Callidus Software, Inc., Q3 2008 Earnings Call Transcript

Oct.28.08 | About: Callidus Software, (CALD)

Callidus Software, Inc. (NASDAQ:CALD)

Q3 2008 Earnings Call

October 28, 2008 4:30 pm ET

Executives

Ronald J. Fior – Senior Vice President of Finance and Operations, Chief Financial Officer

Leslie J. Stretch – President, Chief Executive Officer

Analysts

Chad Bennett Northland Securities

Ariel Sokol – Wedbush Morgan Securities, Inc.

Brandon Chan – Piper Jaffray & Co.

Kevin Liu – B. Riley & Co.

Ted Ketterer – TK Associates

[Greg Spiker – Moss Creek]

[Brian Kowalchek – Pantera Capital Management]

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Callidus Software earnings conference call. (Operator instructions) I will now turn the presentation over to your host for today's call, Mr. Ron Fior, Chief Financial Officer. Please proceed.

Ronald J. Fior

Thank you. Welcome to Callidus Software's third quarter 2008 conference call. With me on the call today is Leslie Stretch, President and CEO of Callidus Software. Shortly after the market closed today, Callidus issued financial results for the third quarter of 2008. The press release was posted on the wire and is available on our website at callidussoftware.com.

We would like to remind you that during the course of this conference call, we will make forward-looking statements, including predictions and estimates. Those statements, including statements regarding future revenues, on-demand bookings, DSOs, expenses, sales and marketing expectations, strategies, product development, strategic partnerships involve a number of risks and uncertainties.

Actual results may differ materially from any future performance suggested in our forward-looking statements. We refer you to the company's Form 10-K for the year 2007 and Form 10-Q for the second quarter of 2008 on file with the SEC for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. We expressly disclaim any obligation to update this forward-looking information.

On today's call, Leslie will begin with comments about our overall business and financial results, and then I will discuss the financials in greater detail. We'll conclude with a question-and-answer session. With that said, I'll turn things over to Leslie.

Leslie J. Stretch

Thank you, Ron. I’m going to focus on three things on today's call and they are, number one our Q3 2008 financial highlights, number two, our Q3 customer wins and number three, our outlook and focus on recurring revenues and profitability.

Let me start with the Q3 2008 financial highlights. I am pleased with our performance in Q3. We achieved non-GAAP profitability and had strong quarterly revenues in a most challenging economy in recent history.

Total revenues were $28.3 million and we generated non-GAAP operating profits of $1.1 million, which excludes stock-based compensation and amortization of intangible assets. We continue to make strong progress in our transformation to a recurring revenue business.

Subscription and support revenues were $10.9 million, recurring revenues up 83% over the third quarter of 2007. These recurring revenues were a significant contributor to our total financial performance. The net yield (ph 00:08:14) annual contract value of on-demand bookings for the third quarter was $1.4 million. We now have 59 customers generating cumulative annual contract value of $24.8 million and accounting for over 73,000 payees.

The gross margins on our Callidus on-demand subscription revenues were 44% in the third quarter. Just one year ago, our on-demand gross margins were negative 65%.

We continue to see a mix of how companies want to deploy our solutions. I believe it is a competitive differentiator and a strength for Callidus to offer our solutions via multiple deployment vehicles in the current market. Some customers prefer on-demand just for technical operations while others prefer on-demand with many of the business operations outsourced to Callidus. Finally, some companies want to run our products on premises, set (ph 00:09:08) a solid quarter in our own premised business with license revenues coming in at $6.8 million.

Services and other revenues for the third quarter were $10.6 million, down 20% from the third quarter of 2007. Our services revenues are lower for several reasons including a faster than expected shift towards shorter on-demand implementations and an increase in partner-led projects, these are good things. We're very focused on the gross margin contribution from services.

Fundamentally believe that a prudent expense structure and a consistent profitability profile should be permanent features of our business. I'm pleased with the progress we've made on both fronts and we will intensify the focus on these areas especially given the current macro-economic situation.

Non-GAAP operating expenses, which excludes stock-based compensation, were $13.5 million for the third quarter. This was down 500,000 compared to the third quarter of 2007. Our GAAP net loss for the quarter was $1.4 million or negative $0.05 a share compared to a GAAP net loss of $4 million or negative $0.14 a share for the third quarter 2007.

On a GAAP basis, we made $2.6 million of forward progress on the net income line. Cash and investments totaled $45.7 million at September 30, 2008, and I'm pleased that we maintained a solid cash position and we have no debt.

Let me turn to some Q3 customer wins and some other business highlights. In addition to our strong market position in the large 2,000 plus payee end of the market, our on-demand business has enabled us to successfully compete in the mid-market defined as 200 to 2,000 payees. With several competitive wins in this segment in the third quarter, we closed on-demand business with companies such us Xerox, T-Mobile, ReThink, JM Family and then Telos (ph 00:11:03). We also had multiple conversion deals in which existing Callidus on-premises customers converted to our on-demand service. Conversion deals included KeyBank and ADP.

Our on-demand customers represent a variety of company sizes and industries, including insurance, pharmaceuticals, banking, communications and media, and high tech. We believe we're the unequivocal leader in the sales performance management on-demand space, larger and growing faster than any of our competitors.

Turning to our on-premises business, we had some significant wins in the third quarter. We closed business with companies such as Comcast (ph 00:11:43), Telos and Genentech. We also fulfilled our revenue recognition requirements with Computer Associates and Vivo in Brazil, deals that were booked at the end of Q2.

We believe that incentives are always critical, but during a financial crisis, incentives are more important than ever and the consequences of insufficient incentive management are punitive to companies large and small. The continued attraction of such brands to Callidus proves that our customers recognize that we address mission critical business problems.

Looking at other business highlights in the quarter, I believe that we continue to execute against a very ambitious product road map that we're very proud of. We launched Callidus Plan Communicator, our first product built on top of salesforce.com's platform as a service force.com platform (ph 00:12:30). Callidus Plan Communicator is available for sales service download from salesforce.com's app exchange online marketplace and more than 50 companies have already tried the application. As a native salesforce.com application, Callidus Plan Communicator provides salesforce.com's large customer user base a seamless and integrated way to deliver compensation plan documents throughout the organizations and to manage the plan signoff and approval process electronically. Salesforce.com will highlight Callidus Plan Communicator as an example force.com application at its annual user conference Dreamforce which takes place next week in San Francisco. Callidus will again be a gold sponsor of Dreamforce this year.

