SumTotal Systems Q4 2006 Earnings Call Transcript

Feb. 6.07 | About: SumTotal Systems (SUMT)
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SumTotal Systems, Inc. (SUMT)

Q4 2006 Earnings Call

February 6, 2007 5:00 pm ET

Executives

Neil Laird - CFO

Don Fowler - CEO

Dave Crussell - COO

Analysts

Eric Martinuzzi - Craig-Hallum Partners

Andrey Glukhov - Brean Murray

Nate Swanson - ThinkEquity

Brad Whitt - RBC Capital Markets

Joan Tong - Sidoti & Company

Matthew Weiss - Maxim Group

Presentation

Operator

Good afternoon, and welcome to the SumTotal Systems' Fourth Quarter 2006 Year End Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions during the presentation.

It is now my pleasure to turn the floor over to your host Neil Laird, CFO. Sir, you may begin.

Neil Laird

Thank you, operator and thank you for joining us for the SumTotal Systems' fourth quarter and 2006 year end earnings conference call. Joining me on today's call are CEO, Don Fowler and COO, Dave Crussell. On this call, we will discuss our results and may refer to the press release that we issued today at approximately 1:10 pm Pacific Time. You can find the copy of the release on our website at sumtotalsystems.com under the Investor Relations section.

Before we review the quarter and the year, I would like to share the following information. Certain comments made in this release and during this conference call are forward-looking statements, including without limitation, statements regarding future business operations and products, future financial performance for the first quarter of 2007 as well as the entire fiscal year, including but not limited to estimated revenue, including deferred revenue and growth of our recurring revenue, profit and loss and expenses, our market conditions that include risks and uncertainties. These forward-looking statements are based on information that is available to us as of today and reflect managements' current expectations, estimates, beliefs, assumptions and goals, and objectives and are subject to uncertainties that are difficult, if not impossible, to predict.

These statements are not guaranties of future results and involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results expressed or implied by these statements. Do not place any undue reliance on any forward-looking statements or statements. Actual results may differ materially from those in the forward-looking statements included in this press release issued today or on this call. Review the Safe Harbor statement set forth in the press release we issued today, and our risk factors disclosed previously, including those in our SEC filings, such as our annual report on Form 10-K for 2005, filed on March 28, 2006; our quarterly report on Form 10-Q, filed on November 9, 2006; our Form S3As, filled on September 28, 2006 and October 2, 2006 and our Form 8-K. We assume no obligation to update the information in either our press release or this call. A live webcast of today's call as well as a replay are available on SumTotal's website at sumtotalsystems.com until February 13.

And I will now turn the call over to our CEO, Don Fowler.

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Don Fowler

Thanks, Neil. Good afternoon to everyone. To give you a sense of the flow of our call today, I will provide an overview of our business, Neil will provide the financial details for Q4, 2006 and our outlook for 2007, and Dave will outline our operational results and outlook.

We are very pleased to announce an outstanding Q4 and the completion of a successful year. Both the quarter and the fiscal year were characterized by solid growth in revenue, including recurring revenue and license revenue and we are also characterized by sustained profitability and solid cash flow. In Q4, our deferred revenue showed substantial growth reflecting the strength of the market. Service margins returned to their planned levels in Q4 showing strong recovery from the Q3 results. We believe these strong operating results are occurring because of the solid strategy which we've been executing over the past year or so. By now everyone is aware of the main elements of our business strategy. It has three parts. Part one is growing our business at a rate higher than the industry growth rate through programs aimed at continuing our record of winning new customers, bringing new solutions to our existing customer base, expanding our international base and increasing the amount of on-demand operations aimed initially at the SMB marketplace.

Part two of the strategy is developing our OEM business, so that the product can be sold in to the market through partners with limited involvement by SumTotal Systems. And part three is expanding our application solution set to include more talent management solutions.

