we're trading for a little more than the potential value of our NOLs, much less the fact that our renewal of maintenance base is where it is. It astounds me especially, when investment bankers continually are talking about multiples of maintenance revenue and business worth. And I just will tell you, given the quality of our products and management team, our relationship with some of the biggest companies in the world including IBM, increased profitability, our assets, cash assets, real assets, I know this is a tough market and I know we've made mistakes, but I'll tell you, guys, I don't get it.

Have any of the insiders -- whether the Board or executives bought stock recently? Or was it a quiet period or how does that work?

Well, we've had -- we've been doing and we continue to do a number of things and stay in quiet periods. What can I tell you? I will tell you this. That we are compensated based on the profitability of this Company. We are -- that's how we're compensated here. We all have equity in the Company that right now, we're looking at trying to build back, but we just don't get it. I understand the Markets, and we are where we are, but our job, we think, is to do the best job we can. And growing our business profitably and growing the business that meets the customer demand out there and beating our competitors, we'll continue to do that and hopefully, as the market dynamics change we'll get credit for it.

And my last question. You talked a little earlier about -- when we're talking about markets and market share, as the opportunities presented themselves. And you have momentum, you increased the size of the sales force but it seems like over the past periods of time, that as revenues increase, costs have seemed to increase block step, and we haven't been getting any scale or real profitability. Do you have a sense of what revenue or size you won't need to keep increasing costs to keep up and we'll start seeing something drop to the bottom line?

So that's basically what our initial goal is this year. I think by trying to indicate that non-GAAP -- and again, and the black shoals model on the stock option is one thing, and we've had some restructuring over the past. So trying to exclude those, which actually hurt us on a non-GAAP basis in Q1 because we had -- we were able to sublet a building that we've been carrying for a number of years out to the term. Looking at 5% from where we've been,is a pretty good initial step. And again the guidance is moving about 18% year-over-year. So dropping from a pretty substantial loss in the past couple of years to a 5% operating profit, and then moving forward from there is what we're trying to do.

I like the progress. I'm just trying to understand it , like a $100 million in revenue or $120 million -- is that where we'll start seeing real profitability? I mean -- profitability -- I know you're break-even now but what I would consider

Well one of the issues that companies that are in the enterprise technology space is that as you grow in size, particularly in that kind of no-man zone between $1,500 million, you have to bring service and support requirements like you're a $100 million company. So as you get closer to that run rate, you could start seeing some more substantive increases in our earnings. But it is our intention, as we are doing now and we will continue to do, is to grow our operating income and our margins so that we'll start to look consistently look better. It's a consistency thing for us and we're very confident in our ability to perform.

All right thank you very much.

Ladies and Gentlemen, this concludes the question and answer presentation of today's conference. I'd like to turn it back to Mr. Mike Fields for closing remarks. Please proceed, sir.

Well thank you for joining us this afternoon. I hope my little rant didn't confuse anybody. But once again, KANA's substantial growth in the first half of '08 -- we think it's a milestone in our resurgence as a publicly-traded Company and as a global leader in multi-channel customer service. We look forward to the balance of '08, and we greatly appreciate your continued support. Thank you very much and this concludes our conference.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the presentation. Have a good day.