SWK Holdings Corp (SWKH) 2008 Q4 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Fourth Quarter KANA Software financial conference call. My name is Jeri and I'll be your conference coordinator today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I'd now like to turn the call over to Mr. Mike Shannahan, Chief Financial Officer of KANA Software. Sir, you may proceed.

Thank you. And welcome to our 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 used 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. We believe these are helpful in understanding our past 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 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 the performance of our business based on these non-GAAP measures.

Also as a reminder on this call we'll be making forward-looking statements regarding anticipated events and future performance of KANA including statements regarding our expected revenues, margins, expenses, profitability, cash, cash flows, as well as expected growth, relationship with customers and integrators, our long term success, new hires, our product and Product Development efforts, and characteristics of our market segment.

Actual events or results could differ materially from those described or anticipated in forward-looking statements. And result in a number of factors including 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 products 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. Forward-looking statements for this call address our view as of the situation today and no one should assume that the comments we provided today will still be valid later in the quarter.

Now I'll turn the call back over to Mike Fields.

Thanks, Mike, and thank you all for joining us today. It's a pleasure to be with you. Needless to say the global economic downturn has had an impact on KANA in late 2008 just as it did virtually every Company. The sudden severity in the macroeconomic decline in the Fourth Quarter caused us to miss our -- achieving our quantitative goals. We were disappointed.

Right up until Q4 where we were on track to achieve our 2008 goals. Even in this perfect economic storm of 2008, we still managed year-over-year revenue growth of more than 7%. We generated approximately $1.8 million in net cash from operations in the Fourth Quarter. We made measurable improvements in our cost structure so that we can be profitable in a tough economic climate. And along with our partner IBM, we put our Next Generation Service Experience Management or SEM product on track to be rolled out in a big way mid year of 2009. Additionally it's important to recognize that we did not see any decrease in renewal maintenance revenues and we achieved significant increases in our professional services revenues. This is a strong base of business for KANA and enables us to be confident that we can have continued -- continue to perform in tough times.

No doubt about it, it's tough out there for everyone. The good news is that even in these truly historical economic times, KANA is not losing business and is generating meaningful new business opportunities. The state of the economy has caused large enterprises to put more emphasis on multi-channel Customer Service and customer retention solutions. Even now, we are converting this heightened interest into revenue generating opportunities. Notwithstanding the incredible economic conditions, a number of seven figure sales, we are working on, continues to grow as business units remain committed to solving their Customer Service problems with our solutions.

While we're starting to see the thaw in purchasing departments, we aren't taking any chances. So we're doing what everybody else is doing, we're battering down the hatches, tightening cost controls, making sure that we come out the other end stronger and well positioned. And we think the other end is not that far away. In fact we've already generated a significant pipeline of opportunities with both new and existing customers. At this point there are almost two dozen multi-million dollar plus opportunities that we're actively working in 2009. The balance of the pipeline is significantly greater and we expect to generate more in larger opportunities during the year. These prospects clearly recognize how critical it is to ensure their end customers have superior experience with their products and experiences.

On the operational side we've made significant cost reductions in 2008. In fact we've reduced our operating expenses significantly from previous year, even though our revenue was up. Our proven cost containment boosters -- has boost our confidence that we can achieve increased profitability in 2009 as these revenue levels, at these revenue levels despite the economy. While 2008 fell short of our quantitative expectations and we are still in a difficult macro environment, we expect 2009 to be a solid year. We expect 2009 revenue levels to be at least even with 2008 and we expect to achieve 8% non-GAAP operating income for the year.

So let's go to our key objectives for the year. Annual revenue of at least $65 million essentially level with 2008, positive cash flow, and positive 8% non-GAAP operating income, and a tightened focus on operational efficiencies. The third goal is to maximize our powerhouse partnership with IBM. KANA and IBM are about to rollout a game changing solution in Customer Service and we'll discuss that more later. Mike Shannahan will give a complete financial review in a few minutes, but first I'd like to mention a couple of critical things.