Let's kick start on how we did against the strategy in Q4 and 2006. First on the strategic emphasis of growing our business, we made good headway. For the past several quarters, we have been winning 15 to 20 new enterprise customers per quarter. In Q4, we closed 26 new enterprise deals. This record underscores a success of our solution selling initiatives. Our results were strong in retail, financial services, and pharmaceuticals in Q4. Over the course of 2006, we showed strength in every industry during one or more quarters of the year. Supporting our programs for new customers and for new solutions for existing customers is the platform products we sell.

In December, we announced availability of our newest product, TotalLMS 7.5. This release has exciting new features, such as e-Commerce capabilities, and represents a high quality, high functionality version of the platform. The platform is key to ongoing solutions for the Learning Management System marketplace.

Our customer base has continued to respond to the solution selling programs we have aimed at this market. These programs include compliant solutions, extended enterprise solutions, performance management solutions, and we have concentrated on selling new licenses for existing software installations. These programs are paying big dividends.

Our International sales have been slower than we would like in 2006. We have taken steps to upgrade our staff and our investment in resources for extending our International business. During the year, International revenue has represented approximately 20% of total revenue. We believe we can grow the percent of total revenue represented by International business, with the programs we have put into place.

The on-demand aspects of our business are truly exciting and will be a major emphasis area in our business throughout 2007 and beyond. MindSolve's performance management solution combined with our SMB offering in our Learning Management Systems, which we called ResultsOnDemand are growing very nicely.

In many markets on-demand is the product that we lead with in customer bid situations, and as we expand into more areas of talent management, we can expect on-demand solutions to become even more pervasive. We are expecting recurring revenues to represent a growing part of our business model and pass beyond the 50% level of recurring revenues in 2007.

Our OEM business continued to develop. We had an excellent year with our partnership with ExcellerateHRO, an EDS subsidiary, and Accenture. In addition, our partnerships with Accenture and Hewitt produced business in Q4. Our year was excellent, but we are also looking for a very strong continuation of growth and success in 2007.

Our guidance which Neil will cover in depth shortly will show 20% growth in revenues and over 100% growth in earnings. The strategy I outlined earlier will continue to pave the way for us in 2007. We are pleased to be in a healthy market with healthy competitors and exciting new opportunities emerging for Talent Management Solutions.

Let me turn the call over to Neil to discuss the financials in detail.

Neil Laird

Thank you, Don. First, let me give you some insight into the incoming business level during the quarter, which was excellent. We booked 119 deals over $50,000 during the quarter. This is a significant increase from any previous quarter and compares to 89 in the third quarter and 77 in the fourth quarter of 2005. The previous highest was the first quarter of 2006 with 94 deals. It represents a 34% increase from the third quarter and a 55% increase from a year ago. The ASP was around $200,000, which is also higher than the $170,000 average we achieved in both the fourth quarter of 2005 and the third quarter of 2006.

As Don mentioned, included in these deals were 26 new enterprise deals. These had an ASP of $380,000 approximately. This compares to the 19 deals in the fourth quarter of 2005 at an ASP of $300,000 and 16 deals in the third quarter of 2006 at an ASP of $470,000. We have three deals in excess of $1 million during the quarter. The change in the ASP from the third quarter was primarily the result of us winning additional smaller enterprise deals in the emerging International markets, such as China and India rather than any trend in pricing.

The strength in our installed base as customers purchased additional licenses and modules, resulted in installed base sales increasing to 68% of the total compared to 65% in the third quarter of 2006. We continued to book around 20% of our business through partners. This strength in terms of the incoming business translated into a non-GAAP revenue number of $30 million, which was 11% higher than a year ago and 9% higher sequentially.

Both license and service revenue increased nicely. On a GAAP basis, the increase is 24% from Q4 2005 and 10% sequentially. Each quarter has its variations, so I think it is useful to look at the total year to get visibility on our organic growth rate. Our non-GAAP revenue for 2006 was $110.3 million compared to $78.4 million for 2005. This is a 41% growth rate.

