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SkillSoft Public Limited Company (SKIL)

F4Q07 Earnings Call

March 9, 2007 8:30 am ET

Executives

Peter Schmidt - IR, Financial Dynamics

Chuck Moran - President and CEO

Tom McDonald - CFO

Analysts

Bob Craig - Stifel Nicolaus

Greg Cappelli - Credit Suisse

George Sutton - Craig-Hallum

Jeff Silber - BMO Capital Markets

Presentation

Operator

Good morning. My name is Elsa, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkillSoft Fiscal 2007 Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Peter Schmidt from Financial Dynamics. Sir, you may begin your conference.

Peter Schmidt

Thank you and good morning, everyone. By now, you should have received a copy of SkillSoft's press release discussing the company's fiscal 2007 fourth quarter and year end which was issued earlier this morning. If you have not received one, you may retrieve it from the company's website at www.skillsoft.com, or please call our offices at 212-850-5600.

On the call with us this morning from SkillSoft are Chuck Moran, President and Chief Executive Officer and Tom McDonald, Chief Financial Officer.

I would like to remind everyone that some of the comments made today or some of the answers in response to your questions may contain forward-looking statements. Any such forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from any future results encompassed within the forward-looking statements.

Factors that could cause or contribute to such differences include competitive pressures, changes in customer demands or industry standards, adverse economic conditions, loss of key personnel, litigation and other matters disclosed under the heading "Risk Factors" in the company's most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission.

The forward-looking information provided by the company in this conference call represents the company's views as of today's date, March 9, 2007. While SkillSoft may elect to update this forward-looking information at some point in the future, the company specifically disclaims any obligation to do so. This forward-looking information should not be relied upon as representing the company's views as of any date subsequent to the date of this conference call.

As one additional housekeeping point, we would just like to note that the state of Arizona where SkillSoft will be presenting at the Credit Suisse Conference on Monday is not adopting daylight savings time this weekend. So, they will be three hours behind the East Coast. Therefore, with the presentation at 7:30 am local time, it will actually be 10:30 am Eastern time as opposed to 9:30 am in the press release.

With that, I would like to turn the call over to Chuck Moran. Chuck, please go ahead.

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Chuck Moran

Thanks, Peter. Good morning, everyone, and thank you for joining us. Today, we will discuss our fiscal 2007 fourth quarter and year-end results as well as our fiscal 2008 outlook.

SkillSoft reported total revenue for our fiscal 2007 fourth quarter of $57.7 million, representing a 5% increase over last year's fiscal fourth quarter. When comparing our Q4 year-over-year revenue growth, by eliminating from both quarters, all the revenues for the SmartCertify Retail Certification business that we divested in the first quarter of fiscal year 2006, our revenue grew 9%.

SmartCertify revenue was $2.2 million in the fourth quarter of fiscal year 2006 and $500,000 in the fourth quarter of fiscal year 2007.

Fiscal year 2007 Q4 revenue exceeded our previously estimated target range of $56 million to $57.5 million. Our net income for the fourth quarter was $8.2 million or $0.08 per share compared to $4.1 million or $0.04 per share for last year's fiscal fourth quarter.

For the full fiscal year 2007 ending January 31, 2007, SkillSoft reported revenue of $225.2 million compared to $215.6 million in the prior fiscal year, representing approximately a 4% increase.

Fiscal 2007 revenue includes approximately $5 million from SmartCertify, which is $9.3 million less than was included in the fiscal 2006 revenue as a result of the SmartCertify sale in the first quarter of fiscal 2006.

Excluding the SmartCertify revenue from both fiscal years, SkillSoft's revenues grew 9% year-over-year.

The net income for fiscal 2007 was $24.2 million or $0.24 per share compared to a net income of $35.2 million or $0.34 per share for fiscal 2006.

As a reminder, the $35.2 million in fiscal year 2006 includes an insurance recovery of $19.5 million from the 2002 class action lawsuit.