What is reflective of our business is a clear trend of large enterprises directly increasing resources to service their existing customers. We said that before this trend is inspired by KANA customers, large companies that have thousands of Customer Service agents engaged in billions of interactions with millions of customers. This is conventional wisdom at this point. This month, Business Week proclaimed 25 companies in their article "Customer Service Champs for 2009", four KANA customers made that list; Jet Blue, Hewlett Packard, KeyBanc and GM/Cadillac.

With input from JD Powers & Associates, Business Week examined the latest trends in Customer Service. Among their findings, Customer Service spending is holding up despite the recession. The story highlighted Forrester Researchers finding that half of the large companies it recently surveyed are sustaining their customer loyalty budgets. The Forrester analysts quoted as saying "There's real resilience in spending."

The second item, better customer satisfaction means better financial performance. Business Week cited a University of Michigan study that showed if a Company's customer satisfaction score improved from year-over-year to a level above the national average, it shares typically out performed the broad Stock Market. And lastly, the let's get better and they focused on customer retention. Business Week found the gap is widening between customer satisfaction scores in those Company's at the top of their industries than those at the bottom. The top performers are treating their best customers better even if it means doing less to whoo new ones and their investing in technology to improve service.

The committment to improved Customer Service is the hallmark of a typical KANA customer. Once we get a customer's first license order we often expand the relationship with follow on orders. We actually tend to quadrupole that initial revenue over the subsequent three years. We know why this happens. Our customers achieve double digit increases in customer satisfaction, as well as an average of 20% reduction in call volumes. That convinces them to make follow on orders. That we saw from a number of our large customers in 2008, amongst them were Barclays, United Healthcare, the US Post Office, Best Buy, Com Hem, Aetna, ATT Mobile, Best Western, General Motors, Hutchinson 3G, Sprint, Verizon and Yahoo! It's just this kind of customer that our service experience Management rollout with IBM is designed to accommodate.

And now under the OEM agreement with IBM, KANA has completed the integration of IBM's service-oriented architecture foundation and DB2 database software into our core Service Experience Management solution that we will call KANA Service. KANA and IBM are providing salesforce alignment, technical integration and support to support reducing development costs and quicker time to value for joint customers. KANA and IBM have worked closely over the last year to combine the latest Customer Service capabilities from KANA with SOA and the information Management middlewear from IBM. And now we're bringing it to market together late in Q2 in a very big way.

Actually, of the nearly two dozen potential $1 million-plus deals in our pipeline, almost half of them are SEM and we haven't really begun lead generation and rollout yet. These large prospects are in a range of industries incidentally such as healthcare, insurance, telecommunications, retail, technology, Financial Services and the public sector. We're seeing a broad range of major opportunity in the $1 million-plus transaction size. By example a large communications Company, it's an existing user of our e-mail response Management system and is looking to increase usage to the entire enterprise and we're in discussions negotiations for an enterprise license.

A large retailer in the UK has been a loyal customer of KANA, our IQ and our response products for several years. They currently have 6,000 users deploying our technology and are looking to upgrade their service, their Customer Service offerings in the Next Generation. They really like our SEM offering and are planning on an implementation late this year. Also, IBM brought us into a Financial Services account in Canada. They are looking to solve a multi-channel service problem and KANA has the complete solution including secured messaging to satisfy their needs. They are currently evaluating either implementing our current response with secure messaging and IQ or going forward with our new SEM solution. We're scoping now those requirements to help recommend the proper direction.

So despite the economy there's a lot of reason for optimism. Half of the Fortune 100 are KANA customers and part of that market as Gartner sees a total growth of about $4 billion within three years. There's an increasing demand for integrated, scalable solutions and professional services and a delivery across channels whether it's e-mail, chat to call center or web service. KANA is meeting that demand.

So I'd like to now turn the call over to Mike to give you a more detailed look on our financials. Mike?