2006 includes four quarters of Pathlore revenue, which contributes about $6 million per quarter, and 2005 includes only one quarter. So if you exclude $18 million for the three quarters from 2006, you get an organic growth rate of approximately 18%, which is consistent with the 15% to 20% range we have discussed before.

Our guidance for 2007 is for approximately 20% growth from the 2006 level. Now that we have a full year of results, including Pathlore, going forward, the total revenue growth rate reflects our organic growth.

A pleasing part of the fourth quarter performance was the recovery of our service margins ahead of schedule. Not only did revenue increased by $800,000, but expenses were lower than Q3 by $400,000, as a result of the non-recurrence of the one-time charges we experienced in the third quarter and effective cost control implemented by our services management.

As a result, service gross margins improved from 50 to 54% on a GAAP basis and from 52 to 56% on a non-GAAP basis. We will continue to see quarterly fluctuations in the margins, as our investments and our hosting in on-demand infrastructure may occur ahead of the related revenue growth. But we believe that we have the controls in place to minimize these variations and we expect the service margin in 2007 to be better than 2006.

Compared to the third quarter, our operating expenses increased by approximately $1.1 million in sales and marketing, as a result of the higher sales commissions associated with the incremental business we booked. And on a GAAP basis, we also took $1.1 million in-process R&D charge relating to the purchase price accounting for MindSolve.

Net income on a non-GAAP basis was $2.2 million or $0.08 per share fully diluted, which was double the $1.1 million or $0.04 per share we reported in the third quarter, and compares to $2.5 million or $0.10 per share fully diluted in 2005’s fourth quarter.

On a GAAP basis, including the non-cash charges for intangible, amortization of $2.2 million, stock-based compensation of $1 million, in-process R&D of $1.1 million, and 400,000 related to deferred revenue, the net loss was $2.5 million, which compares to $2.7 million in the third quarter and $5.3 million in the fourth quarter of 2005.

Let me now talk a little about the balance sheet and the cash flow. We generated $3.6 million from operating activities in the fourth quarter. We used $3.4 million to acquire MindSolve, paid down $1.1 million in debt, and incurred $1.2 million in capital expenditures.

During the quarter, our cash and short-term investments declined by $1.9 million. For the total year, our cash flow from operating activities was $7.2 million, up from $1.6 million the previous year.

Our receivables are in good shape and there was improvement in our past few accounts. However, as is often the case when there is an increase in revenue, day sales outstanding increased. In the last quarter, DSO was 86 days compared to 75 days a quarter ago, but similar to 84 days a year ago. This results from closing many of the deals late in the quarter. The good news is that this should result in solid cash flow in the first quarter, which we are already seeing.

Deferred revenue also increased from about $26.4 million a year ago and $24.9 million at the end of Q3 to $30.7 million. Of this increase, approximately $1.7 million was the result of the acquired deferred revenue from MindSolve.

In January, we provided guidance for total 2007, which we are reconfirming today. For the first quarter, we expect revenue on a GAAP basis to be between $29.6 million and $30.6 million, and on a non-GAAP basis, to be between $30 million and $31 million.

The first quarter is typically slightly lower than the preceding quarter, but we believe that the strong fourth quarter bookings will result in a small sequential increase this year. License and service revenue should increase similarly from the fourth quarter level.

Net loss on a GAAP is forecasted between $1.9 million and $1.4 million or between $0.07 and $0.05 per share on a basic and fully diluted basis. Using the non-GAAP numbers, net income is forecasted between $2 million and $2.5 million or $0.07 to $0.09 per share on a diluted basis.

Compared to the forth quarter, we expect service margins to be slightly lower, with this being offset by a reduction in sales and marketing expense from the typical high fourth quarter level. The reconciling items between GAAP and non-GAAP numbers are $400,000 for deferred revenue, $2.4 million for the amortization of intangibles, and $1.1 million for stock-based compensation. And now, let me pass this over to Dave.