Looking ahead and excluding any impact from the pending NETg acquisition, for fiscal year 2008, we are currently anticipating revenue to be in the range of $234 million to $242 million. This revenue range reflects $4.8 million less SmartCertify revenue than we realized in fiscal 2007. We currently anticipate our net income for fiscal year 2008 to be $31 million to $35 million or $0.30 to $0.33 per share.

Please see our press release which is available at our website, www.skillsoft.com, under the heading "Fiscal 2008 Stand-Alone Outlook" for a description of the potential items that our projected net income does not take into account, such as foreign currency exchange. Because they cannot currently be estimated or because it is not clear that they will have any impact on fiscal 2008 operating results.

The most significant non-cash items included in fiscal year 2008 projected net income are the following: amortization of intangible assets and capitalized software development costs of approximately $1.5 million to $2.5 million, a non-cash tax provision of approximately $7 million to $8 million, and stock-based compensation expense of approximately $5 million to $6 million.

For the first quarter of fiscal year 2008 ending April 30, 2007, we currently anticipate revenue to be $56.5 million to $58.5 million. This revenue range reflects approximately $1.5 million less SmartCertify revenue in the first quarter of fiscal 2008 than in the first quarter of fiscal 2007.

We currently anticipate our net income for Q1 in fiscal year 2008 to be $5.5 million to $6.5 million or $0.05 to $0.06 per share.

The most significant non-cash items included in fiscal year 2008 first quarter projected net income are the following: amortization of intangibles and capitalized software development costs of approximately $0.5 million to $1 million, a non-cash tax provision of approximately $1.2 million to $1.4 million, and stock-based compensation expense of approximately $1 million to $1.5 million.

We are pleased to have exceeded our revenue and earnings targets for the fourth quarter of fiscal 2007 and for the full fiscal year.

For fiscal 2008, SkillSoft will focus on closing and integrating the NETg operation, which we are hoping to close before the end of our second fiscal quarter. We will also continue to put a strong focus and emphasis on revenue growth and, of course, earnings growth, excluding the normal and anticipated acquisition and integration related expenses, we will incur when we close the NETg deal. It is also our goal in closing the NETg deal to use as much debt and cash as prudently possible, in order to minimize the amount of equity we would issue to fund the transaction.

As you have heard me say in the past, we need to do a better job of finding new business, whether it is from new accounts or new products that will deliver new revenue streams. In that light, let me talk some of the things we are going to do to drive these initiatives.

First, from a distribution standpoint, our telesales operation in Fredericton, Canada finished a fairly successful year of selling to small and medium size organizations. Although their sales achievements are small compared to the overall size of the company, we are encouraged by the progress they have made and we will continue to pursue this strategy as a means to both grow our revenues, as well as to add new customers.

The investment we made in the new business direct field sales force of approximately 8 to 10 people started-off slow but showed some signs of promise. As you remember, this group's charter is to exclusively call on and generate new business.

It is our plan to continue with this program by continuing our investments and to make adjustments to the model to improve the efficiency of the sales force in landing new accounts.

On the product front, in February, SkillSoft acquired, for approximately $4.5 million a small company that has created a library of video-based assets that addresses B2B leadership development, and will fit nicely into our Multi-Modal Learning Strategy. We will call these video assets the Leadership Development Channel.

They total over 300 video-based programs and cover 28 key organizational competencies, such as, business acumen, diversity awareness and attracting and retaining talent. They are delivered by such thought leaders as Ken Blanchard, John Connor and Stephen Covey. The products will be sold as a collection and will be sold by the entire field sales force.

With that, I will now turn the call over to Tom. Tom?

Tom McDonald

Thanks, Chuck. Good morning, everyone. Our fourth quarter performance exceeded the high end of our previously released financial targets, and as a result, our fiscal year 2007 financial results also exceeded the high end of our previously released targets. Fiscal 2007 fourth quarter revenue increased 5% to $57.7 million compared to $54.7 million in the fourth quarter of fiscal 2006, exceeding the high end of our estimated target of $56 million to $57.5 million.

Fiscal 2007 revenue increased 4% to $225.2 million compared to $215.6 million in fiscal 2006, also exceeding the high end of our estimated target of $223.5 million to $225 million.

