SWK Holdings Corp (SWKH) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 KANA Software earnings conference call. I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I will now like to turn the call over to your host for today, Mr. Mike Shannahan, CFO of KANA Software. Please proceed, sir.

Thank you. Mike Fields, and I welcome you to the earnings call this afternoon.

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.

Our management regularly uses our supplemental non-GAAP internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are a among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is base in part on performance of our business on these non-GAAP measures.

Also, as a reminder, 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, our long-term success, new hires, our product and product development efforts and characteristic of our market segments.

Actual events or results could differ materially from those described or anticipated in our forward-looking statements as a result, of a number of factors, including, risks associated with our efforts to grow our sales, our reliance on large orders to meet expected sales in a given period. Our sales cycle, our ability to manage our expenses and finance our operations, competition, market acceptance of product or services. These KANA customers, which include half of the largest companies in the world are part of a large and growing global market that Gartner projects to be about $4 billion within the next three years. It's a market that increasingly demands integrated scalable solutions and professional services, the kind that only KANA can truly provide. It's a market that is calling for delivery on any mode, e-mail, chat, call centers and Web self-services and it's a market that demands results.

Now let me turn the call over to Mike.

Thank you, Mike. Thank you for joining us today, it's a pleasure to be with you. As we enter the home stretch in a year that's become economically perilous for much of the world, KANA continues to execute. Despite the macroeconomic environment KANA is, by in large, continuing its march towards revenue growth, operational efficiency, positive operating income, cash flow, and product innovation. Or improved nine month performance year-over-year continues to again, demonstrate KANA resurgence as a leader in a multi-channel customer service market. As we review the first nine months of 2008, let's assess our progress towards the key objectives I established at the beginning of the year.

A Goal One, is annual revenues between 69 million and 72 million, with measurable growth in licenses and services. For the first nine months of 2008, KANA recorded revenue of $51.6 million, increase of 19%, from the same period last year. Our license revenue climbed 16% while services up 21%.

A Goal Two, positive cash at 5% non-GAAP operating income had a tightened focus on operational efficiencies. KANA logged 4% in non-GAAP operating profit for the first nine months of 2008, as well as the fifth consecutive quarter of non-GAAP operating income in the third quarter. Due to the macroenvironment and its impact on lengthening sales and payment cycles, we don't anticipate achieving positive cash flow for the year 2008; however, we most certainly expect to generate positive cash flow if the fourth quarter. We continue to improve as net income, APS and operating expenses getting significantly better.

A Goal Three, an enhanced partnership with IBM and consistent delivery of technical innovation, this is really exciting. We are seeing the first demonstrable traction in the expansion of our global strategic alliance agreement that we announced in May with IBM. We expect it to build right through 2009.

In fact, we are particular excited that IBM has selected KANA as one of a very small group of ISV's to participate in the first two strategic [SOA] market solutions in both banking and insurance. IBM and KANA are actively working on defining the solutions, which is expected to be brought to market in 2009.

On the innovation front KANA continues to receive numerous product and innovation awards including, this week's announcement that in 2008, excuse me, in the 2008 Forrester Wave for Interaction-Centric Customer Service Software named KANA a category leader. In a field of 10 competitors and 160 criteria, KANA earned 6 - 89 perfect scores and 54 scores one level down from perfect. KANA earned perfect scores in criteria's including, self-service search, content authoring and publishing, chat, e-mail, response management, high volume capacity, and internationalization.

KANA perfect scores also included integration, usability, scalability, performance, security, and time-to-value. Forrester recognition followed honors earlier this year from CRM Magazine, KMWorld Magazine and the Customer Interaction Solutions Magazine. So despite the macroenvironment we are making headway in all three of our key objectives, we continue to expect sequential growth through the balance of 2008. The economic downturn has not affected fiscal 2008 growth projections of 69 million to 72 million in revenue and at least 5% in non-GAAP operating income.

Mike Shannahan will provide a financial overview in a few minutes both for the first nine months and the third quarter. Before I get to a overview of our business, let me reiterate a couple of points that I believe are important. First, as you know, our customer base consists of large enterprises whose sales and payment cycles are uniquely your own, and as you know, the state of the global economy has lengthened those cycles, for KANA and for everyone else so it's the economy perhaps more than year-over-year results are much more reflective of our business than quarterly rewards.