Dave Crussell

Thanks, Neil. Let me start by taking a moment to thank the whole SumTotal team. The company's remarkable top and bottom-line results were due to a team that worked tirelessly throughout the year to ensure that our customers were delighted and that our products continued to be superior.

Before I talk about results from Q4 and our initiatives for 2007, I would like to summarize our progress and achievements in 2006. It's been a remarkable year, where it executed to, and in many instances, above our slated plan, and set the foundation for increased execution in 2007. Throughout the year, we’ve made changes where change was needed, bolstered our infrastructure to accommodate future growth, and increased our presence in talent management.

In early 2006, we began offering performance management capabilities in our SumTotal 7.2 platform. With only 10% of our customers having the performance management solution, we believe there is significant opportunity for an integrated offering. Our MindSolve acquisition in the fourth quarter allowed us to bring the technology in-house, an opportunity to integrate learning performance management suite, could it be installed either behind the firewall or hosted, whichever the customer prefer. This year, our business continued to be strong across all verticals, but we saw a dramatic increase and acceptance in financial services with governments around the globe and especially in retail. As retail has worked to [embolden] their best staff more quickly, more large retail chains are turning to SumTotal to help them replicate the success that peers have seen business has seen when using our products. In 2006, we closed 15 deals with major retailers, including Kohl's Department Stores, PETCO, Wegmans Food Markets, just to name a few.

Throughout 2006, we continued to focus on systematic deploying SumTotal 7 with our new customers and migrating customers from our legacy releases to this platform. During 2006, we successfully deployed the SumTotal 7 platform for 102 customers. We now have 172 customers live on SumTotal 7 compared to 140 customers live at the end of the third quarter. This is directly in line with our plan.

During 2006, we introduced many innovative products, opening new market opportunities in satisfying customer needs. In the spring, we launched SumTotal 7.2 suite which offered in-house performance management module, activity versioning and exception reporting. In the fall, we launched our new software to service option, which we called ResultsOnDemand. This model gives customers an option to use our software in a subscription module, and provides rapid deployment options to produce faster business results. And in December, we started selling our recently announced SumTotal 7.5 suite. This new suite includes a variety of e-commerce solutions and enhanced language capabilities. These three major releases and the MindSolve product line expand the functionality of the SumTotal Suite and its deployment capabilities.

As I summarize the year, we also saw some challenges. For example in Q3, we had a problem with serviced expense controls. As Don and Neil already mentioned, we corrected the problems and returned to a more appropriate level in Q4. Another challenge that we faced has been our international business. Last year, the strength of our business was fueled by the US and a few international markets. We've made changes in areas of our international business that frankly weren't working. We've made changes to the management team, building out a new foundation for our international business. We expanded our relationships with local distributors and added new distributors. I'm confident these changes will give us the opportunity to grow outside the US more rapidly.

I would like to draw your attention to one other point. The percentage of our revenue is now recurring. In 2006, our recurring revenue was 40% of our total revenue or $52 million. This was up from 42% in 2005 and 37% in 2004. The increase in recurring revenue gives us more visibility into our quarterly forecast and should make our business model more predictable. It also becomes the revenue foundation to accelerate our growth as we move forward. With the availability of ResultsOnDemand, total performance, and our traditional hosted version, we expect the recurring revenue to continue to grow during 2007.

Let me focus on a key point in Q4. In November, we acquired a performance management company, MindSolve and the integration has gone extremely well as we've achieved immediate market success and business growth. The MindSolve product, now TotalPerformance, has been very well received by the market, where we were successfully inserting our pure-play performance management offerings as well as the integrated performance management and learning solution.

In Q4, we closed 24 performance management deals. 15 of these were with TotalPerformance. Most of our TotalPerformance deals were pure-play. However, one I would like to note is AGCO Corporation, who purchased our integrated learning and performance suite, TotalLMS and TotalPerformance.