Fiscal 2007 fourth quarter earnings were $8.2 million, exceeding the high end of our target of $5 million to $6 million. Fiscal 2007 earnings were $24.2 million, also exceeding the high end of our estimated target of $21 million to $22 million.

Substantially all of the company's revenues in fiscal 2007 are from its Multi-Modal Learning segment, representing $57.2 million for the fourth quarter of fiscal 2007, a 9% increase over the $52.5 million of Multi-Modal revenue reported in the fourth quarter of fiscal 2006.

For the full fiscal 2007 year, revenue included approximately $5 million from the Retail Certification segment as compared to $14.3 million in fiscal 2006. Excluding Retail Certification revenue, the company's revenue increased $18.9 million or 9% in fiscal 2007.

Remaining revenues for the fourth quarter and full fiscal 2007 year came from the company's Retail Certification segment as a result of the amortization of the deferred revenue retained by the company following the sale of certain assets related to SmartCertify in the first quarter of fiscal 2006.

From a sales channel perspective, approximately 78% of the total revenue was from domestic sales and 22% from international.

As a reminder, the international channel includes our telesales operation based in Canada. Another prospective of our sales channel reflects approximately 90% of the total revenue from the direct sales and 10% from reseller sales.

Gross margin increased to 88% for the company's fiscal 2007 fourth quarter compared to 85% for its fourth quarter of fiscal 2006. The gross margin percentage is mainly impacted by the mix of royalty-bearing content and SkillSoft hosting capacity needed to meet our existing and new customer solution requirements.

Included in cost of revenue in the fourth quarter of fiscal 2007 and fiscal 2006 is the amortization of intangible assets related to acquired technology and capitalized software development costs of $0.2 million and $1.7 million, respectively, which was previously recorded within operating expense under the caption "amortization of intangible assets." The amortization decreased gross margin less than 1% for the fiscal 2007 fourth quarter and 3% for the fiscal 2006 fourth quarter.

For the full year, gross margin increased to 86% for fiscal 2007 compared to 85% for fiscal 2006. The amortization decreased gross margin 2% for fiscal 2007 and 3% for fiscal 2006.

R&D increased to $10.9 million in the fiscal 2007 fourth quarter compared to $9.9 million in the fiscal 2006 fourth quarter. R&D expenses as a percentage of revenue increased for fiscal 2007 fourth quarter to 19% of revenue compared to 18% of revenue in fiscal 2006 fourth quarter. Research and development expenses increased to $40.8 million for fiscal 2007 and $39.2 million for fiscal 2006.

This increase was primarily due to an increase of $0.8 million of stock-based compensation expense and $0.8 million of additional courseware and translation development expense.

Sales and marketing expenses decreased to $22.5 million in fiscal 2007 fourth quarter compared to $22.8 million in the fiscal 2006 fourth quarter. Sales and marketing expenses as a percentage of revenue decreased for fiscal 2007 fourth quarter to 39% of revenue compared to 42% of revenue in the fiscal 2006 fourth quarter.

Sales and marketing expenses increased to $90.9 million for fiscal 2007 from $88.4 million for fiscal 2006. This increase was primarily due to an increase of $1.2 million of stock-based compensation expense, $1 million of process improvement consulting expense, and $3.1 million additional investment in worldwide sales and marketing headcount and program expenses.

These fiscal 2007 increases were partially offset by the elimination of $2.8 million of SmartCertify related expenses as a result of the disposition in the first quarter of fiscal 2006.

General administrative expenses decreased to $6.8 million in the fiscal 2007 fourth quarter compared to $7.2 million in the fiscal 2006 fourth quarter. General administrative expenses as a percent of revenue decreased for fiscal 2007 fourth quarter to 12% of revenue, compared to 13% of revenue in the fiscal 2006 fourth quarter.

General administrative expenses increased to $27.7 million for fiscal 2007 from $25.8 million for fiscal 2006. This increase was primarily due to an increase of $2.1 million for stock-based compensation expense and an increase of $0.7 million in business systems software development expense.