Another quarterly highlight was hosting the first Sales Performance Management Thought Leadership Conference in Europe. We had a crowded room of customers and prospects. The event included customer presentations from Standard Life and Nokia and a thought leadership panel comprised of key Callidus partners such as Accenture, CIS and (inaudible 00:13:28). The strong attendance and high energy interaction amongst participants reaffirmed my belief in the growing demand for sales performance management solutions in Europe.

In the third quarter, we also received third party validation of our sales performance and incentive compensation management leadership. For the third year in a row, Gartner rated us positive in its sales incentive management market scope report. Additionally, we won the CRM magazine's 2008 CRM market leader award for the incentive management category beating out all of our competitors.

Let me turn to our outlook and focus on recurring revenues and profitability. As I mentioned earlier, I'm pleased with the progress we've made in substantially growing our recurring revenues. We expect to exit 2008 with recurring revenues comprising over 40% of our quarterly total revenues and plan to increase that between 45 and 50% in 2009. Entering each quarter with a large amount of revenues already on the books enables us to be much more effective in achieving profitability and planning our investments.

As you know, we've been laser focused on managing expenses and year to date in 2008 have spent $2.7 million less on operating expenses than we did in the same period of 2007. When adjusted for stock-based compensation, the year-over-year savings on operating expenses are even more impressive at $4 million.

I'm pleased that we achieved non-GAAP profitability in Q3 especially in a historically challenging time for the economy. Consistent profitability is a top priority at our company and we will manage the business prudently. We're keeping a close eye on the macro-economy and are prepared to make the necessary adjustments to our model. To that end, we will be taking action by the 31st of October to eliminate a number of roles that are no longer core to the immediate future of the business as well as reducing excess capacity in our services organization.

Now, let me turn the call back over to Ron to go though the financial results in more detail.

Ronald J. Fior

Thanks, Leslie, and good afternoon everyone.

I'm very pleased with our financial performance for the third quarter. Despite experiencing one of the worst economic downturns in recent history, Callidus was successful in delivering on our key financial operating objectives which were revenue growth, margin improvement and cost control. As a result, total revenues were up 14% over the Q3 2007 numbers. Total gross margin was 48%, up from the 37% we reported in Q2 and our GAAP net loss of $1.4 million was the lowest it has been since 2006.

In addition to improvement in these operating metrics, we continue to grow our recurring subscription and support revenues which are up over 80% from the prior year. For the first time in company history, subscription and support recurring revenues of 10.9 million were the largest revenue line item on our income statement, edging out professional service revenues which totaled 10.6 million and license revenues of 6.8 million. We expect continuing strong contribution from recurring revenues.

Now I'll walk you through the numbers in more detail. Unless I mention otherwise, the comparative percent increases or decreases are as compared to the same period of the prior year. Let’s start with bookings. During the quarter, we added $1.4 million in net new annual contract value to our on-demand business. This compares to $2.6 million in the third quarter of 2007. Net new ACV, annual contract value, represents the annual value of contracts signed less any cancellations. We found that at the end of the quarter, a number of smaller enterprises pushed off their decision processes.

On the license booking side, we had one license transaction over $1 million in the third quarter. This compares to two transactions in the third quarter of 2007 and one in the prior quarter. Excluding transactions under $100,000, our average license bookings in Q3 was approximate $1.1 million. This compares to $715,000 in Q3 of 2007. Remember, this number can vary greatly from quarter to quarter depending on the number of $1 million-plus deals we complete.

Let’s look at total revenue. Total third quarter revenues were $28.3 million, up 14% from the prior year and up 20% from the previous quarter. It should be noted that much of the consecutive quarter revenue growth was a result of the two deals signed in Q2, but recognized in Q3. Nevertheless, it was a solid revenue performance in what is typically our toughest seasonal quarter made more difficult with the trying economic environment. By geography, 90% of third quarter revenue was generated in North America. This compares to 85% in the third quarter of 2007. By vertical, total revenues for the third quarter break down as follows: insurance 18%, banking 12%, high technology, manufacturing and life sciences 35%, telecommunications 31%, and retail and distribution 4%.

Let’s look at license revenues. License revenues were $6.8 million for the quarter, up over 250% from the previous quarter. As Leslie mentioned, we closed and fulfilled a number of significant deals in the quarter. It should be noted that our third quarter 2008 license revenue includes 600,000 that has previously been recognized in the third quarter of 2007. Due to a recently discovered revenue recognition issue, this revenue was reversed out of Q3 2007 and recognized in Q3 of 2008. Adjusting for the effect of this adjustment, our license revenues were essentially flat with the same period last year. License gross margin in the quarter was 95%, consistent with prior quarters.

Subscription and support revenues for the quarter were $10.9 million, up 83% which reflects the increase in on-demand bookings over the past year. Subscription and support gross margin for the third quarter was 62%, an increase from the 55% margin in the third quarter of 2007 and nearly unchanged from Q2 of 2008. The margin increase compared to 2007 was primarily due to continued improvement in our on-demand business. Subscription and support recurring revenues represented 38% of our total revenues for the quarter. This is up from 24% in the same period of last year.

Services and other revenues. Services and other revenues for the quarter were 10.6 million, down 20%. As we noted last quarter, there are a number of factors contributing to the lower services revenue, including much shorter on-demand implementations as compared to on-premise implementations, deferrals of service revenue due to customer project delays, and an increase in partner-led implementations.

Services and other gross margin for the quarter was 4%, down from 13% in the third quarter of 2007. Included in the margin total are acquisition related amortization cost totaling $500,000 and stock-based compensation charges totaling $320,000.

Adjusting for the amortization cost, which did not exist in the prior year, and for stock-based compensation charges, our services and other gross margin was 11% compared to 14% in the prior year on the same basis. We are committed to improving margin for this area of our business and as Leslie mentioned, we are taking actions to improve utilization including the elimination of excess capacity that will help us improve our profitability.

Overall gross margin. Overall gross margin for Q3 was 48%, up from 42% in the prior year, primarily due to the increase and higher margin subscription and support revenues. This improvement in total gross margin is highlighted even further when you adjust for amortization cost, which did not exist last year. Our overall gross margin excluding amortization expense was 50%. The major driver for this increased margin has been the on-demand business which became profitable this year and now generates a gross margin of 44% versus losses in 2007.

Operating expenses. Overall operating expenses 15 million in Q3 continue to reflect our commitment to controlling costs. As a result, we experienced only a slight increase of less than 1%, approximately $100,000 year-over-year despite driving a 14% increase in total revenue over the same period. Our efforts to control costs are even more pronounced when you exclude the impact of stock-based compensation charges. Adjusting for approximately 1.5 million of stock-based compensation in the current year and approximately 900,000 in the prior year, total operating expenses decreased by $500,000 over the same period last year. Stock-based compensation by-line item is disclosed as a footnote to the income statement included in our press release.

