SWK Holdings Corp (SWKH) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 financial conference call. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the ends of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Mike Fields, Chairman and Chief Executive Officer. Please proceed.

Thank you operator, and thank you, everyone, who's joining us today. Before I begin I'd like to introduce a colleague who is greatly admired and respected here at Kana and throughout our industry. As most of you know Jay Jones very recently became interim Chief Financial Officer as we consolidated the Company's finance and operations under his leadership. Jay has succeeded Mike Shannahan who is retired and whom we wish well.

For two years Jay has done a terrific job as our Chief Administrative Officer. He's already in charge of business operations, human resources, information technology and legal. So consolidating finance under Jay is perfectly logical. Jay has been in charge of finance in public companies before. At Veritas Jay served as Senior Vice President of Operations, Chief Information Officer and Chief Administrative Officer. A role he held at Open Vision prior to the Company's merger with Veritas. During his tenure at Veritas Jay led the Company's operations and administration as the Company grew from $80 million to over $2 billion in annual sales by the time it was acquired by Symantec in 2005. Jay is a natural for the job and we are very fortunate to have an executive of his level and talent available to us.

I'd also like to add a good word about another esteemed colleague who has joined us here today, Bill Feichtman, our highly regarded Vice President of Finance. Bill is a CPA who has been with us for three years and he has assumed the added role of Chief Accounting Officer. Bill came to us from Go Remote, Internet communications, where he served as Vice President, Corporate Controller. Between Jay and Bill Kana has a very strong team to head up our finance and operations throughout the Company. With that I'd like to turn it over to Jay for the obligatory introduction to our earnings call.

Thank you, Mike, and welcome everyone, 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 use the non-GAAP measures indicated in the table in our press release which includes 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 statement 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 will be making forward-looking statements regarding anticipated events and the future performances of Kana including statements regarding our expected revenues, margins, expenses, profitability, cash and cash flow as well as our expected growth, relationships with 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 statement 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 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-K.

The forward-looking statements for this call address our view of the situation today, May 28, 2009, and no one should assume that the comments we provide today will still be valid later in the quarter. Now I will turn the call over to Mike Fields, Kana's CEO.

Thanks, Jay, and thanks again everyone, for joining us this afternoon. I'd like to start with the fact that the first quarter of 2009 for Kana was weak. It was weak for the world. It was weak for our industry and it was weak for Kana. So let's quickly review the results and then I'd like to point to some glimmers of light that we frankly have not previously highlighted and then be want to talk about our goals and path to profitability and growth for this Company in a difficult economy.

Kana's total revenues for the first quarter of 2009 were $10.9 million, compared to $18.3 million in the same period for 2008. Maintenance revenue was $6.6 million compared to $7.4 million in the year ago quarter. Service revenue was $3.1 million and license revenue was $1.2 million; compared to $5.2 million, and $5.7 million respectively in a year ago quarter. I'll let Jay go through the Q1 numbers in detail in a few minutes but I'd like two provide just a few data points that we believe are important for shareholders to focus on. We also believe that they are central to our planned profitability and growth.

Let's start with our maintenance revenue which is not something we've always put under a bright light but maintenance is a particularly sturdy leg of the stool for Kana. It has historically been resilient and relatively predictable. In the first quarter of 2009 maintenance was $6.6 million compared to $7.4 million in the first quarter of '08. This was not a great quarter by any means. However, foreign exchange differences and lower license revenue negatively affected maintenance revenue. But maintenance is historically consistent performer that gives stability to our revenue base.

Second is cost structure. Kana will continue to make substantial improvements to its cost structure in 2009 with the plan to achieve a 25% reduction in non-GAAP operating expenses over 2008. We are demonstrate ago cost run rate that makes profitability attainable in each period from Q2 through Q4. Third is non-GAAP operating income. While Q1 shows a loss our goal is to record positive non-GAAP operating income in each of the three remaining quarters of 2009 and to record 10% non-GAAP operating income for the year as a whole. We can achieve this double-digit level largely because of our historically consistent maintenance revenue and our tighter cost structure. Again, Q1 was weak, for the world, for the industry and for Kana. We can't do much to strengthen the world or the industry but we are strengthening Kana. Kana has three broad objectives for the rest of 2009, showing profitability in each of the remaining quarters, maximizing the mid year launch of our game changing product with IBM and positioning ourselves to substantial profitability and growth from recovery when the global economy recovers. We believe that we are on track for all three.