Second we we are executing on realignment of our cost-structure as well as our growth plan. Much of our optimism stems from the significant measurable progress we are achieving as we remake our organization into one that will allow us to scale the business. This means imposing needed cost controls, defining right skill sets as we sharpen our focus on large enterprise customers and architectural a substantial realignment internally. This is hard but necessary work and we are achieving terrific results with more to come. As we mentioned we taken action which we expect an estimate of 2.9 million in annualized savings.

With that, let's talk about the business. I'm not going to say much about the state of the world economy, there's little point in stating the obvious. KANA is not immune to the economic slings and arrows that the entire world is experiencing. But, KANA is executing on our parallel initiatives of revenue growth and cost-structure improvements, even in the face of worldwide economic difficulties. KANA is continuing its resurgence as a international leader and multi-channel customer service and perhaps differentiating us from many other companies, we believe that the challenging global economy does present certain opportunities for KANA. Clearly large enterprises are sharpening their focus on customer service in the face of the current economic challenges.

In a period of economic contraction, large enterprises are shifting more emphasis on servicing their existing customers. This is especially true of the prototypical KANA customer, a large enterprise that has billions of interaction with millions of customers. That kind of industry leader, KANA serves in industries like retailing, telecommunications, and financial services. One of those prototypical customers is one of the most prominent retail giants in the United States. You will recall our earlier announcement of a 7 figure transaction. This huge retail chain plans to use KANA's Knowledge Management Solution to more effectively place important information at the finger tips of store personnel, therefore gaining service experience to 16,000 stores.

For this large retailer, KANA is delivering a guided knowledge approach that dramatical reduces the time it takes to answer customer inquires. Our solutions enable the employees of the 1,600 plus stores to quickly diagnose problems and determine the right answers, take into account the context of the situation. Using contextual search methodologies, and automated best practices, KANA is enabling these employees to provide consistent accurate answers to customers questions , with out the need for extensive training. Large orders in recent weeks are not limited to KANA's customers in the US. There maybe no better example than two of KANA's most prominent European customers. Barclays Bank and Com Hem, two of the world's most respected and customer rich leaders in the industry. These two large orders we received recently, one from Barclay's this month and from Com Hem in September, were proved in the teeth of the worse economic upheaval in the world that has seen in perhaps the last 80 years. Both are great illustration of global leaders putting increased emphasis on customer service as time gets tough.

Let's start with Barclays, which gets our fourth quarter off to a very good start. One of the premier financial services companies in the world, Barclays UK Retail Bank selected KANA to provide its secure messaging technology. With a stated goal of delivering access to over 4 million customers by 2010. Barclays selected KANA as a multi-channel initiative that gives its customers choice. A choice of channel they prefer when engaging with Barclays customer service, as well as an ability to switch seamlessly to another channel. Barclays' customers currently use branch and telephone channels for secure communications. KANA secure messaging will provide Barclays' customers with an additional choice of a channel to communicate with the bank, securely through an online session. KANA secure messaging combined an e-mail management with secure web portals and providing simple and effective secure customer communications throughout web channels, delivering private communications without the need for encryption applications. The integration of KANA Software with Barclays current system will also enable Barclays customer facing teams to have full visibility of customer communications across all channels through secure messaging.

KANA's technology will enable Barclays' customers to use its online channel with peace of mind, knowing they're in a secure environment. This is the corner stone of Barclays multi-channel customer communications initiatives as approved--- to improve customer service, reduce customer attrition and increase online sales. Barclays selected KANA, not only for the return on investment that we provide, but, Barclays was recognized as customers increasing demand for secure online communications as customers change the way they bank. Barclays selection of KANA's secure messaging reflects that demand for safe secure communication in today's customer service environment.

Then there is the order of KANA's recent order from Com Hem, one of the premiate media entertainment and telecommunications providers in Europe. Com Hem provides cableTV, digital television, broadband, telephone and HDTV to more than 200 television stations serving more than a third of the households in Sweden. Com Hem which translates into Come Home in English, has launched the customer service transformation project lead by CapGemini . The Com Hem CapGemini the initiative has two phases, first, Com Hem and CapGemini will use KANA's entire knowledge management Suite for self-service and assisted-service, then their deploy KANA's e-mail response and online collaborations solutions.