These increases were partially offset by a one-time $0.5 million payment to Howard Edelstein, a Director of the company, which was made in fiscal 2006 in recognition of Mr. Edelstein's contributions related to the company's settlement of certain litigation matters.

The fiscal 2007 increases were also partially offset by the elimination of $0.4 million of SmartCertify related expenses as a result of the disposition in the first quarter of fiscal 2006.

Included in operating expenses for fiscal 2007 fourth quarter and for fiscal 2007, is approximately $0.9 million and $5.1 million respectively of stock-based compensation expense. For fiscal 2007, the cost of revenue, research and development expense, sales and marketing expense and general administrative expense included $90,000, $952,000, $1.8 million, and $2.1 million of stock-based compensation expense respectively.

As part of the SEC's investigation into the historical financial statements of SmartForce prior to its merger with SkillSoft, the SEC is also reviewing SmartForce's option granting practices prior to the merger.

The restatement charges related to the ongoing SEC investigation of $0.5 million in the fiscal 2007 fourth quarter included expenses incurred as part of this options review, and the restatement charges of $0.4 million in the fiscal 2006 fourth quarter related solely to the SEC's investigation regarding the restatement of historical financial statements of SmartForce.

With respect to the SEC's current review of the historical option granting practices of the former SmartForce, it is useful to understand the accounting treatment applicable to the SmartForce-SkillSoft merger. Because SkillSoft Corporation was the accounting acquirer of SmartForce, the pre-merger financial statements of SmartForce are not included in the historical financial statements of SkillSoft.

SkillSoft's financial statements include only the results of SmartForce from the date of the merger. Under applicable accounting rules, SkillSoft valued all the outstanding SmartForce stock options assumed in the merger at fair value upon consummation of the merger.

As a result, these stock options were accounted for properly in the merger. And any accounting issues that might have resulted from such option grants had SmartForce remained independent would have no effect on SkillSoft's financial statements from an accounting point of view.

In the fourth quarter, the company expensed $412,000 for intangible asset amortization. For fiscal 2007, the company expensed $1.7 million for intangible asset amortization.

The company's interest income less interest expense increased to $1.2 million for the fiscal 2007 fourth quarter as compared to $0.5 million for the fiscal 2006 fourth quarter and increased to $0.4 million for the fiscal 2007 as compared to $1.3 million for fiscal 2006.

This increase was mainly due to the more funds being available for investment and higher interest rates on our cash, cash equivalents and investment balances.

The company's effective tax rate increased to 33.1% for the fiscal year ended January 31, 2007 as compared to 20.6% for the fiscal year ended January 31, 2006. This increase is primarily due to the fact that $19.5 million insurance recovery related to the settlement of the 2002 securities class action lawsuit recorded in fiscal 2006 was not taxable, which resulted in the lower effective tax rate for fiscal 2006.

The company's effective cash tax rate included in the effective tax rate is approximately 5% for the fiscal year ended January 31, 2007.

Regarding DSO on a net basis, which considers only receivable balances for which revenue has been recorded, DSOs were 12 days in our fourth quarter compared to 16 days in the fourth quarter of the prior year and seven days in the third quarter of this year.

On a gross basis, which considers all items billed as receivables, DSOs were 151 days in our fourth quarter compared to 144 days in the fourth quarter of the prior year, and 77 days in the third quarter of fiscal 2007.

The company's combined dollar renewal rate was 106% for the year ended January 31, 2007 compared to 100% for the prior year.

As a reminder, the combined dollar renewal metric combines the dollar renewal rate and expiring customers and the dollar upgrade rate on all existing customers, committed and expiring, to provide a single metric that compares existing customer contract dollars spent with SkillSoft year-over-year. This combined dollar renewal rate metric is what SkillSoft now reports on an annual basis in place of the customer upgrade rate and expiring customer renewal rate metrics previously reported.

The company's average contract length was 19 months as of both January 31, 2007 and January 31, 2006. The company's 12 month average contract value as of January 31, 2007 decreased to $137,000 as compared to $146,000 as of January 31, 2006.