As I look to the future, I see many opportunities for our continued success. A major initiative for 2007 in line with the strategies Don has outlined will be to increase our recurring revenue through targeted selling of SaaS offerings and hosting, our going 2007 is 50% recurring revenue, grow our momentum overall in the international marketplace, aggressively sell performance management to our customer base and new prospects and expand our OEM channel partnerships. We believe these initiatives along with our focus on extending our products and services leadership will fuel our business growth in 2007.

Operator, please poll for questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions). Your first question is coming from Eric Martinuzzi with Craig-Hallum Partners. Please go ahead.

Eric Martinuzzi - Craig-Hallum Partners

Thank you. Good afternoon. I have a question on your Federal business -- I saw you had the large win with the VA this quarter. I was wondering if you can talk a little bit about how that is looking for 2007 versus 2006?

Dave Crussell

In terms of Federal business, 2006 was a year where we certainly had some key wins, but we didn't see the consistent deal flow that we're looking for during the year. I think the increased presence and our expanded suite are going to play better in the Federal marketplace during 2007. So I've hoped a little bit more consistency of our win rate in that marketplace as well as the adjacent marketplaces in state and local government.

Eric Martinuzzi - Craig-Hallum Partners

When you say increased presence, was there additional marketing dollars, additional sales people?

Dave Crussell

Additional marketing dollars and access channels into the marketplace.

Eric Martinuzzi - Craig-Hallum Partners

Okay. And then how does the performance management play, is that an opportunity?

Dave Crussell

Yeah absolutely, this is an emerging opportunity in the federal place and very active opportunity in state and local governments.

Eric Martinuzzi - Craig-Hallum Partners

Okay. And then lastly a housekeeping item here, share account for Q1, what should we use for that?

Neil Laird

Let me get back to you on that, I will answer that in a minute, Eric. Let me look at it to give you an exact number.

Eric Martinuzzi - Craig-Hallum Partners

Thanks Neil. That’s it from me.

Neil Laird

Eric, I would say about $28 million.

Operator

Thank you. Your next question is coming from Andrey Glukhov with Brean Murray. Please go ahead.

Andrey Glukhov - Brean Murray

Yes, thanks. Congrats on the good quarter. Neil, can you -- or Don can you talk about the conversion of Pathlore customers to your on-demand solution which was one of the, I guess emerging initiatives that you've put in place this year?

Dave Crussell

Yeah, I see. This is Dave. I will respond to that. We looked at the Pathlore customer base in the different segmentation of the customer base. We are very active in the selling cycle with the number of customers to migrate them to the ResultsOnDemand solution, where the footprint is more within the customer side. We are able to kind of show them the cost effective and benefits in moving forward with that solution. Other parts of the Pathlore base are actually more receptive to more of the traditional large enterprise type solutions provided by perpetual licenses on those things.

Andrey Glukhov - Brean Murray

Are there any stats that you guys can share with us in terms of how many customers have you migrated, what is the kind of near-term opportunity looking like?

Dave Crussell

We have a number of customers that are active in the pipeline. I do not know the exact number at this time.

Andrey Glukhov - Brean Murray

Okay. And then can you talk about current sales headcount and maybe your targets for headcount as we throughout 2007?

Don Fowler

Are you -- not talking about targets or headcount in sales or just generally?

Andrey Glukhov - Brean Murray

Sales reps?

Don Fowler

Yeah, sales reps we have 50 at the moment. We believe that that’s essentially the right number. We will be adding a few in some of the international markets, but will end up with about 55 we think, just a broader projected plan.

Andrey Glukhov - Brean Murray

Great. Thank you.

Operator

Thank you. Your next question is coming from Nate Swanson with ThinkEquity. Please go ahead.

Nate Swanson - ThinkEquity

Hi guys. Did MindSolve contribute to revenue in Q4?

Neil Laird

Yes, it contributed about $500,000 in line with what we told you when we announced the acquisition.