KANA's multi-channel knowledge solutions will enable 600 plus Com Hem Service Agents to respond to customers inquires quickly, reducing handling time and identifying solutions that are personalized for each individual customer, it will also increase first core resolutions its's agents provided with advance search capabilities to facilitate fast, accurate and relevant help. Having a major European triple-play provider choose our Knowledge Management Suite as a testimony to the broad scalable multi-channel customer experience that KANA offers. Com Hem's CIO publicly noted that we won the business because we provide a complete customer care solution and because with KANA Com Hem's customers and agents can get consistent, accurate and timely responses on the first call. Com Hem also sided that KANA enables its knowledge to be centralized, solving the current problem of knowledge being dispersed across various subsidy systems. Barclays and Com Hem's large order reflect the increase emphasis on large enterprises are putting on customer service, customer loyalty and customer retention.

We know something about customer retention. Incidentally we keep 90% of our own customers. In a tough economy, large companies want to do the same. They are intent on maximizing customer retention, and they are turning to KANA's unsurpassed multi-channel customer service solution to help them do that. Barclays and Com Hem are illustrative of the kind of encumbrance KANA builds with large world class enterprises. The more customer interactions the more touch points, the more customers of companies, the more value KANA brings. Once they choose KANA for a initial order they tend to grow was towards integrating customer services across all the channels.

In fact, once you get a customer's first license we tend to quadruple the initial revenue over the subsequent three years. KANA and Com Hem are two reasons why we continue to be committed to maintaining our growth for 2008 and beyond. There are plenty of others like the companies that have made new and follow on purchases of KANA solutions in 2008. Names's like Barclays and Com Hem as well as other industry leaders such as United Health care, US Post Office, Best Buy, Aetna, AT&T Mobility, Best Western International, General Motors, Sprint, Nextel, Verizon and Yahoo. These customers which include half of the 100 largest companies in the world are part of a large and growing global market, which Gartner projects to total $4 billion within the next three years.

Now I would like to turn the conversation over to Mike Shannahan for more detailed look at our

Thanks, Mike. Turning to the income statement as Mike mentioned earlier, KANA's total revenue for the 9 months of 2008, ended September was 51.6 million, representing an increase of 19% over the year ago period. Total revenue for the quarter ended September 30, was 16.7 million, representing a decrease of 1% over the year ago quarter. License revenues for the first 9 months of 2008 was15 million, representing an an increase of 16% over the year ago period. Included in the 9 months 2008, our 5 - 7 figure license transactions compared to 2 such transactions in the year ago period. License revenue for the quarter ended September 30 was 5.3 million, representing a decrease of 8% over the year ago quarter. Included in the quarter are 2 - 7 figure license transactions, compared to 1 in the year ago quarter. Service revenue for the 9 months of 2008 was 36.6 million, representing an increase of 21% over the year ago period. Service revenue was 11.3 million for the quarter ended September 30, an increase of 3% over the year ago quarter. Looking at our business by geographic region, the US contributed 76% of total revenue in the first nine months of 2008 and 75% in the quarter ended September 30, compared to 73% in the first 9 months of 2007, and 78% in the year ago quarter. License margins were relatively consistent, 95% in the first 9 months of 2008, in the first 9 months of 2008, and 96% in the quarter ended September 30. And 93% in both the first 9 months, of last year, and in the year ago quarter.

My following comments are using non-GAAP measurements. I will address the GAAP reconciliation after the non-GAAP operating results. Just to confirm revenue is always reported on a GAAP basis. Service margins for the first 9 months of 2008, and in the quarter ended September 30, were 59%. Compared to 65% in the first 9 months of last year and 64% in the year ago quarter. This decline is attributable almost entirely to a higher growth rate in our professional services which is due in part to our acquisitions eVergance at the end of June 2007, as compared to maintenance revenue for the first 9 months of 2008 and the quarter ended September 30.

For the first 9 months of 2008, sales and marketing expenses were 16 million, compared to 18.6 million in the year ago period, representing a decrease of 14%. For the quarter ended September 30, sales and marketing expenses were 5.1 million, compared to 6.2 million the the year ago quarter, representing a decrease of 18%. As a percentage of revenue, sales and marketing represented 31% in the first 9 months of 2008, compared to 43% in the first 9 months of 2007 and 31% in the quarter ended September 30, compared to 37% of revenue in the year ago quarter.

For the first 9 months of 2008, R&D expenses were 9.9 million compared to 9.5 million in the year ago period, which represents an increase of 4%. For the quarter ended September 30, R&D expenses were 3.3 million, compared to 2.9 million in the year ago quarter, representing an increase of 13%. As a percentage of revenue, R&D expenses represented 19%, and the first 9 months of 2008 compared to 22% in first 9 months of 2007. And 20% in the quarter ended September 30, 2008 compared to 17% of revenue in the year ago quarter. For the first 9 months of 2008, G&A expenses were 7.8 million, compared to 8.4 million in the year ago period representing the decrease of 8%. For the quarter ended September 30, G&A expenses were 2.4 million, compared to 2.6 million in the year ago quarter representing a decrease of 8%.