Thanks, Mike. Turning to the Income Statement, KANA's total revenue for Fiscal 2008 was $65.2 million representing an increase of 7.3% over the year ago period. Total revenue for the quarter ended December 31 was $13.6 million compared to $17.5 million in the year ago quarter. License revenue for Fiscal 2008 was $17.7 million compared to $18.1 million in Fiscal 2007. Service revenues for Fiscal 2008 was $47.5 million compared to $42.7 million in 2007. Service revenue was $10.9 million for the quarter ended December 31, 2008, compared to $12.4 million in the year ago quarter.

Looking at our business by geographic region, the US contributed 75% of total revenue in Fiscal 2008 and 71% in the quarter ended December 31st. This compares to 75% in Fiscal 2007 and 79% in the year ago quarter. License margins were 94% in Fiscal 2008, 92% in the quarter ended December 31st, 2008. This compares to 93% in the last Fiscal Year and 94% in the year ago quarter.

The following comments are using our non-GAAP measures. I will address the GAAP reconciliation after the non-GAAP operating results. Just to confirm, revenue is only reported on a GAAP basis.

Service margins for 2008 were 59% and 52% in the quarter ended December 31st, 2008 compared to 63% in 2007 and 60% in the year ago quarter. This decline for the year is attributed almost entirely to a higher growth rate of our professional services which is due to the acquisition of eVergance which was completed in the first half of 2007. In Fiscal 2008, Sales and Marketing expenses were $21.6 million compared to $24.4 million in the year ago period representing a decrease of 11%. For the quarter ended December 31st, Sales and Marketing expenses were $5.6 million compared to $5.8 million in the year ago quarter representing a decrease of 3%. As a percentage of revenue Sales and Marketing expenses represented 33% in Fiscal 2008 compared to 40% in 2007. 41% in the quarter ended December 31st, 2008 compared to 33% of revenue in the year ago quarter.

For Fiscal 2008, R&D expenses were $13.5 million compared to $12.3 million in 2007 which represents an increase of 10%. For the quarter ended December 31st, 2008, R&D expenses were $3.6 million compared to $2.7 million in the year ago quarter representing an increase of 33%. As a percentage of revenue, R&D expenses represented 21% in 2008 compared to 20% in 2007. 26% in the quarter in December 31st, 2008 compared to 15% of revenue in the year ago quarter. And these increases in R&D are attributable to the work that we're doing in conjunction with IBM on our new product offering.

For Fiscal 2008, G&A expenses were $9.7 compared to $10.6 million in 2007 representing a decrease of 9%. For the quarter ended December 31st, G&A expenses were $1.9 million compared to $2.4 million in the year ago quarter representing a decrease of 22%. As a percentage of revenue, G&A expenses represented 15% in 2008 compared to 17% in 2007. And 14% in the quarter ended December 31st, 2008, as well as in the year ago quarter.

The Company recorded non-GAAP operating profit of $55,000 for Fiscal 2008 compared to a non-GAAP operating loss of $3.4 million in 2007. The quarter ended December 31st, 2008, the Company reported non-GAAP operating loss of $1.8 million compared to non-GAAP operating income of $1.5 million. The Fourth Quarter of 2008 included reserve of approximately $800,000 for work performed for a customer during the year. We are still negotiating a final resolution. I would also like to point out that our current breakeven run rate is approximately $14.5 million.

There are three expense components that reconcile our non-GAAP to GAAP expenses. The first is stock based compensation. For 2008, stock based compensation was $2.2 million as compared to $2.9 million in 2007. The second is amortization of intangibles which is the result of our acquisition of eVergance and represented $500,000 for 2008 or $125,000 per quarter compared to $288,000 for 2007 which the bulk was $125,000 for each of the quarters Q3 and Q4 of 2007. And the last item is restructuring expenses. For Fiscal 2008 restructuring expenses were $582,000 compared to $567,000 in 2007. For 2008, KANA reported a GAAP net loss of $3.7 million compared to GAAP net loss of $8 million for 2007 representing an improvement of 46%. For the quarter ended December 31st, 2008, the Company reported a GAAP net loss of $2.6 million compared to a GAAP net income of $539,000 in the year ago quarter.