SkillSoft's average total contract value as of January 31, 2007 decreased $217,000 as compared to $231,000 as of January 31, 2006. The decrease is primarily the result of our new customer acquisition emphasis, where the initial contract value with a new customer would generally be smaller, thereby reducing the 12 month average contract value and the average total contract value.

SkillSoft had approximately $127.8 million in cash, cash equivalent, short-term investments, restricted cash and long-term investments as of January 31, 2007 compared to $78.6 million as of January 31, 2006. The increase primarily reflects cash provided by operations of $50 million and cash provided by stock option exercises and employee stock purchase plan activity of $7 million in the fiscal year ended January 31, 2007.

These increases were partially offset by capital spending, primarily investments in the company's hosting infrastructure of $5.5 million in the fiscal year ended January 31, 2007. The cash balance as of January 31, 2007 includes funds reserved for the final payment of the 2002 securities class-action settlement of $15.3 million, which is expected to be paid in the next six months.

Now, I will spend a few minutes discussing our outlook for fiscal 2008. This outlook excludes any impact of our pending acquisition of NETg.

On February 9, 2007, the company acquired Targeted Learning Corporation, TLC, under the terms of the acquisition; SkillSoft paid approximately $4.5 million in cash to acquire TLC.

The acquisition provides SkillSoft with a new offering that includes an online library of over 300 video-based programs featuring organizational and leadership experts, CEOs and best-selling authors.

SkillSoft's fiscal 2008 standalone outlook incorporates the revenue contribution and cost structure associated with the TLC acquisition. The operating model for fiscal 2008 supported the TLC product line reflects revenue of $1.5 million to $2 million with an associated cost structure of $2 million to $2.5 million in the first year, while SkillSoft's sales distribution ramps the business over its normal six to nine month sales cycle.

SkillSoft is currently anticipating revenue for fiscal 2008 to be between $234 million to $242 million. The contribution to revenue from the SmartCertify business is $5 million lower in fiscal 2008 than it was in fiscal 2007 as a result of the amortization of the deferred revenue retained by the company following the SmartCertify disposition in the fiscal 2006 first quarter.

Therefore, revenue in fiscal 2008 is targeted excluding the $5 million of SmartCertify revenue reported in fiscal 2007 to grow in the range of 6% to 10% year-over-year. The company expects to replace the SmartCertify revenue with bookings revenue from other sources.

At January 31, 2007, the company had deferred revenue of approximately $146 million and 12 month non-cancellable revenue backlog of approximately $180 million, which includes deferred revenue committed contracts, which represents approximately 76% of the midpoint of the company's revenue target for fiscal 2008 of $234 million to $242 million. That compares to $171 million for the prior year, which was approximately 76% of the company's final revenue for fiscal 2007.

Deferred revenue of approximately $146 million at January 31, 2007 compares to approximately $137 million at January 31, 2006. The increase in deferred revenue reflects an increase in billings being partially offset by a reduction of approximately $5 million of deferred revenue due to the SmartCertify disposition at the end of fiscal 2006 first quarter. Therefore, deferred revenue, excluding the $5 million of SmartCertify deferred revenue at January 31, 2006, grew year-over-year approximately 11%.

We are expecting gross margin to be between, 87% to 88% of revenue, for fiscal 2008, which includes amortization expense for intangible assets related to acquired technology and capitalized software development expense.

R&D expenses are expected to be $42 million to $43.5 million. Sales and marketing expenses are expected to the $90 million to $92 million.

G&A expenses are expected to be $28 million to $29 million. Amortization of intangible assets is expected to be $1.5 million to $2.5 million. Stock option expense is expected to be $5 million to $6 million. This expense is included in the operating expenses previously mentioned.

Restructuring and restatement expense is expected to be $1.6 million to $1.8 million. Provision for income taxes is expected to be $10 million to $12 million or approximately 22% to 25% of net income. Only $3 million to $4 million of the provision is expected to be represented by actual cash payments.