As a percentage of revenue G&A expenses represent 15%, in first 9 months of 2008, compared to 19% in the first 9 months of 2007 and 14% in the quarter ended September 30, compared to 15% in the year ago quarter. The Company recorded non-GAAP operating profit of 1.9 million for the first 9 months of 2008, which represents 4% of revenue, compared to non-GAAP operating loss of 4.8 million in the first 9 months of 2007. For the quarter ended September 30, the Company reported non-GAAP operating income of 996,000 which represents 6% of revenue, compared to a non-GAAP operating income of 694,000, in the year ago quarter, or 4% of revenue. This marks the fifth consecutive quarter the company has reported non-GAAP operating income.

There are three basic expense components that reconcile non-GAAP to GAAP expenses. The first is stock-based compensation. For the first 9 months of 2008, stock-based compensation was 1.7 million or approximately $560,000 per quarter, compared to 2.2 million in the year ago period. The second amortization of intangibles, which is a result of the acquisition of eVergance, which was 375,000 for the first 9 months of 2008, or $125,000 per quarter, compared to 164,000 for the first 9 months of 2007, 125,000 of which was reported in Q3 of 2007. The last item restructuring expenses, for the first 9 months of 2008, restructuring expenses 582,000 compared to 567,000 in the same period of 2007. For the quarter ended September 30, restructuring expenses were 1.1 million and were comprised of costs associated with the departure of 16 employees, the closing of two offices, and the write off of software of approximately $263,000. As Mike has previously stated we expect these actions will reduce operating costs by approximately 2.9 million on a annual basis. For the first 9 months of 2008, KANA reported a GAAP net loss of 1.1 million compared to a GAAP net loss of 8.6 million in the year ago period. For the quarter ended September 30, the Company reported a GAAP net loss of less than 1 million compared to a GAAP net loss of 1.3 million in the year ago period.

Turning to the balance sheet, unrestricted cash was 1.6 million on September 30, down from 4.3 million at December 31, 2007. Accounts receivable totaled 12.5 million at September 30, compared to 10.2 million at December 31. DSO's were 69 days as of September 30, compared to 65 days at June 30 and 54 days at December 31. At September 30, 2008, total deferred revenue 13.3 million compared to 15.8 million at June 30, 2008 and 16.1million at December 31, 2007. The current macroeconomic environment is partly responsible for the increase in DSO's and with our ability to invoice annual maintenance renewals in advance, which we had been successfully able to do previously.

Customers are delaying purchases until the end of the quarter, which also negatively impacts DSOs. Customers are also delaying approval of maintenance renewals and negotiating much more diligently on the terms. Although we are achieving our revenue goals and non-GAAP operating goals and planning for cash flow for the year, we assumed our normal 50 to 55 days for DOSs and we assumed are maintenance renewals would follow our previous trends. As a result of experience increase in DSOs and and the delays from when we assumed we would generate renewals, operating cash flow negative by 1.3 million for the quarter ended September 30 and 2.2 million for if first 9 months of 2008. However, based on our forecast which takes the factors into account, we anticipate achieving positive cash flow from operations in Q4, but are not as confident about achieving positive cash flow for the full year.

Moving to head count, at September 30, the Company had 220 full time employees, down 14 from June 30, and down 4 from December 31, 2007. We are focused on continuing to drive efficiency within our financial model. As demonstrated by the actions we took this quarter. We reported non-GAAP operating profit of 6% for the quarter and 4% for the first 9 months and we believe we are well positioned to achieve a 5% non-GAAP operating profit for the year. Now I will turn the call back over to Mike.

Thank you, Mike. Once again, even though the global economic climate has taken a pronounced turn, KANA continues to expect that we will be able to execute and we are reiterating our 69 to $72 million guidance and the minimum of 5% non-GAAP operating income for 2008. additionally, as Mike stated we expect positive cash flow in the current fourth quarter of 2008. Even as as extended payments and sales cycles have deferred what I would characterize as full fiscal year positive cash flow to 2009. So now I would like to turn the call over to operators to answer any questions.

(OPERATOR INSTRUCTIONS). First question from the line of Nathan Schneiderman with Roth Capital Partners.