Turning to the Balance Sheet, unrestricted cash was approximately $7 million on December 31st, 2008, which was up from $4.3 million at December 31st, 2007 and $1.6 million at September 30, 2008. As Mike indicated, the Company generated $1.8 million in cash from operations during Q4 and we also borrowed $4 million under our Credit Facility with our bank. Accounts Receivable totaled $7.6 million at December 31st, 2008, compared to $10.2 million at December 31st, 2007. DSO's were 51 days at December 31st, 2008 and [54%] at December 31st, 2007. Headcount at December 31st, 2008, we had 229 full-time employees. This compares to 224 at December 31st, 2007.

Now I'll turn the call back over to Mike.

Thanks again, Mike. Once again, we expect our 2009 revenues to be at least even with 2008. And we expect both 8% non-GAAP operating income and cash positive cash from operations regardless of the macro environment we're facing. We don't expect a down year and we fully expect a profitable year. We expect terrific momentum this year with our new SEM offering in the second half of the year with our partnership with IBM. Again, we see this as a game changer for Customer Service.

And so now I'd like to turn the call over to the Operator for questions.

(Operator Instructions) Your first question comes from the line of Nathan Schneiderman with Roth Capital. You may proceed.

Hi thanks, Mike and Mike. This is actually Andrew Lee covering for Nathan Schneiderman .

Hello, Andrew.

Hi. Could you talk a little more about the deal dynamics in Q4 that lead you to fall short of guidance? Did deals just not come in? Did customers delay purchase orders? What were some of the dynamics you saw?

The answer would be yes meaning that both a combination of deals that we expected that got pushed out, the macro climate. And the time that it was taking in order to get transactions consummated with purchasing and procurement organizations within the companies we deal with. We feel very good about the fact that we really haven't lost many deals at all. It's really been a factor of the slowdown in the process of getting them signed and decided on. So it was, we certainly expected better but we have seen growth now in our pipeline going into 2009.

Okay, thank you. You commented that you noted that the number of seven figure deals in the pipeline continues to grow. Have you booked any significant transactions in Q1 and how does the deal environment look so far in Q1?

Well obviously we don't want to talk about Q1 at this point, particularly this point in the quarter, but as we mentioned we're seeing good a growth in our pipeline for 2009.

Okay, and would you be able to break out or split the maintenance revenue and professional services revenue from the quarter and for the year? I would have expected services to be up year on year particularly because of the eVergance acquisitions and the two big deals you guys booked in Q3, but it was slightly short of our expectations. Could you talk to the dynamics and why there was a decline in services revenue for the quarter?

Sure. Services revenue is obviously a reflection of license transactions for the most part. The work that we do outside of new deployments, other than on a strategic account level, amounts to just working with customers to upgrade. And the shortfall in license revenue where professional services is involved impacted the professional services revenue for the quarter. But we haven't historically broken out maintenance from our service line and I don't think we're in a position to do that yet.

Would you say that maintenance revenue declined quarter-over-quarter? Because I know last quarter you noted you were seeing a lot of pushback from customers in reducing the number of seats, reducing the level of service, and pushing back on the increase for the standard CPI on contract renewals. Are you still seeing same dynamics there?

The dynamics are the same; however, keep in mind that there is a significant difference between when we are able to invoice a customer and what impact that has on revenue. So we have historically enjoyed being able to invoice maintenance renewals between 30 and 60 days in advance of the actual commencement date. Now that has been delayed, so that by itself doesn't impact our revenue recognition because our revenue recognition is done ratably over the period that the renewal represents.