Interest income is expected to be between $4 million to $5 million. We are currently anticipating projected net income for fiscal 2008 to be between $31 million and $35 million or $0.30 to $0.33 per basic and diluted share.

The most significant non-cash items included in projected net income for fiscal 2008 are the following: amortization of intangible assets related to acquired technology and capitalized software development costs of approximately $1.5 million to $2.5 million, a non-cash tax provision of approximately $7 million to $8 million, and stock-based compensation expense of approximately $5 million to $6 million.

The company anticipates that it will have 105 million to 108 million diluted shares outstanding for earnings per share or EPS calculation purposes in fiscal 2008.

For the first quarter of fiscal 2008 ending April 30, 2007, the company currently anticipates revenue to be between $56.5 million to $58.5 million. The contribution to revenue from the SmartCertify business is $1.5 million lower in the first quarter of fiscal 2008 than the first quarter of fiscal 2007, as a result of the decline in the amortization of the deferred revenue retained by the company following SmartCertify disposition in fiscal 2006 first quarter. The company expects to replace the SmartCertify revenue with bookings revenue from other sources.

The company currently anticipates net income for the fiscal 2008 first quarter to be between $5.5 million and $6.5 million or $0.05 to $0.06 per basic and diluted share. The most significant non-cash items included in the first quarter of fiscal 2008 projected net income are the following: amortization of intangible assets related to acquired technology and capitalized software development costs of approximately $0.5 million to $1 million, a non-cash tax provision of approximately $1.2 million to $1.4 million, and stock-based compensation expense of approximately $1 million to $1.5 million.

The company's projected net income excludes the following items: foreign exchange gains or losses. Any settlement related to the ongoing SEC investigation or other litigation, potential restructuring charges or the potential impact of any future acquisitions including NETg or divestitures, including potential non-recurring acquisition related expenses. And amortization of any purchased intangibles and deferred compensation charges resulting from an acquisition transaction.

The outlook also does not take into account the effect of a public offering or other financing arrangements that could impact outstanding shares and thereby the company's EPS outlook.

SkillSoft is presenting projected net income for both fiscal 2008 and the first quarter of fiscal 2008 with these items excluded, because it is currently unable to estimate the amount of the excluded items. And it believes that this measure presents investors with meaningful information about the company's projected operating performance for fiscal 2008.

With that, Chuck and I will now be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions). Our first question is coming from Bob Craig with Stifel Nicolaus. Please go ahead.

Bob Craig - Stifel Nicolaus

Good morning, guys. Congratulations on a very good year.

Chuck Moran

Thanks, Bob.

Tom McDonald

Thanks, Bob.

Bob Craig - Stifel Nicolaus

Chuck, I was wondering, if you could comment, I know we have asked this in the past on demand patterns, trends, changes that you are seeing by product area, looking at soft skills versus IT and/or by geography? And what are you seeing or hearing from customers at the front-end of the pipeline?

Chuck Moran

Okay. Well, the demand trends I will have to characterize as stable and predictable. Product areas, as you know, IT is driven pretty much by new introductions of technologies. And obviously with Microsoft coming out with Vista, we start to see a little bit of interest in that, but companies that we sell to don't immediately switch. So, that's not something that you will see an immediate spike on, but it is something that we are putting our development dollars in to obviously support and be ready for that.

In terms of the geography, the North America market is still more dominant than international. But international seems to be growing reasonably well and I would certainly like both sectors to grow better. But, I would say, it's pretty well balanced and fairly predictable to what we had expected when we looked at the beginning of the year.

Bob Craig - Stifel Nicolaus

Okay. You mentioned the development expenses and so on. Can you indicate what the net title growth was in fiscal '07 and what it might be in '08?

Chuck Moran

I probably can give you like soft numbers. We probably added, I'm guessing now, probably maybe 200 to 300 titles from the beginning of our fiscal year '07 to the end and we would expect to do approximately the same amount in this fiscal year going forward. And that excludes the Targeted Learning, which is now known as our Leadership Development Channel. That excludes those assets that we have added. We also aside from adding just content subjects themselves we also translate or have localized courses that are over and above those numbers.