Thank you very much. Handle of questions for you guys. First of all I was hoping you could talk in more detail about the sequential decline and services revenue. What drove that and maybe if you could speak to it I know you particularly Don like to break down maintenance and professional services, something like that would be helpful to allow us to get a better handle on that.

The third quarter is historically the low water mark for professional services especially in Europe, the month of August is very very slow, and with vacations et cetera, this was something that we were expecting and -- did occur. But the sequential decline is all in professional services.

Okay. Just to maybe to walk us through that in a little greater detail, the prior two quarters you had comped nicely positive on the services side and this quarter, just up a tad. Any comment there? Well -- I guess part was the eVergance, anything you would say about the shift.

Was was the first -- this was the first comparable quarter where we had for third quarter of 2007. And obviously we had them from that point forward, so in comparing services revenue on a year-over-year basis, for the first two quarters of 2008, is really like comparing apples to oranges because without eVergance, we were only doing a percentage of our deployment work, that percentage of work surrounding product sales increased significantly. But the Q3 quarter , as I said, from the services stand point, is always the low water mark, that's what we experienced this

How just further on that line of discussion, because you lost a little bit on vacations, what sort of general levels are you thinking about for Q4 would you see something that comes back close to the second quarter levels?

No I think Q2 is where we would expect to end up.

Okay. It's really mostly the vacation?

Yes. It was just a decline in in our ability to provide services when the customer isn't there.

Okay. Then, helping us try to understand the ability to be confident in your Q4 out look your full year guidance given what is going on in the macroenvironment. Could you share was more details on the Barclays deal? Should we assume as you described it as a large deal, would that be multi-million dollar deal or a 7 figure deal or what can you say about that?

The products and professional services delivering, it's a 7 figure transaction. And it's somewhat indicative of what we are seeing. The global climate is pretty hard. However, with the kinds of companies we sell to, primarily large companies, that have significant business consumer operations, their product lines are primarily commodities meaning it's very difficult for them to win just based on the futures of their products. And they have millions of customers and deal with billions of interactions with those customers. When we look at the criteria, those companies are really internally now focused on growing and preserving their customer base. You need no more -- than what we seen Sprint had to say customers retention, customer loyalty is number one goal over the next year. The reason why is that in these times it's difficult for large companies to go get new customers that's an expensive proposition, marketing dollars and other kinds of programs associated with it.

So you drive more profitability in revenue from existing customer base. So this falls right in the mid ole of our core strength that's helping our customer better interact with their customer. So if you take Barclays by example, they are in the middle of trying to fig out what pieces of Lehman they are going to keep alive. At the same time we won a substantial transaction because offering secure messaging to their existing customer base was considered to be a way of defining competitive value against other financial institutions. Most certainly couldn't do it based on their products. They do it based on how they support their customers. Not just seeing in financial services but seeing it in all of the major markets that we focus on. Real Keane interest in finding ways to improve customer satisfaction thus gaining loyalty and advocacy on the part of customers.

Other than the 7 figure deal with Barclays, have you been able to book other significant transactions thus far in October that give you confidence that you can meet the guidance? Or is it more just pipeline?

To me it's pipeline. As the sales cycle sort of lengthened out, the size of our pipeline and we have every expectation that a number of these transactions will close in this quarter because its for the most part year ends, but our pipeline is actually at its largest level that it has been since I've been here. I'm very encouraged by what we are seeing.

Based on what you're seeing there, do you feel like license revenue in Q4 is most likely up sequentially, flat or down a little?

I think it's definitely up sequentially.

We are focusing on having -- a great quarter in the fourth quarter relevant to a license revenue and say that for a couple of reasons, one what what I stated the customers are coming to us looking for the solutions. We are not just seeking them out. The cycle I mentioned the last call, we have seen the cycle from the time the customer says they want to buy our product. We run the competition -- won the competition from other vendors, taking longer than we would like. And we think the good news in our pipeline is is that a number of transactions that we expect to close in the Q4 were transactions that we won the competition on in the second quarter and third quarter.

We feel we are reaching the closing cycle a lot of the companies focused on the year budget process. Also we are not, we don't have any significant focus on the financial services market as far as this is concerned. We very proud of the Barclays win. We are not really identified by the financial services market. The opportunities that we expect in this quarter are coming from companies in the telecommunications space, in the continuing growth in the retail space, insurance and health care, government, in those places where excellent service experience on the par of our customers to their customers are important to them.

