SWK Holdings Corp (SWKH) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter Kana Software Earnings Conference Call. My name is Shanise (ph) and I will be your coordinator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jay Jones, Chief Financial Officer. Please proceed, sir.

Thank you 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 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 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 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 relationship 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 statements as a result of a number of factors, including risk 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 prospective 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 of this call address our view of the situation today, July 29, 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.

Well, thanks Jay, and again thanks to everyone for joining us this afternoon. Let's see, material reductions in cost, non-GAAP operating profitability, positive net operating cash flow, increased cash, and a successful introduction of Kana 10. These are the hallmarks of our second quarter. I'd like to start with the first one, the topic of material cost reductions. It certainly deserves a bit of discussion and it's certainly a topic of serious interest to everyone.

Kana is on track to reduce costs by at least $16 million from our 2008 levels. Our minimal goal is a 25% reduction in costs overall. Now, that's a sizeable cut. That's a big factor in why we're profitable in the current economic client. Clearly, we're a leader company. We have fewer people than we did last year. We've made substantial cuts in nearly every department. We're spending less on pretty much everything, but here's an important point, we've made these cuts without diminishing the level of investment in either research and development or customer support.

Not one headcount reduction has taken place in either one of those organizations. R&D and customer support are fairly sacrosanct. That's because they're pretty good investments needless to day. R&D has given us Kana 10. Customer support has given us a 90% plus customer loyalty. The entire package deserves and gives us the platform for growth and sustainable profitability.

Now, let's take a look at the next two hallmarks of the second quarter, non-GAAP operating profitability, and positive net operating cash flow. By sustaining strong renewal maintenance revenue within a significantly lower operational cost structure, Kana succeeded in achieving non-GAAP profitability in the second quarter, even though a handful of new business opportunities were delayed, causing our overall revenue to come in slightly below the lower end of our guidance. Excellent early traction for Kana 10 is typified by the selection by Priceline and raises our confidence in maintaining profitability and growing the business in each of the two remaining quarters of this year.

And now we come to one of my favorite hallmarks of Q2, an increase in cash. We're generating cash from operations in the second quarter and we expect to do so again in the third quarter and in the fourth quarter. We believe that our continued ability to generate cash along with our recently announced term share for $1 million in subordinated debt financing should be sufficient for our current working capital needs. The financing, as we reported previously as part of the recently extended loan and security agreement between Kana and Bridge Bank, and we are really grateful that our bank has demonstrated confidence in us.

Priceline has also demonstrated confidence in us as evidenced by the fact that they selected our new Kana 10 product in the second quarter even before we rolled it out. IBM certainly has confidence in us and the growth prospects for Kana 10 and the introduction, which is remaining a major hallmark for Q2. Kana 10 gives customer service executives unprecedented control over the end-to-end service experience, allowing them to make changes in minutes not months. We rolled it out on time and at a time that large customer intensive companies are focused on serving and retaining their customers. We've had great expectations for Kana 10.

There a few other expressions of confidence worth noting. The reviews are in for Kana 10 and here are just a few of them, all direct quotes. Forrester Research says, it's the right product, it's the only way to effectively deliver customer service across multiple platforms. Inside CRM Magazine says, no longer do you have to suffer through a bad set of service processes while waiting for IT to get your project, and more importantly, no longer will customers have to suffer because of your company's internal inefficiencies in process management. Those are pretty good reviews and pretty great expressions of confidence in Kana.

Here's one more for good measure and this one's from John Ragsdale from SSPA. With tech-spending rebounding and Wall Street saying the tech sector is bouncing back long before other industries, it's a great time to launch a new platform, especially one that promises lower ownership cost and much easier integration because of it's pure Web 2.0 platform, as well as IBM's reputation for scalability, which is critical since Kana has many high volume contact center customers.

We absolutely agree with John and the others. We've said before that purchasing departments are becoming more active. These and other large enterprises are increasingly focused on retaining their existing customers in this economy. That means multichannel customer service, email, chat, call centers, and web cell service. We see this in our own pipeline and we see it from customers who have maintained their large customer service initiatives in a customer intensive industry.

Now, that's not to say that there are not challenges ahead. The global economy is still what it is and we continue to implement improvements to our operations. There's a lot more work to do and we're doing it. An example of our continued improvement is this week's announcement of the formation of Kana Global Consulting Services, a new business unit charged with providing strategic business consulting, expertise in industry specific business process, and the delivery of new technology solutions critical to helping major corporations deliver superior service experience for their customers.

We are fully merging eVergance, our management consulting services subsidiary into Kana under the Kana Global Consulting Services flag. This will streamline operations and better align ourselves with our strategic business services. Indeed, we have marked a pivotal advancement in Kana's transition to growth and sustained profitability. We're focused on market leadership and multichannel customer service and we are confident there are more positive milestones to come.

We're confident that we have substantial demand for our products, particularly the game changing Kana 10. We're confident that we've right sized our cost structure to ensure continued profitability regardless of how the global economy affects our revenues and we're confident that we provided enough resources on the balance sheet, not just because of our pending debt financing but also because of the added cash we're now generating from operations.