Bob Craig - Stifel Nicolaus

And where was that growth concentrated, Chuck? Was it at IT or was it soft skills or both?

Chuck Moran

I think it was a little more IT than we had done in the past. And that's again ramping up for some of the new releases that are coming out.

Bob Craig - Stifel Nicolaus

Okay. A couple of quick questions on the sales force. The size of the sales force at year end is still roughly 200, 25 and 10?

Chuck Moran

What's the 25 and 10?

Bob Craig - Stifel Nicolaus

The telesales and the new business people.

Chuck Moran

Yeah. That's about right.

Bob Craig - Stifel Nicolaus

Okay. And it sounds like the latter two you are planning to still add to in '08. Is that correct?

Chuck Moran

That would be our goal. We certainly want to add to it in the telesales area and have activities already ongoing in that department. On the field sales force side, we want to make sure that we have a full understanding post to NETg acquisition and integration of what the landscape of talent looks like and the account base, the structure of it, the geography make-up of it. And then, at that point, we can probably make a more intelligent decision in terms of how we want to redeploy or deploy the resources that we have collectively and how much we want to add to the new business team.

Bob Craig - Stifel Nicolaus

You lead in well to my next question. What can you tell us or give us comfort in the rapidity and smoothness with which you will be able to integrate the two sales forces post deal? And again, could you refresh us on what the combined size of that sales force is going to look like?

Chuck Moran

Last question, first. I actually can't issue a number as to what that will look like, because until we actually sit down and map accounts name by name, and since we are still competing, we don't have that type of detail yet. It would be premature for us to guess at what that overall headcount would be. We certainly will get some synergies in those areas as well as in the management side, but we are going to hold off in giving out specific numbers. If you look at overall how we expect to integrate the organizations from a sales perspective, we had done a lot of leg work already on the management side because we are allowed to talk with the managements, obviously of NETg and not getting into anything that is going to be viewed as competitive.

So, we have a good feel for to some of the people in those ranks. And obviously, from a competitive perspective, we certainly know many of their sales people because we compete against them. So, when we walk into the acquisition, it is not going to be blind, and we are not going to be starting from ground zero. We have got a lot of thought process already underway and a lot of diligence in those areas. So, we were pretty effective when we integrated the SkillSoft-SmartForce sales force from a timing perspective, and we expect to be as good in the NETg one.

Bob Craig - Stifel Nicolaus

Chuck, assuming a May/June close, any timelines that you can outline, even vaguely on specific integration accomplishments when you would like to have those done and finished?

Chuck Moran

Nothing that we could talk about with exactness yet. Obviously, the tall pole in the tent is going to be some of things that the customer requirements are, and to get multiple platforms down to one takes some time and we need to look and see what commitments have been made and making sure that we take care of the customers first. And then obviously deliver as we did in the SkillSoft-SmartForce merger hopefully a one plus one equaling three in terms of the platform features and functions.

Years ago when we merged with SmartForce, SkillSoft's platform was not as robust as it is now and SmartForce had a superior feature set. So, we had to do a lot of work and it probably took us about 18 months to do that integration. We are hoping we can do something better than that simply because I think both companies' products are probably a little closer in terms of features and functions than they were when we merged in 2002.

Bob Craig - Stifel Nicolaus

Assuming half a year that you will be able to work as a combined company, you would expect 70% of the total integration process to be completed, 50%?

Chuck Moran

I don't know if I would put a number on it because without defining what that would mean, it would be a different thing. If you are talking about organizationally and the headcounts, we probably would have that done sooner in terms of where we were going and we would certainly have transition teams. But in terms of knowing where the overall headcount would be, we would certainly know that. If you are looking at it from a dollars perspective, we would be a little more guarded in that because we would need to understand the long-term transition costs and the cost structures that we have to sustain.