Then final question, these two quick questions may be related. You referenced elongated cycle from the time that the customer made a decision, to the close, are you also seeing a stretch out in the sales cycle from the time the customer goes in to the pipe until the time they make the decision to buy. Then can you go to more detail on the elongated payments and is this related or can discuss the decline in deferred revenue and is that related to the payments or is it customers that decide to turn off the maintenance and those are my questions, thanks very much.

Let me start. I will start with the elongated cycle. I think that most of these customers are pretty seasoned enterprise software application acquires, and as a result, unfortunately things don't seem to get done until the end of the quarter which has impacted our DSOs because we still have more of that revenue stating in receivables at the end of the quarter. We are working obviously to see if we can't improve that. On the renewals, what we are seeing, I think with Oracles announcement this quarter, third quarter, followed by SAP, they have really or -- almost infuriated a number of CIOs over the cost of maintenance. As you know, we sell perpetual license, so the customers always have a right to that license but they are basically in a position where they can pick and choose who they or how many seats for example they are going to pay maintenance on. Knowing that should they need additional seats the cost to them is going to go back and pay for the maintenance that they haven't paid plus reinstatement fee but they are assessing this on a on going basis and therefore the time it is taking us to get customer approval where we are issued a purchase order so we can invoice for that maintenance contract, has lengthened and it has become a contractual, negotiation over what are the benefits, what are the repercussions, unfortunately there is not a lot that we can do if they believe that they have more seats than they are using, then they have that ability to just pay for the maintenance on the seats that they believe they are using and then understand there is going to be a future cost when they need additional seats. That's really what has impacted. It's not that they aren't renewing it's just that the numbers and the process has lengthened.

Just one other clarification, because Nate you had talked about this relevant to the payment cycle. And I just want to clarify because the payment cycle means to us, that we contracted for this technology with one of our clients. And the payment cycle is from that contract signing until such time we are paid. We are not seeing any elongation of the payment cycle customers because we deal with large corporations and whatever the payment terms are we get it in that cycle. The time from the time they decided to buy out technology until the time we get the contract, that's where the length of time has grown. Because the process includes a lot more oversight from finance and procurement that didn't exist before where the business person would have made a decision based on their budget to make an acquisition of technology for a particular business purpose and once they made that decision, then the contraction contracting time frame which used to take a month before because it was all about coming to terms, now, it's a revisit of the business value, and the cost associated with other things they may want to do in the Company. It's not competitive, we are typically not involved with anyone look at a competitor at this point but the competition is do we spend a cup official million dollars with you or or refurbish a plant in Illinois. I mean that's the competition. So we started to do I think a very good job and doing what yes call a service experience assessment during the cycle, to help the customer identify the business value, and the return on investment from time to market and other criteria, and that's helping us to close the cycle, almost certainly get to a positive result in the cycle. But I just wanted to clarify that the term, payment term, if thought of is the way I explained it does not represent anything that's lengthened. Not finding customers saying we contracted with something, told you we were going to pay you in 30 days and not going to pay you in 30 days.

Of our receivables 90% of the September 30 balance is less than 30 days old.

Next question.

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

Nice job on the quarter.

Thanks, Derrick.

Couple of clarifications, so did you say you were seeing a push back in maintenance pricing?

They are obviously, they are fighting everything. We have a standard CPI increase built in to these contracts, that is one of the top negotiating items. And then another is what level because obviously we provide different service levels. So they are considering moving from gold to silver, we are seeing very few customers moving up but they are all considering moving down. Those are priced differently. Then the last one is how many what seats they are going to be paying. That hasn't really been the biggest component of the negotiations. The negotiation has been over the standard CPS, what level of service they feel that they need.

And so you alluding to the fact this may be happening across the industry.

I'm sure it's happening across the industry, yes.

Then in terms of foreign currency was there any impact on deferred revenue?

Yes. Obviously with the dollar getting stronger it had a negative impact about $400,000.

They have a marginal impact on your maintenance revenue going forward?

Well, it has -- foreign currency has a plus and minus bond revenue and expenses. Obviously it's a minus on revenue and a plus on expenses, so depending on where you sit for the rest of the world, either helps your income or hurts your income. With us with transfer pricing et cetera, we are at just about a break even. It does impact the balance sheet.

I might have missed part of your comments, did you talk about where and what areas you were reducing head count?

Actually we reduced head count in about every category. We did reduce probably most significantly in G&A. What we have done is we had finance people in Japan and in the Netherlands, the Netherlands is one of the offices that we closed, we contracted with a service organization to provide us accounting services around the world using our Net Suite application and at a much less cost than what we were incurring with the combination of own employees and the outside services that we were using. So we consolidated all that into one service provider who was using our accounting application.