Sales and marketing expense was $7.6 million, up from $7.1 million in Q2 and up approximately $300,000 from Q3 of 2007. The increase from Q2 was primarily due to an increase in commission expenses related to the increase in total revenue over the same period. The increase from Q3 2007 resulted primarily from higher third-party commissions as we closed a large deal with the assistance of SAP. For our on-demand transactions, the direct commission expenses are deferred and recognized along with the on-demand revenue over the non-cancelable term of the contract.

Research and development spend for the quarter was $3.8 million, up approximately $300,000 from Q2 and up approximately $100,000 from Q3 of 2007. The increase from both periods resulted primarily from higher personnel cost, including the expansion of resources in our offshore center.

General and administrative expense was $3.5 million, up $200,000 from Q2, but down approximately $400,000 from the same period in 2007. The increase from the prior quarter was related to higher personnel cost primarily from the accrual of bonuses during the current quarter. The decrease from Q3 2007 resulted primarily from lower legal costs attributed to a mediated settlement made in the prior year partially offset by an increase in stock-based compensation expense in the current year.

Now let’s look at our business model. From a business model point of view, we continue to see the impact of growth in the on-demand in the relative percentage of revenue. Subscriptions and support, i.e. the recurring revenue streams, accounted for 38% of total revenues. This compares to 24% for the same period last year or an increase of 58%. At the same time, license accounted for 24%, essentially flat with prior year.

On the operating expense side, as a percent of total revenues, sales and marketing was 27% as compared to 30% in Q2; R&D was 13%, down from 15% in Q2; and G&A was 12%, down from 14% in Q2.

Interest and other income net in Q3 was $103,000.

Income taxes. The provision for income taxes was $64,000 in the quarter.

Let’s look at our headcount. Our total headcount at September 30, excluding contractors, was 452 employees, up 15 from the end of June. The increase was primarily due to continued expansion of our on-demand operations team.

The balance sheet and cash flow. We finished the quarter with $45.7 million in cash and investments. This is a decrease of 3 million from June 30. Our net accounts receivable balance at September 30 was 18.4 million, up 2 million from June 30. Days sales outstanding for the quarter were down to 55 days, down 24 days Q2's number. Excluding the impact of the changes in our deferred revenue, DSO would have been 56 days, reflecting the current quarter decrease in deferred revenue. We expect DSO to return to a more normal 70 to 80 days in Q4.

Total deferred revenue including both short- and long-term decreased 2.5 million since June 30. This decrease is related to the timing of renewals combined with the addition of new annual contract value and maintenance transactions.

During the quarter, we repurchased approximately 293,000 shares of our stock for $1.4 million. This brings the total amount repurchased under the Board authorization to approximately 1 million shares for a total of approximately $5.2 million. The Board recently reviewed our repurchase plan in light of the economic environment and determined it was appropriate to re-authorize the company to repurchase up to $5 million of Callidus stock over the next year. It should also be noted that stock option exercises brought in approximately $1.3 million in the quarter, while capital expenditures were approximately $669,000 in the quarter.

We continue to hold approximately $4.3 million in auction rate securities, secured by student loans. During the quarter, there was no adjustment to the par value of these assets. Our unrealized loss remains at just over $386,000. Given the lack of liquidity at this time, the investments are classified as long-term. Subsequent to the end of the third quarter, we entered into a settlement agreement with one of our money managers that provides for the full recovery at par value of approximately 3.4 million of these auction rate securities. The agreement provides for full recovery by June 2010.

Now let’s turn to Q4. I want to remind you of the Safe Harbor language provided at the beginning of the call. Further, it should be noted that we plan to update any guidance only during our quarterly conference calls. In these tough economic times and given the uncertainty of the financial markets and their impact on our customers' buying plans, it is important for us to be cautious with our own projections and spending. For Q4, we are expecting total revenues to be between $25.5 million and $27.0 million. This would represent growth of 2% to 8% compared to the fourth quarter of 2007.

Despite the moderate year-over-year growth estimate, we expect our recurring revenues generated from subscription and support services to continue to represent a larger portion of our total revenue in comparison to the prior year

Total revenue, I would like to remind you, is made up of license, subscription and support services, and other revenues. While we do not give guidance on annual contract value bookings for our on-demand business as these quarterly bookings can be lumpy, we do however expect our net new bookings to be up significantly from the 1.4 million in Q3 of 2008, but down from the net new ACV bookings in Q4 of 2007, which totaled 6.5 million.

It should be remembered that Q4 of 2007 included a single multimillion dollar annual contract value transaction that caused the quarter's net ACV to be higher than a more normalized quarter. Please remember that with our transformation to a recurring revenue model, even modest levels of net new annual contract value bookings increase our cumulative backlog which drives future revenues and allows us to better align our cost structure.

Operating expenses are expected to be between $14.5 million and $15.5 million and include approximately $2 million of stock-based compensation.

As I mentioned, we are taking a cautious stance on expenses and to that end, we will be taking action later this week to reduce excess capacity in services and eliminate certain other operating positions.

We currently expect to generate approximately $500, 000 of quarterly operating savings starting in 2009 as a result of these actions. Further, we expect the Q4 charges related to these actions to be approximately $1 million. Before we open it up for questions, I would like to remind you also that we’ll be presenting at the AEA Conference in San Diego next week as well as the Needham Conference in early January.

With that said, I would like to open up the question-and-answer session. Operator, can you please prompt the questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question is from the line of Chad Bennett with Northland Securities. Please proceed.

Chad Bennett – Northland Securities

Yes, hi. Good afternoon. A couple of questions, first, on the on-demand net new bookings in the quarter of $1.4 million, I am just trying to match that with the 10,000 pace (ph 00:31:42) that you added in the quarter. It would imply, I guess, very aggressive pricing or deterioration if you wanted to put it like that or something in the terms, maybe in terms of time that I am not quite understanding or am I looking at the right numbers here?

Leslie J. Stretch

No, you are looking at the right numbers. The mix of the business is interesting because we have some conversion where people have paid up for the license that paid maintenance that paid implementation already. So, that has an impact. And also, there are some customers with very simple plans and from our cost basis, easy for us to create the deals with and our focus is on the net margin, the margin of course in the on-demand business.

And we are also beginning to sell products, lines of products, and more products which changes the profile. So, it is hard to map. But for us, when we arrive in a contract with a customer, the main focus is can we maintain the gross margin that we set out to maintain, can we maintain the cost profile and then, how does that play into the sort of deal that we have to do.