Nate Swanson - ThinkEquity

Okay. And was that in the services line or was that in license?

Neil Laird

Services line.

Nate Swanson - ThinkEquity

Okay, and then the increase in receivables this quarter. Was part of that also due to MindSolve or was that all organically?

Neil Laird

No, part of that was due to MindSolve, although not significant because we collected most of the MindSolve receivables by the end of the quarter. So, I think you can view it as being predominantly organic. Okay, all but a couple of hundred thousand for sure.

Nate Swanson - ThinkEquity

Okay, and then I was wondering if you could talk about the integration plans there. I'd imagine MindSolve Suite has their own competency models, do you plan in keeping those separate or integrating to one standard, and I guess what’s your timing in terms of how you will be rolling that out?

Dave Crussell

The first step in step in terms of our integration was to provide an integration between the two applications, as we announced at the time of the acquisition. We are scheduling that to be released in Q1 and we are very much on track to produce that and that is synchronization between the two applications and they are not just seamless user interface. We are currently going through the planning process to look deeper integrations and perhaps the rationalization of some of those pieces of functionality. It’s a bit early to give a firm direction on that.

Nate Swanson - ThinkEquity

Okay. Last question, I would imagine you guys just had your annual sales kick up. I was wondering what kind of feedback or response you got from your sales force in terms of the MindSolve Suite and how quickly you think those reps can ramp in terms of their ability to sell the performance suite?

Dave Crussell

It's hard to describe this one. On a scale of 1 to 10, it was probably 11. There was -- this has been so well received by every single customer that we have presented this to, every single sales person that’s seeing the customer’s appreciation of the suite. I can only just start to explain how well received this has been by our sales force and how excited they are to have this fantastic product selling in the marketplace.

Nate Swanson - ThinkEquity

That’s great. Thanks.

Operator

Thank you. Your next question is coming from Brad Whitt with RBC Capital Markets.

Brad Whitt - RBC Capital Markets

Hi, David, a follow-up question on the MindSolve, I think you said you had 15 -- you closed 15 new MindSolve transactions in the quarter, is that correct?

Dave Crussell

That is correct.

Brad Whitt - RBC Capital Markets

Okay. How many of those were subscription versus perpetual, were they all subscription?

Dave Crussell

They were all subscription. This resulted in an ASP, BPO type model.

Brad Whitt - RBC Capital Markets

Okay. Is that you envision it going forward or will you be doing perpetual license around MindSolve?

Dave Crussell

We’re going to lead in an ASP type model for the MindSolve solutions, I should say TotalPerformance solutions. We have seen those few circumstances, where customers have – really, their desired procurement model is around perpetual licenses, and we will make exceptions like that as we go forward.

Brad Whitt - RBC Capital Markets

Okay. And when you talk about -- you expect recurring revenue to grow in '07 as a percentage of total revenue. Is that at the expense of perpetual deals, or do you think this is more of a supplement to your core business?

Dave Crussell

I think the latter, Brad. Our recurring revenue has grown from 42% in 2005 to 47% last year, and we said we expected to go about 50%. Where we see the growth is, first of all, there is the organic growth that comes from the renewal business in terms of hosting subscriptions and maintenance, but we also expect to see incremental sales of -- in the SMB market with our ROD offering and also in the performance management area, and we think those will fuel additional growth beyond what we are seeing in the perpetual license business.

Brad Whitt - RBC Capital Markets

Okay. And, Neil, just a housekeeping item for you, I think you mentioned last quarter that you were going to have some additional auditing expenses in Q4, will that continue into Q1 or should that --?

Neil Laird

Yes, that will continue into Q1. Typically, Q4 and Q1 are our heavy audit quarters. And we do expect the G&A expense to be very similar in Q1 to Q4.

Brad Whitt - RBC Capital Markets

Okay, great. Thanks for taking my questions, guys.