Now what does happen though is if we are late in getting a renewal signed and able to invoice, we're then able to go back and recognize the prorata revenue from the commencement date of that renewal period. So we will see some spottiness in both the, within a quarter, the revenue or the invoices that we're able to generate and the revenue that we're able to recognize. In answer to your question, maintenance revenue was actually higher in 2008 than 2007 and it was also higher in Q4 2008 than it was in Q4 of 2007 or Q3 of 2008.

I think the key thing to remember is that we continue to see strengthen our renewal maintenance base with our customers. We're not seeing any decrease in our renewal maintenance take up by our customer base now or in the foreseeable future.

Okay, thanks for that. That's very helpful. You talked about you expect cash flow from operations to be positive in 2008. Do you guys expect cash flow from operations to be positive in each quarter or I meant 2009 and do you expect non-GAAP operating profit in every quarter in 2009?

We're really as we said not going to give any guidance on this than the annual guidance that we have stipulated thus far. We feel very certain about the annual guidance for 2009.

Okay. One last question. To reach the 8% non-GAAP operating margin, what type of plans or future cost cuts do you guys plan to detail your cost structures to get to that level of operating margin?

So there's, I think that the results demonstrate what we've done in G&A expenses to date. We are also looking to reduce Marketing expenses year-over-year and the other thing is R&D expenses will overall decline in the back half of 2009.

Okay that's it for me. Thanks a lot.

(Operator Instructions) Your next question comes from the line of Ross DeMont with Midwood Capital. You may proceed.

Hi guys. Just a couple quick questions. Can you tell me about the underlying assumptions that go into your guidance of sales being flat for the year? I mean, are you assuming some kind of back half recovery there and I guess another way of saying it is what's another way of asking, what I'm asking is are you assuming that the first half of 2009 will be as good as the first half of 2008? Because that would seem hard for me given how bad the economy is.

Well, Ross as we stated, we're not giving guidance within quarters. But we are continuing to focus on operational efficiencies in the business and you will see that continue over the quarters --

I'm just trying to understand the model that you're using to get to a flat topline, what basic economic assumptions are you making? Is there a back half recovery for the economy built into that?

Well not a substantive economic change more that we have a new product coming out for the second half of the year, which we think will have an effect on our second half revenues.

Is it the release of the I think you called it the SEM offering which allows you to kind of make this number in the back half of the year? Is that what we're sort of banking on here?

Well, we think that the release of the new product also helps us with our existing technology. It offers an opportunity for us to broaden our market and look to the large set of particular existing clients we have with a broader set of capabilities. We don't believe it's going to slowdown our efforts for our current technology which continues to have good support in the marketplace.

Okay. And then just quickly, Mike Shannahan, do you anticipate having any kind of going concern language in your or issues with that in your 10-K?

Not at this time.

Okay, thank you both.

Your next question comes from the line of Steve Martin with Slater Capital. You may proceed.

Hi, guys. Mike in all fairness I'm really tired of hearing about the seven figure opportunities. Here we are, four days away from the end of the First Quarter and clearly since you're not willing to say anything about the First Quarter, it was probably a disappointment at the revenue line. So revenues keep going down and all we hear about is the great opportunities. That's point number one, I'd love a response. As to why you won't comment on the Q1 four days before it's over, I don't get. Sales and Marketing, with this level of revenue, I don't get why your Sales and Marketing expenses keep maintaining. Are you paying salespeople for not producing? Okay. That's number two.

And number three, your headcount is up from last years end on a nominal increase in revenue and clearly you're telling us you have an expectation that revenues are going to be flat and your headcount is up from last year. Where is the cost savings here? Where is some -- other than the G&A line, where is there some reflection of the current economic times? And you're addressing it other than this pie in the sky seven figure revenue deals that are always out there but never seem to get closed? And I've been a shareholder for a long time so I'd like some straight up answers not the [gobble gook] you always give us.

Well, we have seen some substantive decreases in some of our individual headcounts. Keeping in mind we had a substantive increase in our professional services revenue and professional services of course requires Human Resources added in order to meet that demand. So if you saw those specific numbers our professional services headcount is up whereas Sales and Marketing headcount as well as headcount in all other areas are down going into 2009. Where we are leaving us with virtually a flat overall headcount for the business.