Chad Bennett – Northland Securities

Is there any way of indicating what percentage of the 10,000 pace came from conversion versus new customers?

Leslie J. Stretch

Not of immediately to hand but we will check into that for you.

Chad Bennett – Northland Securities

Okay, I guess I will shift a little. On the license side, obviously a really strong quarter in terms of the lights and skills judging by the DSOs, it does not seem like anything was terribly back and loaded there, I guess the license pieces paused around quite a bit quarterly. I know you do not like the detail kind of revenue segmentation going forward, but how should we look that business based on pipeline and what you see out there if we are trying to look at it going out a few quarters? What are you seeing in that business and is there going to be somewhat of a, I do not want to call it resurgence, but are we back to the days of kind of $45 million per quarter in license revenue being the norm?

Leslie J. Stretch

Well, I think on our size, it is a still a mix picture. We have got these different geographies that come into play as well in Latin America and Europe where there is still a lot of demand from premises business, in telco and insurance where there is high demand from premises business relatively and I think we will continue to support it. We have always said do not predict the license because it is monthly, as you say, banks around has the nature of that business.

I think what is more significant is the proportion of business that is attributable to the recurring revenues now and that is what gives us comfort on the guidance, that is what gives us the visibility going in. So, we may well see significant license fields and enterprises because they are still weighted for the on-premises model.

And in the current environment, I do not want to take away opportunity from the company. I want us to be able to prosecute that and service the customers. So, we are going to have a mix business through this difficult economy and I think that is a strong suit.

I think the implication on the question as well as ACV and I think Ron put it very well. Summer, of course, is typically our worst from the booking's perspective. We do see despite the economy. We know it is difficult. We know we are (inaudible 00:35:29) about it but we do see very, very promising annual contract value bookings in Q4.

Chad Bennett - Northland Securities

What gives you confidence there, Leslie, have you made some headway kind of in the first month here in terms of on-demand bookings coming off of $1.4 million is kind of a tough quarter based on your expectations. What gives you confidence in light of current economic environment and what other on-demand companies are saying that is a pretty tough environment?

Leslie J. Stretch

It is a tough environment, so, no questions. But a couple of things, we are playing in the mid-market a little bit more strongly now than we were. We also see some conversions that are underway. Campaigns are all ready underway. We also see some quite large enterprises considering on-demand.

And so, a mix of those three things at this stage, we are having a busy October, those are the things that give us the confidence.

Ronald J. Fior

And I would just clarify on the license side or/and premises businesses. I mean, I think we have been relatively consisting in saying that we sort of see a $3 million, $4 million, $5 million kind of on-premises business that seems to, if you look back and you did a little bit of normalizing for this year, you really have three quarters of roughly $4 million of on-premises business.

So, there is a certain amount that happened in particularly in EMEA in Europe. We tend to still see more license-type business. So, it is going to be both as well as I said, we want to take advantage and for customer who wants to do that, we will do it.

Chad Bennett – Northland Securities

Okay. And then maybe, last question for Ron, I will jump off and maybe jump back on but the cost savings measures that, it looks like, are being implemented as we speak or are already done, in your Q4 guidance, have you factored in any of the $500,000 quarterly savings for the AppEx guidance that you gave and is there any way to break down how much of that $500,00 is in the cost line versus the AppEx?

Ronald J. Fior

Yes, that $500,000 is straight AppEx in moving into next year. We have not actually broken down the amount that relates to the services but clearly, we want to get our services gross margin on a non-GAAP kind of way up into the 20% plus range. So, that is where we are targeting but the $0.5 million is next year. We have not included anything immaterial in this quarter.

Chad Bennett – Northland Securities

I guess I have one last question, on the services revenue line assuming the cost cuts happen which it sounds like they are in the service side, based on kind of that 20% target, where do you have to be on a quarterly run rate on the revenue line to hit that?

Ronald J. Fior

We can take all the steps we can to make progress towards that in this quarter and we will see where it comes out.

Chad Bennett – Northland Securities

Okay.

Ronald J. Fior

I do not have an exact answer for you at this stage.

Chad Bennett – Northland Securities

Do we feel like the service line overall probably trends down for another couple of quarters or are we at a stabilization period here?

Ronald J. Fior

I think we are anticipating a relatively stable level of services and we are trying to deal with the fact you saw in our numbers this quarter that the margins were not good.

Chad Bennett – Northland Securities

Yes.

Ronald J. Fior

The reason was that we had a number of people on the bench again. We thought again it is the same old answer and we said, okay, enough of that answers that says hey, we think deals are going to happen, et cetera, et cetera. They are on the bench, I hate to be blunt about it, but we are not going to be able to keep them sitting on the bench.

Chad Bennett – Northland Securities

Okay. Thanks, guys.

Ronald J. Fior

Thanks.

Operator

Your next question is from the line of Ariel Sokol with Wedbush. Please proceed.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Hi guys. Congratulations on a good quarter and achieving profitability.

Leslie J. Stretch

Thanks.

Ronald J. Fior

Thank you.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Sure. I will start off in a kind of very high level. What kind of progress are you guys making on selling licenses via termed model rather than a perpetual model?

Leslie J. Stretch

I think a couple of quarters ago, we are experimenting with a couple of small deals because the main focus is to get to a point where subscriptions are making enough of the contribution that were healthy at the bottom line and then, we can pull the thing on term. So, we are keyed up to do it.

We understand the compensation plan implications. We understand the term structure that we want to implement, but I think we said on the last quarter, let me repeat, that we are looking into our first half of 2009 but we want to get the overall revenues to a healthy enough level that may support a healthy bottom line and then we can drive more towards that recurring revenue model for the on-premises business as well. I also think in the current climate, it actually plays well to some customers as an option.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Great. Well, then the question, if you could elaborate, will it be more on reversal of the license revenue from Q3 2007, Q3 2008, what exactly happened here? What was the situation and how was this reversal?

Ronald J. Fior

It is related to delivery of one piece of product and it is an immaterial error and unfortunately, it happened and we will make the adjustment in this quarter's queue. As I said it accounts for less 0.6% of 2007 revenues, so, immaterial.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Okay. The next question, so, you mentioned a deal in excess of $1 million, what was the size of that deal, was it an excess of $2 million or $3 million?

Ronald J. Fior

We do not give that detail, Ariel, you know that.

Ariel Sokol – Wedbush Morgan Securities, Inc.