The historical consistency and strength of our maintenance revenue combined with the leaner cost structure allows Kana to target significant profitability even with this downturn. As a result of our sharpened focus on our initiative with IBM and our cost reduction program the second, in the second quarter of 2009 we expect non-GAAP income -- non-GAAP -- excuse me, we expect positive non-GAAP operating income and revenue of $12.5 million to $14 million. Additionally we expect non-GAAP operating income of greater than 10% of revenue for 2009 as a whole. Combined with the renewed banking relationship we announced today with our bank these actions position Kana to emerge strongly from the recession towards sustainable profitability growth and market leadership.

This blueprint, combined -- as we said previously it's tough out there for everybody. That's the bad news. In customer service it's the good news too. In this economy large enterprises are increasingly focused on retaining their existing customers. That means multichannel customer service. Kana continues to maintain its pipeline of seven figure opportunities, perhaps as many as 20 more of them. Purchasing departments are beginning to stir again. We are not ready to say that they are coming out of hibernation yet but we are cautiously optimistic about the latter part of 2009. Gartner still is sees our market totaling $4 billion in three years and our customers are still asking for integrated scalable solutions and professional services. They are still asking for multichannel delivery of e-mail, chat, call centers and web self service systems. We know this because we are adding to our pipeline. We are not saying that we are not going to convert -- we are not saying we are going to convert them right away but none of our existing prospects are pulling the plug on large customer service initiatives.

Even with a tough first quarter we brought in business from a very good customer with big names like Credit Suisse, First Boston, DSP Systems, (inaudible) Group, Reliable France, reliable France SAS, Value Team, Barclays, Cap Gemini U.K., and PNC Financial Group. So there are signs of spring both Kana and IBM think so at least. Nearly half of those 20 odd $1 million plus deals are for our new Service Experience Management product. The existing and perspective customers run the gamut of industries from retail, technology, telecommunications, healthcare insurance, financial services and the public sector. So we are confident about our plans for 2009 and the growth opportunities that we see in the business. But we plan to do this with strong focus on cost management, strong focus on ensuring that we meet profitability objectives as well as growing the top line of the business. I'd like to turn this to Jay Jones for a more detailed look at the financials. Jay?

Thanks, Mike. Turning to the income statement, Kana's total revenue for the quarter ended March 31, 2009, was $10.9 million compared to $18.3 million in the year ago quarter representing a decrease of 40%. License revenue for the first quarter of 2009 was $1.2 million compared to $5.7 million in the first quarter of 2008, maintenance revenue was $6.6 million in the first quarter of 2009 compared to $7.4 million in the year ago quarter. Services revenue for the first quarter of 2009 was $3.1 million compared to $5.2 million in first quarter of 2008.

Looking at our business by geographic region the U.S. contributed 71% of total revenue in the first quarter of 2009, compared to 78% in the year ago quarter. License margins were 84% in the first quarter of 2009 compared to 93% in the year ago quarter.

The following comments are using non-GAAP measurements. I will address the GAAP reconciliation after the non-GAAP operating results. Just to confirm revenue is only reported on a GAAP basis. Maintenance margins are 85% in the quarter ended March 31, 2009, compared to 89% in the year ago quarter. Services margin were a negative 10% in the quarter ended March 31, 2009, compared to 13% in the year ago quarter. For the quarter ended March 31, 2009, sales and marketing expenses were $2.9 million compared to $6.1 million in the year ago quarter; representing a decrease of 52%. As a percentage of revenues sales and marketing represented 27% in the first quarter of 2009 compared to 33% in the year ago quarter.

For the quarter ended March 31, 2009, R&D expenses were $3.6 million compared to $3.3 million in the year ago quarter representing an increase of 11%. As a percentage of revenue R&D expenses represented 33% in the quarter ended March 31, 2009, compared to 18% of revenue in the year ago quarter. For the quarter ended March 31, 2009, G&A expenses were $2.4 million compared to 3 million in the year ago quarter, representing a decrease of 18%. As a percentage of revenue G&A expenses represented 22% in the quarter ended March 31, 2009, compared to 16% in the year ago quarter. For the quarter ended March 31, 2009, the Company reported non-GAAP operating loss of $2.6 million compared to a non-GAAP operating income of $254,000 in the year ago quarter.

There are three expense components that reconcile non-GAAP to GAAP expenses. The first is stock-based compensation. For the first quarter of 2009 stock-based compensation was $434,000 compared to $561,000 in 2008. The second is amortization of intangibles which is the result of our acquisitions of eVergance, $125,000 for the quarter ended March 31, 2009, and 2008. The last item is restructuring expenses. During the first quarter of 2009, there was no restructuring expenses compared to a recovery of $482,000 recorded during the prior year quarter. For the quarter ended March 31, 2009, the Company reported a GAAP net loss of $3.3 million compared to GAAP net loss of $79,000 in the year ago quarter.