I'm sure there was turnover in the sales force, and especially around you guys maybe getting rid of under performing reps. But a couple of things, you give us the numbers of reps today. Two, have you been able to retain the better performing top talent reps that you would have wanted to?

Yes, we absolutely been very successful we feel in retaining the top reps we wanted to. We haven't had any attrition from the guys who are selling. Good compensation plan and they see real business opportunity continuing to grow in their territories. So we're not concerned that way. We continue to tweak our sales organization and ensure that we have the best people and the best organizational structure to maximize our ability to get to market.

To the extent that we were letting people go, and not replacing them, that would qualify as restructuring, to tent we let people go and we were replacing them, then that isn't included in restructuring, any cost we might have incurred with letting employees go that we are replacing we absorbed in the line item. For the first two quarters we had quota carrying reps of 20. And we ended September with 19. We had reps in first line managers of 23 in both the first and second quarter, and we ended September with 18. We had total sales and marketing head count of 62 in March, 63 in June, and 60 in September.

Okay. That's helpful. Then last question, can you give us color around the big deals that you're winning kind of who you are winning against, who it's replacing, are these customers looking at on premise, I mean on demand or are you competing against those guys color on the good wins would be nice, thanks.

We are seeing competition in a number of ways, it's quite interesting. Obviously our -- industry standard -- e-mail system -- response continues to be a very affective technology in the marketplace, we are selling it a lot to our existing customers who are upgrading their ability to support more e-mail based and chat based solutions. We are also have been successful this year selling it to new customers and winning some substantive comp against -- competitions against a number of vendors who have e-mail functionality. Where we win is around our scalability. We also with your knowledge product, have seen success continue to grow with existing customers who are adding more functionality or buying knowledge as a cross-sell where they were e-mail only customers but you adding knowledge to that portfolio. We are winning pretty interesting competitions. Even in areas that we haven't specifically defined as being core markets we want to go after for example, on the high-tech area, we won a major competition at Ericson against a number of vendors. And now in a cycle of finding deploying -- that capability into their environment.

Nice transactions for the Company -- that we will recognize benefit over the next couple of years. We are finding that now new product which we are bringing to market mid next year, which is service experienced management product, those holistically climates of integrating all of the channels across e-mail chat, web service and the contact center. Now we are moving into competitive environments with some of the case management vendors who have interesting desktop capabilities such as [Pegar and accordion] (Inaudible) -- but don't have strong knowledge components, by us being able to bring this together with new technology, we are starting to win and starting to be involved in a number of opportunities there. I mean it was one of the key issues for this retailer that we mentioned who required technology this quarter, last quarter excuse me. So we are seeing different kinds of competition, at all the levels we are starting to see some substantive success because of the new product strategy.

Thank you.

Next question from the line of Atul Bagga with ThinkPanmure.

Two deals you talked about. Can you talk about the -- (Inaudible) -- specifically how big were these deals in terms of total revenue can you talk about that.

No, all we ever say is that these were license transactions in excess of a $1million, so we never actually tried to quantify the actual dollar amount of each contract.

Are these multi-million dollars deals?

No.

You talked about your pipeline is very strong going in Q4, I was wondering if you can give color on that pipeline of large deals versus the mid sized deals, how does that look?

We have a number of large transactions, when we look at pipeline, I got a model theory about it relative to expectation on a license standpoint that seems to have worked when you're in a place where your pipeline is about 4 times the size of the rep license revenue that you expect to close in the quarter, and your pipeline of companies, inclusive of your pipeline of companies who have selected you being at least one times the requirements for the quarter, typically you will make your quarterly number. We are in a place exceeding those targets.

In term of the close rate are you assuming for your guidance assuming a worse close rate than before or pretty much the same close rates assumed in the previous guidance?

Well the close rate is really dependent when we think the Company is has the funding, and is negotiating the contract, so as the pipeline and we talked about the expansion, understanding when the customer is actually prepared to negotiate contracts so I would expect knowing where we are today, and knowing where we have been at this time in the three quarters that I've been here anyway, I would say that we are in the same position we have been. So but the pipeline is much better.

Okay. Can you talk a little bit about your marketing campaign with IBM, how is that yielding results -- (Inaudible) and these couple of wins that you talk about Com Hem and Barclays was it a result of the campaign that you guys did with IBM in Europe?