Now, I'd like to turn to Jay for a more detailed look at the financials.

Thanks, Mike. Turning to the income statement, Kana's total revenue for the quarter ended June 30, 2009 was $11.9 million compared to $10.9 million in the first quarter of 2009 and compared to $16.7 million in the second quarter of 2008, representing an increase of 9% and a decrease of 28% respectively. Licensed revenue for the second quarter of 2009 was $1.5 million compared to $1.2 million in the first quarter of 2009 and compared to $4 million in the second quarter of 2008. Maintenance revenue was $7.1 million in the second quarter of 2009 compared to $6.6 million in the first quarter of 2009 and compared to $7.6 million in the year ago quarter. Services revenue for the second quarter of 2009 was $3.3 million compared to $3.1 million in the first quarter of 2009 and compared to $5.1 million in the second quarter of 2008.

Looking at our business by geographic region, the US contributed 81% of total revenue in the second quarter of 2009 compared to 71% in the first quarter of 2009 and compared to 74% in the second quarter of 2008. Licensed margins were 88% in the second quarter of 2009 compared to 84% in the first quarter of 2009 and compared to 96% in the second quarter of 2008.

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 were 88% in the quarter ended June 30, 2009 compared to 85% in the first quarter of 2009 and compared to 91% in the second quarter of 2008. Services margins were 19% in the quarter ended June 30, 2009 compared to a negative margin of 10% in the first quarter of 2009 and compared to 10% in the second quarter of 2008.

For the quarter ended June 30, 2009, sales and marketing expenses were $2.1 million compared to $2.9 million in the first quarter of 2009 and compared to $4.9 million in the year ago quarter, representing a decrease of 26% and 56% respectively. As a percentage of revenue, sales and marketing represented 18% in the second quarter of 2009 compared to 27% in the first quarter of 2009 and compared to 29% in the second quarter of 2008. For the quarter ended June 30, 2009, R&D expenses were $3.3 million compared to $3.6 million in the first quarter of 2009 and compared to $3.3 million in the second quarter of 2008. As a percentage of revenue, R&D expenses represented 28% in the quarter ended June 30, 2009 compared to 33% in the first quarter of 2009 and compared to 20% of revenue in the second quarter of 2008.

For the quarter ended June 30, 2009, G&A expenses were $2 million compared to $2.4 million in the first quarter of 2009 and compared to $2.4 million in the second quarter of 2008, representing a decrease of 19% for both periods. As a percentage of revenue, G&A expenses represented 17% in the quarter ended June 30, 2009 compared to 22% in the first quarter of 2009 and compared to 15% in the year ago quarter. For the quarter ended June 30, 2009, the Company reported non-GAAP operating income of $703,000 compared to non-GAAP operating loss of $2.7 million in the first quarter of 2009 and compared to a non-GAAP operating income of $549,000 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 second quarter of 2009, stock-based compensation was $380,000 compared to $434,000 in the first quarter of 2009 and compared to $561,000 in the second quarter of 2008. The second is amortization of intangibles, which is the result of our acquisition of eVergance. Amortization of intangibles was $125,000 for the quarters ended June 30, 2008, March 31, 2009, and June 30, 2009.

The last item is restructuring expenses. Going to second quarter of 2009, there was $805,000 of restructuring expenses compared to no restructuring expenses recorded during the first quarter of 2009 or the second quarter of 2008. For the quarter ended June 30, 2009, the Company reported a GAAP net loss of $607,000 compared to a GAAP net loss of $3.3 million in the first quarter of 2009 and compared to GAAP net loss of $137,000 in the year ago quarter.

Turning to the balance sheet, unrestricted cash was approximately $2.9 million on June 30, 2009, which was up from $2.5 million on March 31, 2009 and down from $7 million at December 31, 2008. The Company generated $38,000 in positive net cash from operating activities during the quarter. Accounts receivables total $6 million at June 30, 2009 compared to $7.6 million at December 31, 2008. BSOs were 46 days at June 30, 2009 and 51 days at December 31, 2008. Moving to headcount, at June 30, 2009 the Company had 198 full-time employees, down from 229 full-time employees at December 31, 2008.

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

Thank you, Jay. So just to recap quickly, Kana's second quarter was highlighted by non-GAAP profitability, positive net operating cash flow, increased cash, and an immediate success for Kana 10. We are confident that we've transitioned the Company to the point where we're expecting continued profitability in each of the two remaining quarters for 2009. We are energized about our markets, our products, our people, and our Company. We are also very excited by our prospects for growth and sustained profitability. We are expecting revenues in $12 million to $13.5 million and non-GAAP operating profitability in the third quarter of 2009.

Now that the first half is behind us, we expected non-GAAP operating profitability in both the third and fourth quarters. We are revising our expectations for non-GAAP operating profitability for the year to 6% from our previous 10%. However, we expect Q4 to be a non-GAAP operating profitability of 10% or greater.

Now, I'd like to turn the call over to the operator for questions. Operator?

Thank you. (Operator Instructions) There are no questions in the queue at this time.

Well, thank you, everyone, for listening today. We'll get back to work and I look forward to talking to you again. Thank you.

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