Neil Laird

No problem. Thank you.

Operator

Thank you. And your next question is coming from Joan Tong with Sidoti & Company. Please go ahead.

Joan Tong - Sidoti & Company

Good afternoon, a couple of questions here. First off, you -- I think when you made the announcement, the acquisition announcement in MindSolve, you talked about a revenue ramp about 1.5 to $2 million per quarter once the integration is complete, are we looking for this sort of like run rate in the current quarter, in the March quarter or is it more like towards the back half of 2007?

Neil Laird

Yeah, well, in the fourth quarter we had about 500,000 in revenue, which was six weeks. So, just in terms of the baseline business, we will do $1 million in the first quarter. Then in addition to that, given some of the additional deals we booked, we will do better than that. So, I think we'll be somewhere between 1 million and 1.5 in the first quarter, and then it should ramp thereafter to get to our annual run rate of 6 to 8 million.

Joan Tong - Sidoti & Company

Okay. And then, I think Dave mentioned about other than the recurring or subscription model that you guys are focusing on, on MindSolve. You are also planning to sign some perpetual license. So, in terms of the breakdown between license and services, how we should think about it going forward?

Neil Laird

Well, relating to TotalPerformance?

Joan Tong - Sidoti & Company

Yeah.

Neil Laird

Yeah, that’s something we don't really know the answer to. I think we certainly expect the-- the business that we acquired, which was $3 million a year, is essentially all recurring. And then, we think that on a go-forward basis, it'll probably be something like 70-30. So, if it was me, I would model it somewhere like 4 million ASP, 2 million perpetual, 5 million, and 2, something like that.

Joan Tong - Sidoti & Company

Okay. And then, in terms of the 7.2 platform or the 7. -- version, I think you guys sold about 200 plus system from inception to date and also have 170 customers live by the end of 2006. I just wondered do you have a plan or a sort of target for 2007, given that you are now rolling out 7.5 with new functionality. Do you think it would accelerate the sort of adoptions going forward in the new calendar year?

Dave Crussell

Yes. So, in terms of where we are, we have 170 customers that are live on our price on SumTotal 7. We have 260 customers that have actually signed up for SumTotal 7, so they are essentially -- the difference between the two is customers they are in the implementation cycle. I would expect to that ramp to continue during 2007, so I would certainly hope if we are able to bring 100 customers live and deployed on that product in 2006, we'd look for an incremental amount on that in 2007.

Joan Tong - Sidoti & Company

Okay. Thank you very much.

Operator

(Operator Instructions) Thank you. Our last question is coming from Matthew Weiss with Maxim Group. Please go ahead?

Matthew Weiss - Maxim Group

Good evening gentlemen. Quick question on ResultsOnDemand, I was wondering if there is a way for you guys to quantify the traction you are seeing there particularly at the SMB adoption?

Don Fowler

Yeah. During the quarter, obviously this was our first full quarter with the offering released. We saw -- we currently have about 20 to 25 customers live and operational on the release and probably a further 10 that are in progress at this stage. So, we're seeing the adoption from small or medium business as well as, to the point we have already asked some of the segments of our installed base primarily the smaller segment of the installed base -- smaller business size segment of the installed base.

Matthew Weiss - Maxim Group

Okay. Great. And then Neil quick one for you, what are your expectations for CapEx for '07?

Neil Laird

Yeah we're looking at spending somewhere close to $6 million. We have ramped up the rates over the past couple of quarters as a result of the buildup of our infrastructure to support the on-demand business, so about $1.5 million a quarter.

Matthew Weiss - Maxim Group

Okay great, thanks guys.

Operator

Thank you, sir there appears to be no questions at this time I would now like to turn back over to Mr. Fowler for any closing remarks.

Don Fowler

We thank everybody for your time and attention today we look forward to continue dialogue as the quarter proceeds thank you very much and good day.

Neil Laird

Thank you.

Operator

Thank you. This does concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.

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