I do but I still need to ask. Okay, well, then, I guess in the next question. There were some conversations just now that the services in a business, I am just trying to understand what is going on in the business. I think it was two quarters ago, you guys bought compensation technologies. Now, it is a services business to the extent that you acquire that business or that management team is still in place running the show? Is it excess capacity from the old Calladus consultants, if you could just speak to that?

Leslie J. Stretch

Sure, yes, interesting question. Yes, very much that management team is very much running the show. It has been a great acquisition from that perspective to be honest with you. Do not forget we also got $1.8 million or thereabouts that will be carrying revenue in the acquisition which in itself is very valuable but the management team are here, 60-plus% of the personnel are still with us which I am very pleased about.

It is making a big difference to our customers. It is making a big difference to the implementation cycle in the customer experience and I am pretty pleased with it. We have got margin go firmly in sight. We are continuing to take action on that very firmly and I think we are built to report good results at the end of the year. Full year, we have had a full four quarters with the acquisitions. But overall, I am pretty pleased with it to be honest.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Great. Well, thank you very much again for the time.

Leslie J. Stretch

It is our pleasure.

Operator

Your next question is from the line of Brandon Chan with Piper Jaffray. Please proceed.

Brandon Chan – Piper Jaffray & Co.

Hi, good afternoon. How would you characterize the aggregate pipeline and can you provide some confidence that the business is not further softening?

Leslie J. Stretch

Business is not further softening? You mean, which business, you mean the general economy?

Brandon Chan – Piper Jaffray & Co.

Exactly. Can you just provide some evidence or confidence that overall, your business is not further softening in this environment?

Leslie J. Stretch

I do not know what you mean by furthering softening. We have just a record revenue quarter just posted today.

Brandon Chan – Piper Jaffray & Co.

Sure.

Leslie J. Stretch

We are not all biased in (ph 00:43:48), all right? We are a certain size of company with a very large addressable market. We have to have an offensive and defensive strategy for the current climate. Defensive strategy is back here at HQ, we run the cost, we run the business with all these things in mind. Out in the field, we are more aggressive than ever. We are into more markets. We have dramatically diversified our financial services. Only 12% of the revenue last quarter came from banking.

We have got a reasonable amount from healthcare insurance. Then we got a mix of communications, media, manufacturing, pharmaceuticals, and market we were not in a year ago. We have also got this diversification geographically with Europe and Latin America. Europe had a very soft summer quarter, not uncommon for Europe in the holiday season combined that with the economic maelstrom and that is the result you get.

Latin America is kind of different picture actually. We see progress there through our partner, CIS, and with the number of customers and perspective customers. So, we have given the guidance which is flat guidance versus guidance of the last quarter, but I think it is actually pretty strong in the current market but we can give that based on the fact that our larger increasing proportion of the revenues are recurring.

Brandon Chan – Piper Jaffray & Co.

Okay. I have a question for Ron. Ron, as you work on your model for next year, can you talk about how you are thinking about the linearity for next year? Are you looking at about the same?

Ronald J. Fior

The linearity of our on-premises business and I suspect our on-demand business, I have no reason to believe it will be different that it has been for the last five, six years that I have been here. I mean it is clearly Q4 has tended to be our strongest quarter. Q1 has been our second strongest quarter. Q2 and Q3 are our hardest quarters and that is just really the way it has been and I do not have any basis right now to change that prediction.

Brandon Chan – Piper Jaffray & Co.

Okay and then I looked at total revenue, it declines sequentially for the last five quarters, is there anything that you would take away from that?

Ronald J. Fior

Sorry.

Brandon Chan – Piper Jaffray & Co.

The total different revenue declines sequentially in the last five quarters?

Ronald J. Fior

Yes. You have got to remember that when we did most of our business in the last year or so, if you take a look, Q4 was a huge quarter from an on-demand point of view and also from a license point of view, that all comes up for renewal in Q4 of this year. So, what happens is you set that up as the forward revenue at the beginning of last year or at the end of last year and it gets drawn down.

To the extent, if you look over the last few quarters, we have continued to add ACV each quarter and we have continued to add the deferred maintenance obviously from the license deals. So, it is really just a balancing front. I do not think you can think anything away from it other than you would expect it to go up next quarter.

Brandon Chan – Piper Jaffray & Co.

Okay. Thanks.

Ronald J. Fior

Thanks.

Operator

Your next question is from the line of Kevin Liu with B. Riley and Company. Please proceed.

Kevin Liu – B. Riley & Co.

Hi, Leslie, hi, Ron. Nice quarter.

Ronald J. Fior

Hi, Kevin.

Kevin Liu – B. Riley & Co.

First off, in terms of looking at the investments you guys alluded to on the on-demand business, I was curious kind of when you would expect that level of investment to start to stabilize and kind of how much margin extension we would expect in that line of the business going in 2009?

Ronald J. Fior

I think the whole on-demand business for us anyway, it kind of runs in a plateau for a while. So, if you can remember, we just actually spent a significant amount of money in upgrading our equipment at the end of September. At the beginning of September actually, we increased our capacity, was it four times, I believe? Four times our capacity and as we now add more ACV that is where you start to get the leverage.

There will be probably a point next year where we will probably have to go on and increase our capacity again and it will settle down again for a period of time. Exact percentages, I am not ready to give you that other than ultimately our longer term goal has to be up in the 60s to 70s or even higher percentage gross margin.

Kevin Liu – B. Riley & Co.

I got it. So, at least in the near term though, we would not expect that level of investment to continue to climb here at say, the next quarter or two?

Ronald J. Fior

I think the level of investment is relatively flat over the next quarter or two?

Kevin Liu – B. Riley & Co.

Okay. And then just going back to the first caller, you mentioned kind of you guys having a lot of businesses earlier on in the quarter. I was curious, if you could just comment on the kind of activity you saw right at the end of the quarter when it seemed like the economic condition is far more uncertain and the kind of the activity you have seen this far in Q4?

Ronald J. Fior

Actually, the fact of the matter is, part of the benefit obviously was the closing of the two deals that we closed actually at the end of the last quarter which we recognized in Q3. We collected those in Q3. After those two deals, I would actually suggest that it was a pretty typical quarter in where everything else was pretty well back loaded. So, do not take that, I know that person suggested it was all front it, but it actually really was not.

What we did find was that the large companies continue to move along and they have their deals done and we did have in the smaller-type companies, in the on-demand space, we did have customers who pushed out their processes. They were a little skittish with the whole economy. That is what happened.

We have actually closed the other big deals right at the end of the quarter just like every other quarter and I hate to say that but -

Kevin Liu – B. Riley & Co.