We believe that we had a difficult period in the Fourth Quarter. We are still focused on our operating efficiencies and our ability to make those appropriate changes as we see them. We still expect to see a growth from our overall pipeline, not just from the large transactions that we mentioned. We're still seeing a lot of business opportunity coming from our existing customer base and that is helpful in growing our close rates.

But, Mike, your Sales and Marketing expense for the quarter was down a mere $250,000 on a $6 million quarter last year, despite the fact that your revenues were down $4 million. And you're telling me that your professional services headcount is up and the others are down, well if sales in that Marketing headcount is down, why is the quarterly run rate barely down?

That's where this issue with a ongoing customer, the reserve that we set up is recorded in Sales and Marketing expense.

All in the Fourth Quarter?

Yes, all in the Fourth Quarter.

So you're saying that the Fourth Quarter Sales and Marketing expense would have been $4.9 million, but for that reserve?

Yes.

Okay who is the customer?

Well we're in negotiation. I can't really get into who it is we're talking about. It's an ongoing customer and we're trying to resolve something. So we felt the best thing to do was to provide the reserve and if we're able to resolve it, we'll realize the impact once the situation is done . I can't go into who

Okay and you're unwillingness to comment on First Quarter revenues despite the fact that the quarter is over?

We're a software Company and the quarter is not over until the 31st.

Well, I got to tell you, this is been one of the major disappointments in my career. And Mike, hearing you talk about all of these great opportunities and watching the sales line is just amazing. I don't know how you think, maybe you're fooling yourself but it's appalling that you get up there and wax about these opportunities I've been hearing about for a year and the revenues are doing what they and the revenues are doing what they are doing.

Okay.

Your next question comes from the line of Michael Huang with ThinkEquity. You may proceed.

Thank you just a couple of quick ones here. So, Mike for the deals that did not get done in Q4, I mean obviously we all understand economic headwinds but if you could give us some more color around were they around, were they more with existing customers, were they more with new customers? And do these deals ultimately get done later on this year? Do they get pushed out to next, or do they go to competition who perhaps can offer a lower cost solution as a stop gap measure for the interim? And if you could just give any color around that, that would be helpful.

I'd say it was a mixture, Mike, of both existing customers and new customers. I think that the issue hasn't been competitive losses or companies scaling down and the kind of capabilities they are looking for. It's been more about the getting a real clear understanding of the ROI that they would receive from the implementation of the technology. We've been doing we think a better job at helping customers to define that ROI with a number of new services that we offer. And we feel very confident that we will see a number of these things come back for us here in the first half of the year.

I mean have you seen any of the deals that got pushed out of Q4 already get done in Q1 or would you imagine that we need to see some sort of economic improvement before we actually can close these?

Again, I think the answer is yes to both questions. I mean we've seen some happen that we expected and we also expect that the economic, as the economic environment improves and as the ROI justification improves that we'll see these things close at a faster rate.

Now, so just to kind of talk about from a product standpoint. When you look at your ability to be able to sell into the install base and you have a breadth of product now can you talk about where you're seeing most action right now? Is it in knowledge base, is it in chat, is it somewhere else? And then if you could just comment on this we've been hearing that perhaps there's organizations who are trying to move a little bit away from e-mail because of the latency in response and perhaps the ongoing communications that doesn't really resolve the customer issue quickly and perhaps that moves it to chat or something else. And do you see that as well and how does that impact your install base of e-mail customers?

Well, actually, our install base of e-mail customers still is very strong. We have a great renewal rates out of our renewal maintenance base and we have add-on seats in environments that they are adding. It's interesting particularly with large complex organizations, the e-mail channel is still a very viable channel. Now, they are at the same time of course looking at other channels. But but I'd say the vast majority of our e-mail customers still believe this is a value channel for them and they aren't scaling back its utilization and in most cases are looking to add seats and are looking to us for some new capabilities that we have been bringing to market.