Well Barclays was part of the--- we did a mystery shopper campaign, and Barclays was one of the companies that we mystery shopped. We talked about that a couple of calls ago, but where we jointly with IBM hired a third party research firm to go out and contract a number of about 85 financial institutions worldwide asking questions about not asking questions but trying to utilize things as Web self-service in the contact center and seeing what kind of responses they got. We came back with a chart of how companies were measured on a customer service ratio. And from that we got a lot of interest from Barclays and we are working closely with them now to this recent order and we expect more. Now over all with IBM, we in their solution maps for the two major verticals we mentioned earlier, insurance and retail, and we are looking ahead other areas for joint go-to-market programs for 2009. And in terms of the products can you talk a little bit about what are you seeing (Inaudible ) strength in any specific area versus others is it in more in the knowledge or e-mail or chat?

Which products are selling the most?

It's about the service experience that the customer wants. We are seeing customers realizing more and more that they want an integrated multi-channel solution. And that's the direction we are heading in with that new technology. We have offered now for a number of years multi-channel solutions, now we are talking about highly integrated desktop integration across the channels, shared knowledge across the channels, compelling story that ties together business process management as well as resolution management. So we are excited about the future, we are not -- seeing any slowdown in the desire for having a strong knowledge component desire for being able to support e-mail activity to a high degree now companies want to do those things across all their channels.

Perfect. Last question for you guys, can you talk a little bit about what the line of credit you have now and how much you drawn on?

So we have a $10 million line of credit. Approximately $2.5 million of that ten is a 3 year term note that we have been using to fund our capital expenditures over the past I guess it's been a year and a half now. So that's the extent that we have used it is for capital expenditures purposes. And we got a 3 year term, we have a very good relationship with our bank it's a local public bank here in Silicon Valley.

You still have 7 million --

Yes.

Thank you.

As a reminder if you would like to ask a question, press star one. Bob Ashton with KBO, please proceed.

Just a couple of quick questions for Mike Shannahan have you granted any waivers for the point pill, not when do you plan to do so.

We issued a 8K at the beginning of the month to seek input from existing shareholders who wanted to increase their position. The Board had a meeting and has made their conclusions but we were waiting until after our earnings announcement to get back to those investors to inform them of the board's decision. We will be contacting those investors after this call.

Just a little more clarity, we have having our Board meeting tomorrow where we are going to finalize everything so it's a formal Board decision, we had a number of conversations with the board but the final judgments on structure and how to do it will take place in the Board meeting tomorrow and back to those who expressed interest immediately.

Great. The second question for Mike Shannahan, you did a $10 million raise last year, in the latest quarter of the cash went from 3.2 to 1.6 payables up 700k. It's always great to hear nice forecasts and I'm happy to hear them and hope they come true. You are as a CFO in the plan b business as well, if you end up in a situation where you do-- you end up where you don't have enough capital, are you going to look at massively diluting shareholder as a price less than a 1$ or look at strategic alternatives given that comparable deals that times maintenance would value KANA north of $2?

No intension of diluting the shareholders, $7.5 million available -- I made the point earlier that 90% of our receivables are within 30 days. And so we would have no problem accessing the line should we need it. Obviously what I have been trying to do is manage the business without accessing that line for other than capital expenditures and but it is available to us and our on going dialogue I have monthly communications with the bank. So we believe there there isn't an issue there.

No conveyance that --

Banking relationship, they know the customers, they know our receivables, so we are in good shape there.

Thanks.

Also the second part of your question, clearly we have every intention, as Mike said, reiterate, we have no intention of having to dilute our shareholders and as any public company would do, consistently at no timely I think it's one of our obligations and look although strategic alternatives to the Company, you got to just keep doing that. We don't believe there is going to be a need for it under the circumstances by which you mentioned. We expect only great outcomes for our investors. But I wouldn't want you to think that we we did that when stock was a lot higher. It's always important to consistently know what is happening in the market.

That's great. I hope there is never a need for more capital and it's great to hear that you guys have a Plan B in terms of your credit line. Thanks.

Due to time restraints I will now turn the call over to Mr Mike Fields, CEO for closing remarks.

Thank you very much. We appreciate you joining us today. Again, as we stated we are very confident about our Q4. We are continuing to be confident for the year as we mentioned in reiterating our guidance that we gave at the beginning of the year and believe you will see again substantive improvement on your goals through the fourth quarter for 2008. Thank you very much and for those of you that I may not speak to, have a great Thanksgiving, Happy Holidays and Happy New Year.

Thank you for your participation in today's conference this concludes the presentation, you may now disconnect and have a good day .