I see. So, some of these smaller customers presumably, they would probably be on the on-demand side, so I was curious, at this point, are you saying they are pretty much not looking to do anything here in 2008 and kind of want to say that for potentially 2009 or do you still feel like maybe their confidence are starting to come back in and you can get deals done on the on-demand side?

Leslie J. Stretch

I think what we would say is our confidence of improving the on-demand bookings sequentially is quite high. I think we have got a mix of some of those some of those customers from last quarter. We have got some new perspective customers now in process and we are confident that we have improved the on-demand bookings.

Kevin Liu – B. Riley & Co.

And then, in terms of the partnerships, it sounds like a nice with SAP here in this quarter and then I know that you guys still have that deal with IMS Health which, it sounds like they are making progress on the healthcare side. So, I was curious, as you explore your pipeline for this upcoming quarter and then in 2009, how much of the pipeline is coming by way of these partnerships and how much they do still kind of direct sales model?

Leslie J. Stretch

Yes, we are still as most of our activity is direct, it is more than two and three deals. We are now beginning to get visibility all through the partners. SAP offer a long time. SAP are beginning to bring us a steady flow of deals, not large transaction kinds but some good deals, very valuable, great marquee brands that they lead us into. So, it is still a mix. But we are still predominantly direct and dependent on our direct sales and marketing demand creation. But I am really encouraged to see that activity from CIS and Latin America. From ICM Advisors in Eastern Europe from Accenture and from SAP and of course, sales force.

Kevin Liu – B. Riley & Co.

And then just lastly, as I remember correctly, I think last quarter, you guys had about $1 million in professional services revenue, that were supposed to be recognized during the third quarter? I was just wanted to make sure those did get recognize more as that got delayed further?

Ronald J. Fior

No. I thought I clarified it last quarter but that was basically the customer delaying the whole project out, which pushed out the million dollars. So everything just kind of keeps pushing out the same amount of time. So it’s really, it’s flowing through, yes. The answer is yes, it flowed through this quarter but it didn’t give us a pick-up or a win this quarter. It just met the whole project had moved out a few months.

Kevin Liu – B. Riley & Co.

Alright. Thanks a lot.

Ronald J. Fior

Thank you.

Operator

Your next question comes from the line of Ted Ketterer with TK Associates. Please proceed.

Ted Ketterer – TK Associates

Hey guys.

Ronald J. Fior

Hey Ted.

Ted Ketterer – TK Associates

The actions that you’re taking here with the reduction in your operating costs, does that mean you’re not going to lose that much money next year and you don’t have to answer that?

Ronald J. Fior

That’s our objective. We don’t want to lose money. We want to be profitable man.

Ted Ketterer – TK Associates

Okay. I do have a couple of questions. One, the services side of the business is really getting wretched, I’m not sure down but refined and machined down to it sounds like really a core group of people. What would happen if you got into the second quarter next year and ever economic forecaster on the planet’s wrong and the economy starts to pick up and activity starts to pick up? Can you get these people back?

Leslie J. Stretch

That’s actually really a great question I think…

Ted Ketterer – TK Associates

(Inaudible 00:53:27) a thought.

Leslie J. Stretch

I think that, actually there’s less colors in what we’re doing here. We want more partners. We want partners to believe that they can make money and be successful implementing our solution and we want that very firmly out there so that kind of dictates a certain size of professional services business.

Second thing is we very firmly want to get a decent margin from that business. The only thing we will not compromise on is customer servicing, all of the, everything else, we want to point towards getting a decent margin in the business and I think the third thing is that we want a balance of flexible labor here and we haven’t had that and so our new management team and consulting services have a very clear set of marching orders to maintain enough contract relationships with flexible labor pools so that when that when does happen, when that prediction does happen, we’re ready but we actually, we do feel that it’s important to be ready with that flexible labor pool. So that’s the way we’re trying to address it.

Ted Ketterer – TK Associates

Okay. I guess my second question, Leslie, is to you, you’ve been working on the sales force relationship for, if my memory’s right, somewhere a year.

Leslie J. Stretch

Yes. Yes.

Ted Ketterer – TK Associates

And this is going to be the second time that you’ve been a gold sponsor at DreamWorks and you now have the new plan communicator product integrated and will sales force cuts, sales people be selling your product or are they just bringing you deals?

Leslie J. Stretch

Well that is what we hope that they will point their prospects to our products. That’s a market of 45,000 customers that, and we’ve got 180 customers, a lot of them enterprise and now more mid-market customers and 60 on demand customers. It’s the market we want to play in. we’re working hard. We had, they attended our user conference in Phoenix this year. They did a couple of keynote presentations. They attended the (inaudible 00:55:36) dinner. They had their own sponsored lunch, which was very well attended and we had some fabulous feedback from our customers and our prospective customers about sales force.

I think that it’s up to us to really work that hard. The product now is cut and fresh and live and real. The way we really want that product to get bought though is through the art exchange online market place using sales force checkout and we’d probably be, hope to be one of the first companies to have transactions executed in sales force checkout but it’s part of a strategy to have a number of light, easy to build but high-value light applications in that force.com ecosystems. So this is really just the first toe in the water but we all would only get a million plus of recurring revenue from the art exchange partnership with our traditional products.

So I’m very hopeful but that’s one of several of these partnerships and we know from our experience that when you tease these things out, they always take longer than we’d like but you’ve got to persist. We’re seeing now some fields come from SAP because we persisted with the partnership. They’ve continued to see us in North America as a very good solution for the services problems. So they bring us, so far the last two quarters they’ve brought as a marquis client each quarter. Sales force bring us, got a lot of eyeballs and good lead flow now.

Ted Ketterer – TK Associates

Are the sales force people going to be incented to work with you guys?

Leslie J. Stretch

Oh the way that the force.com environment works is that as revenue flows through the sales force checkout through the whole mechanism, a whole market place then sales people responsible for those (inaudible 00:57:18) accounts that work for sales force will be paid commissions on those revenues.

Ted Ketterer – TK Associates

So they’re on board? Good. You announced that a prodigal son returned to the fold. Jimmy Duan, is that the way to pronounce it?

Leslie J. Stretch

Yes.

Ronald J. Fior

Yes, that’s correct.

Ted Ketterer – TK Associates

And just two questions. Can you give an overall commentary on how you see the competitive landscape in this environment? Secondly, it’s not every company on the planet that welcomes back somebody who left to go to a competitor. What’s he going to be doing and what’s the focus either going to be or is now?