Turning to the balance sheet, unrestricted cash was approximately $2.5 million in March, on March 31, 2009, which was down from $7 million on December 31, 2008. The Company used $444,000 in cash from operations during Q1 and repaid $3.4 million under our credit facility with our bank. Accounts receivable totaled $6.4 million at March 31, 2009, compared to $7.6 million at December 31, 2008, DSOs were 53 days at March 31, 2009, and 51 days at December 31, 2008. Moving to head count, at March 31, 2009, the Company had 229 full-time employees. That was unchanged for December 31, 2008. Now I'll turn the call back over to Mike.

Jay, thank you. So as a quick recap the first quarter was a tough quarter for us. We believe we put ourselves on the road towards profitability with the cost changes that we've made and the new technology we are bringing to the market in the second half of the year. However, we have also positioned ourselves to ensure that we can operate effectively even at a very low level of a new license revenue. So as we look to the fact that we've reduced costs in our planning for -- by an overall 25% year over year, and reduced our potential exposure from a profitability standpoint or reduced to increase our capability to be profitable for the year sure to put us in good stead to sustain the corporation and grow the corporation in 2009 leading to a more significant future for the business. So we thank you for your time and attention today and I will now turn the call over to the operator for questions.

(Operator Instructions) Your first question comes from the line of Ross Seymour with Midwood Capital.

Hi, guys. Jay, not to throw you into the fire here but wanted to know, we've been trying to divine from your filings how many quarters you guys have been in covenant violation. Can you take me through the last three quarters, let me know in which quarters you violated your covenants and where you stand now?

Well, you are throwing me into the fire here. I am going to ask for a little hill from Bill because he's more familiar with the history on this.

Hi, this is Bill Feichtman. I think if you look back in our K and the Q that we just filed there is the bank amendment that specifically that address your questions but in general at the end of November and December we are out of covenant. Again in Q1 and through April we were out of covenant. Today based on a new amendment that we signed yesterday we are back in covenant and we've actually adjusted the covenant as we move forward based on our 2009 operating plan so we believe we are in good stead as we go forward.

Am I to understand that to get back in compliance with the covenants that it basically stipulates you need to go out and raise money? Mike, this is something we sort of pounded the table with you guys on the last couple of quarters and you said, we are not going to need to raise money, we are not going to need to raise money and now find ourselves needing to go raise money, I guess we need to anticipate you guys being on the road here in the next few weeks looking to raise a few million bucks?

Yes, there is a covenant in the modified arrangement that we will need to raise some capital, approximately $2 million.

But, we have no -- we were very sure we are able to raise that capital as debt financing. We have no intention of looking to raise capital.

Final question just a point of confusion for me, I think at the end of your fiscal fourth quarter, with just sort of four days left you guys did a call, I asked I think you, Mike, or maybe Mike Shannahan whether or not you expected problems with going concern language, you only had four days left in the quarter, now we find that you had going concern language, can you help me understand what transpired in those four days such that that was a change there?

It was, I think during the entire process of working with, working through everything with the auditors their final position at the time we issued the K was to define a going concern. I suspect at the time the statement was made there was a perspective we wouldn't have to worry about that but it ended up shortly thereafter that we did.

Okay. I'll open it up to other people. Thank you.

Thank you.

Your next question comes from the line of Steven Martin with Slater Capital Management. Please proceed.

Mike, I've railed on you guys a couple times before and I'm going to do it again. You're talking about revenues down 40% and you've managed to reduce your G&A 19%. Your research and development is up. Your gross margins are down. And you're talking -- are you dreaming? You're talking about being profitable? All you're doing is taking the equity value that those of us put money behind you invested and just flushing it down the toilet. When is your Board, when are you and your Board going to wake up and do what you can do to salvage some value here? Because you guys are all, your lack of disclosure and your conduct and your allowing Night Watch to run everything, Boards are not openly protected from litigation and there is, there are a number of us who are fed up. There is just no way you are ever going to get profitable and restore equity value. So the best thing you can do is sell the Company and put us out of your misery. How are you going to get profitable when you can't reduce your expenses?

Steve, I believe we've -- we have and we are continuing to make changes to our cost base that will move us to profitability. I can assure you the Board of Directors of this Company and myself take our fiduciary responsibility very seriously and we are doing everything possible in order to, in order to ensure and protect shareholder value as best we can. Thank you very much. Any other?

Thank you very much. We appreciate everybody on the call today and we are going to get back to work and focus on the continuation of our operating plans and also our business plans in the marketplace. We plan to be very shortly in the next couple of months release our new technology and we think that will have a great effect on our business going forward. Thank you all for your time and attention today.

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