But what we are seeing now is the growth in our traditional multi-channel setting of the knowledge Management opportunities we're seeing more of those. And of the seven figure transactions that we've talked about virtually half of them I think I mentioned are for our new SEM technology. And we really haven't started any Marketing efforts around it. So we see that as being the significant growth opportunity for us going in the second half of the year.

Okay. And then in terms of -- I'm not sure if you guys have had a sales kickoff event yet. I would imagine you have. Could you talk about and I think you alluded to wrapping some tighter ROI around your sales messaging, but can you talk about what are the biggest incremental changes to the way that you go to market this year in the face of this economic environment versus what you were doing last year?

A lot of focus and pre-planning around the opportunities that we work on ensuring that the client, prospective client that we're talking to really can justify this particular opportunity. We meet consistently on these transactions to ensure that we are positioning not only our technology properly but the return on investment properly with the customer. And ensuring that the customer has an appropriate budget focus and knows how they will be able to get this transaction done if in fact we earn the business. So I think the biggest change that we've been making is the pre-planning effort around the business opportunities we see. So we don't spend a few months working on something and then find out that the budget or the way it's going to be paid for really hasn't been defined by the client. So that would be our biggest thing so we're getting, looking to get more productivity through that focus with the salesforce.

The other thing that we're doing is in a lot of occasions we are leading with our professional services capability. That has proven to be successful for us in a number of cases where we can offer a number through our eVergance group a number of strategic service and best practice services with a client. Or strategic alignment services where the client really understands how this would work for them. We charge for those things and that then helps establish our credibility more with particularly large enterprise customers.

Okay and then in terms of the product cycle that kicks off in the second half of the year, how does that impact your ability to go after new customers? Does that change at all deal sizes or your thoughts around that?

I'm sorry, Michael in terms of what?

I think that the average deal size will certainly be higher. The SEM product is a totally integrated application starting at the desktop. And today we have a separate product contact center which of the three of our major product offerings generates the least amount of revenue. And so we introduced SEM starting with select accounts at our users conference in October and have continued to pursue discussions with them talking about proof of concepts, etc. So I think that we will see our average deal size increase with this product.

And then just with respect to new customers versus existing customers is this primarily a mind the existing customers first and get them to integrate desktop?

Well I think we're actually working on both right now. I think as Mike lead in in his comments IBM has introduced us into one of their accounts with this product and then we have a couple of others that we had been talking to and now with this product offering we're able to get in and dive a little deeper.

Okay. And then in terms of the sales guys and how trained they are on this product, is that completely, are they completely through that or does that happen through '09 or where are we?

Well, it will most certainly continue throughout the year but we had some pretty intensive training earlier in the quarter to start the appropriate messaging. So and we have certain members of the salesforce who are specialists in this new product, that will also help us to generate these new markets that we're after.

Last question for you so salesforce.com is certainly making some noise in the service and support space and they've noted or they've announced some integrations with Twitter and Facebook and Google. Do you have any comments on whether or not those are things that make a difference to the type of customers that you go after? And do you see them as, are you factoring them in as a potential stronger source of competition as we exit '09?

Well I would not suggest at all that salesforce.com isn't a formidable competitor in any markets they choose to enter. But I do believe that when it comes to the enterprise side of this equation we have some strengths that should allow us to continue to be very competitive. We also recognize this whole area of salesforce networking and as we begin to rollout our new technology we're looking for ways of incorporating that within our product line. We think that having salesforce in the market frankly is helpful to some extent to mean it's having others swimming in this ocean we think is beneficial to the client base truly understanding the value proposition and then it's our job to convince them that we have the best solution.

Okay, great. Thank you.

(Operator Instructions).

That's good. Let's just wrap it up.

Thank you, sir. There are no questions.

All right, and thanks, everybody.

Thank you very much.

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