Leslie J. Stretch

Yes. Well that’s a good one. The whole company’s been built around enterprise, cost, customers, and their past history of the company as you know was relatively small transaction accounts, large deals in a quarter and that profile’s changed and we were also fairly well (inaudible 00:58:21) in a couple of vertical markets and that’s changed. We’re also (inaudible 00:58:24) in the U.S. and that’s changed.

The mid-market is kind of beckoning that it’s an interesting time to be investing in that market but we’re beginning to see pooled, demand pooled there. We want somebody who can run that business whilst a whole slew of other people get on with their enterprise class business, which we’re still going to do. It’s great business to do but a mid-market business promises a set of volume transactions over the next few years. If we can build that up then that complements our recurring revenue model and we have more visibility, less dependence on small transaction accounts and certain small numbers of customers.

With regard to the competition, we welcome Jimmy back because he’s an eminent individual in the space. He’s got a unique combination of sales performance management knowledge. Customers love him. Our customers here still love him. He has a great understanding of stock (inaudible 00:59:19) service and on demand market place, second to none I would argue and so he’s a great guy to lead that.

With regard to the competition, our position today is $45 and $46 million in cash, no debt and we’re the masters of our destiny. We’re not, unlike the private, our private competitors, they don’t, the management teams do not control the PNL and do not control the money. They don’t control their cash. We do. So there’s an interesting opportunity for us, I think, in the current market place with regards to those companies and we see evidence all over the place that they’re hard pressed, that they’re being squeezed and quite frankly, we’re not.

So I think it’s a very good opportunity for us at the current time. There’s some formidable small companies out there with good ideas and embryonic products but really I think this puts us in a strong position and also think the mix model at the moment that we’re in because of our history, is also a strong suit in the current environment.

Ted Ketterer – TK Associates

Thanks.

Ronald J. Fior

Thank you.

Operator

Your next question is from the line of Greg Spiker with Moss Creek. Please proceed.

[Greg Spiker – Moss Creek]

Hey guys, I’ve only got I think maybe one or two. At what point is support in subscription revenues do you think you can be consistently either break even or profitable without having to worry about licenses? Have you thought about it that way yet?

Leslie J. Stretch

Yes we do. We think about that all the time, all the, a million different ways.

Ronald J. Fior

Well we’re not going to give you an answer.

[Greg Spiker – Moss Creek]

Do what?

Ronald J. Fior

We’re not going to give you an answer at this point in time. I mean you can start to do the calculation yourself though with a relatively consistent services revenue and a growing on demand revenue base and there’s a point in time if you think about our operating expenses, what we’re doing with them, you can make your own assumptions as to where that would be but we’re not giving really any guidance on that.

[Greg Spiker – Moss Creek]

Okay. Well then part two of the question is and maybe you said this and I missed it but when do you think you can get to that 20% service margin, that’s obviously pat of the equation. Did you say something earlier and I missed it?

Ronald J. Fior

No. I mean that’s our goal is to make progress towards that. I think we need to get there on a consistent basis. It’s probably not until, it’s probably not until the early part of next year to be perfectly honest.

[Greg Spiker – Moss Creek]

Okay. That helps and then last question. You said there were some deferrals on demand. Was there a particular vertical or was it just kind of across the board where people were getting nervous on that?

Leslie J. Stretch

I think it’s just the last couple of days, it was a mix. I don’t think any particular vertical, just a mix of a few small deals yes.

[Greg Spiker – Moss Creek]

Yes but I mean people just, they hear the market goes down 800 points or down 700 points , then it goes up 800 points. It just spooks some people. Are these guys having a problem getting funding to close the deals? Is that a problem with any of them?

Ronald J. Fior

I don’t think so.

[Greg Spiker – Moss Creek]

Okay. Alright. Fair enough. Thanks a lot.

Ronald J. Fior

Yep. Thanks Greg.

Operator

Your next question is from the line of Tom Tunpresik (ph 01:02:28) from Pantera Capital Management. Please proceed.

[Brian Kowalchek – Pantera Capital Management]

Jeff, this is actually Brian Kowalchek. I apologize. I’m on my hands free on my cell phone. Is the connection okay?

Ronald J. Fior

Yep, we’re here Brian.

[Brian Kowalchek – Pantera Capital Management]

Very good. it’s been a while since I’ve visited your story. I apologize if some of my questions are somewhat naïve but tried to reconcile in my mind the $800,000 sequential or quarter over quarter growth in your subscription and your support revenue line with the $1.4 million in ACV and what might give me some help there is understanding the mix between maintenance and some cursory (ph 01:03:07) revenue. Could you provide any granularity on that line?

Ronald J. Fior

Yes. Actually the reality is the $1.4 million of ACV actually will come in over the next year, okay. So that’s the amount of the annual contract value. We amortize that or we spread it out as we provide the service over the next year. we actually recognized little if any of that revenue in this particular quarter. What you have in the quarter, you really have to go back and we’re happy to talk to you about it afterwards but everybody has heard the numbers before. If you go back into some of the on demand bookings that we booked in the prior quarters, you have to do a waterfall chart and then you can actually track it actually reasonably closely actually and I’m happy to go through that with you if you want to give us a call afterwards. We can get that set up. The split is generally, in this particular quarter, maintenance was around $5.3, $5.4 million and the on demand subscriptions was about $5.5 million.

[Brian Kowalchek – Pantera Capital Management]

Okay. That’s helpful and I might take you up on your offer at a later time but can you maybe provide some detail on how much impact you had from the revenue recognized from the deals that were booked and collected in the second quarter?

Ronald J. Fior

I don’t have that right off the top of my head. No, sorry. It would have been, at the most, it would have been maybe 2, 2/12 of it maybe at the most I would argue.

[Brian Kowalchek – Pantera Capital Management]

Okay.

Ronald J. Fior

Are you talking about the on, you’re talking about the on demand right?

[Brian Kowalchek – Pantera Capital Management]

No, I guess you mentioned, at some point that I think your license revenue line benefited from…

Ronald J. Fior

Oh licenses. Licenses actually recognized all at once. I was talking about on demand. License revenues, the $6.8 million, that’s what we recognized this quarter.

[Brian Kowalchek – Pantera Capital Management]

Was some of that from deals that were actually closed in the second quarter?

Ronald J. Fior

There was $2.6 million.

[Brian Kowalchek – Pantera Capital Management]

Thank you.

Ronald J. Fior

Right.

[Brian Kowalchek – Pantera Capital Management]

Just trying to get back to that normalized number that you were talking about.

Ronald J. Fior

Yes, no problem.

[Brian Kowalchek – Pantera Capital Management]

Remind me again the average subscription term on the softwares of service model, your renewal experience and your pricing experience at renewal.

Ronald J. Fior

The average term is what 2 to 2½ years I think. I haven’t got the latest statistic on it but it’s probably around that. Sorry what, the other two questions.

[Brian Kowalchek – Pantera Capital Management]

Just to follow up, what has the renewal experience been? Is there a renewal rate or statistic that you guys speak to and…

Ronald J. Fior

We’ve only been doing it for , we’re on our kind of our, we’ve had renewals of some of the earliest customers but we’re only into year 1½ or 1 and ¾ so we’ll start to see renewals in this, in Q4 of this quarter, we’ll start to get a real sense, Q4 and Q1 of this next year I think we’ll get a sense of what renewal rates should be.

[Brian Kowalchek – Pantera Capital Management]

Okay. That’s what I was figuring you’ve got somewhat limited experience on renewals yet how much of your ACV, I think you said something like $24 million right now in cumulative ACV. How much of that is up for renewal in Q4?

Ronald J. Fior

There’s probably about 6/½. I’m not sure if it’s all up for renewal though. It’s actually, some of it’s in autorenewal but if you look at last year’s $6 and $6.5 million, there’s probably a good, say a good 50-percent of that’s probably up for renewal.

[Brian Kowalchek – Pantera Capital Management]

Okay and will your reduced expense structure that you’re kind of going towards during this quarter through some of the cuts that you’re making, will that support a modicum or a moderate level of growth going forward and maybe a corollary to that is what revenue base do you think your revised expense structure can support?

Ronald J. Fior

The idea is to cut not so much in the R&D or the selling types of positions. It’s really more in the administrative and those areas as well as we’ve said we’re going to reduce some excess capacity. I mean that’s really what we’re trying to focus on. So we expect to try to drive for growth. I mean that’s important. We expect growth in our on demand business as long as we continue to add ACV net, new ACV every quarter. We will grow that business and yes, so that’s what our expectation is. We’re not going to give an exact number for next year yet.

[Brian Kowalchek – Pantera Capital Management]

Sure and last one. Remind me please the typical tie rate between your perpetual license and the ACV on your subscription revenue and the associated services. Is it one-to-one?

Ronald J. Fior

On, well from a services point of view, on the license, on a license, on an on-premises implementation, services run probably at least two times, the license revenue kind of in that range. Now you have to understand we do not do the majority of our implementations in the on demand space and our partners do that., the Accentures, those are the kind of people that we actually use and the customers use to do the implementations. We probably do these days, we’re probably doing no more than maybe 30% of our implementations for on premises.

In the on demand space, generally if there’s $1 of ACV, there’s about $1 of implementation revenue and we generally do say right now, we’re probably doing 90% of our implementations in the on demand space.

[Brian Kowalchek – Pantera Capital Management]

I’m sorry. You’re doing 90% of your implementations or your partners are doing 30%?

Ronald J. Fior

No. So in the on demand space, in the on demand space, we are doing 90% of our implementations. In the on premises, i.e. license space, we’re doing say 30%.

[Brian Kowalchek – Pantera Capital Management]

Okay.

Ronald J. Fior

Okay.

[Brian Kowalchek – Pantera Capital Management]

That’s helpful. Thank you. I’ll follow up with you on a later date.

Ronald J. Fior

Thank you.

[Brian Kowalchek – Pantera Capital Management]

Thanks for taking my call.

Ronald J. Fior

No problem.

Operator

(Operator Instructions) Your next question is a follow up from the line of Ariel Sokol with Wedbush. Please proceed.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Hi guys, just a quick question, a kind of follow up from another question. There was a discussion of your strong balance sheet and the challenging environment. A lot of your private competitors, they’re funded by , do you see clearly that funding or continued funding for those organizations could dry up. I just want to get your perspective on the visibility (ph 01:10:09) on acquisitions and the characteristics the companies that you would be interested in potentially acquiring, if such a situation arises.

Leslie J. Stretch

Yes. I think that’s a really interesting question. We’ve got ourselves into this long gap positive net income position. We put a lot of effort into that. we want to do everything we can to maintain that. So an acquisition is not going to be (inaudible 01:10:34) is going to have very negative balance sheet debt and recurring losses as I would say not appealing to anyone with a sane sort of sane mind in the current market, certainly not appealing to us.

So we want to look for something that is fairly sensible from a financial profile perspective, something that’s got a decent number of customers, improved points, products that are really better than what we have today and more importantly, better than our road map and to be honest, that’s like trying to find a unicorn in a desert at the moment. So it’s pretty tough. I mean I think that although I haven’t said that, there’s probably a few things out there.

So I mean without giving away too much, we’ve always got to look at that but if we think of the financial profile, we don’t want things that are going to be damaging to a steadily improving and nice and healthy balance sheet and PNL but at the same time, we’ve got to look. It’s an interesting time in the market and these companies aren’t challenged because they don’t, they have debt. They have investors under pressure. We have neither of those things. We have no debt. We have, and we have cash. So we’re looking. If you got any suggestions then…

Ronald J. Fior

Yes. I mean there still are some, one of the things that we still find is that there are still some of these people who have expectations that are still just how can I say it, they are, their expectations are not in line with the current market realities. So those we will not be interested in so.

Ariel Sokol – Wedbush Morgan Securities, Inc.

Great. Thank you.

Ronald J. Fior

Thanks.

Operator

And your next question is a follow up from the line of Ted Ketterer with TK Associates. Please proceed.

Ted Ketterer – TK Associates

Okay guys, can you just review the stock buyback, what the initial was and now the current because and it was not in the press release.

Ronald J. Fior

Yes. It’s basically the board took a look at everything because we spent about $5.2 million of the $10 million that was originally authorized and the authorization was only for a year, which was going to come up in this, between basically next month and so they had another look at it and said okay, were going to make sure there’s, we’re going to say okay, it’s $5 million now today from today going forward for the next year and we’ll go out there and look at opportunities to buy our stock back and it’s a 10B5 plan. So it’ll be just down automatically.

Ted Ketterer – TK Associates

Okay. So it’s another $5 million to come?

Ronald J. Fior

Yes.

Ted Ketterer – TK Associates

Okay. Thanks.

Ronald J. Fior

Thank you.

Operator

And there are no other questions in the queue. I’d like to turn the call to go over to Mr. Ron Fior for closing remarks.

Ronald J. Fior

Actually, Leslie.

Leslie J. Stretch

I’d like to thank you for joining us on our call today and we look forward to speaking with you again next quarter.

Ronald J. Fior

Thank you.

Operator

Ladies and gentlemen, thank you all for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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