We also, as you know, talked about this on the press release when we announced the NETg deal, the makeup of their product offerings is about 76% in the core product offerings that we know of is courseware and about 24% in other businesses. And we need to look at those businesses from the 24% front because they are different to us as both from a growth potential as well as the profitability and making sure that we are comfortable in making those decisions that we can grow those businesses and grow them profitably. So, depending upon the outcome of those, we would also dictate those numbers, which is why I can't give you one now.

Bob Craig - Stifel Nicolaus

Okay. Last question and I will turn it over. How did the backlog and the combined dollar renewal rate look relative to your expectations?

Chuck Moran

It actually came in pretty good. I won't say I am overly pleased because I never say that because we can always do better. But I'm certainly satisfied and pleased that I think we did a good job and we did a good job of focusing on supporting the accounts throughout the year and managing those renewals quite effectively. So, the team did a very good job, and overall, we think that we were very successful in what we set out to do.

Bob Craig - Stifel Nicolaus

Should we have been expecting the backlog number to be up slightly higher given the revenue growth that you attained throughout the year?

Chuck Moran

No. I think it's a pretty reasonable one. It's typically on a percentage basis pretty consistent with the prior year. So, obviously dollar-wise, it is up. But the percentages stay fairly close.

Bob Craig - Stifel Nicolaus

Okay, great. Thanks, guys.

Chuck Moran

Okay.

Operator

Thank you. Our next question is coming from Greg Cappelli with Credit Suisse. Please go ahead.

Greg Cappelli - Credit Suisse

Good morning, guys.

Chuck Moran

Hi, Greg.

Tom McDonald

Hi, Greg.

Greg Cappelli - Credit Suisse

I might just ask you again about, when you think about the main factors that lead to the revenue being in the top range of your guidance. Is it more aimed towards adding the new clients that you did given what you said about the average contract value? Chuck

Chuck Moran

That's certainly some of it. We did a better job than we did in the prior year, but I don't want to have you folks think we are in the promise land yet and we are firing on all cylinders because we're not. I think we have a very talented sales organization, and I think they are capable of doing a lot more than they did now. But with the renewal rate and upgrade rates combined being at 106%, I think that was one of the contributing drivers to the improvement on those numbers.

Greg Cappelli - Credit Suisse

Okay. Just as it relates to NETg, have there been any more decisions that you've made on which businesses you might keep or start [divesting]? Is it all pretty much the same as just talked about before?

Chuck Moran

Pretty much the same. We are little hesitant to jump the gun and without really having a chance to sink our teeth into the businesses and understand them really in detail and to know whether there are things that we can do or take different approaches and look at them to make those decisions on keeping them or divesting them or shutting them down. That remains to be seen. So, it is probably not worth us speculating because it's not going to be worth much right now.

Greg Cappelli - Credit Suisse

Alright. And then, I know you were thinking about trying to acquire private financing to cover the last 70 million or so of the acquisition that you talked about before. Does it look like that is still the plan? Or should we expect you to be issuing ADSs for the remainder? Do you have any thoughts on that?

Chuck Moran

We do have thoughts. As the transaction has not closed yet, it has given us an opportunity to continue to build our cash position. So, as a result, we're feeling more confident that we may be able to do the transactions without having to issue certainly the 11 million shares we're talking about and our goal is to not have to issue any, and we need to secure our debt financing and look at what the overall cost of the deal is going to be if there's any purchase price adjustments as our cash grows and growth continues month-by-month and quarter-by-quarter. All those will factor into it. But it is still our goal, and I think it is in the realm of possibility that we could do this with minimal or no equity.

Greg Cappelli - Credit Suisse

Okay, great. Thanks very much, very helpful.

Operator

Thank you. Our next question is coming from George Sutton with Craig-Hallum. Please go ahead.

George Sutton - Craig-Hallum

Hi, guys. Well done on the quarter. Could you discuss the competitive landscape during this pre-merger period? Your backlog certainly does not suggest you saw any real impact, but has there been any stalling in the market or excessive pricing discounts that you've seen?

Chuck Moran

Overall, George, we will have to say no, it's been pretty predictable. We've seen a few deals that have, I will say stalled to use your word, but it hasn't been by any means across the board, that's almost like the exception rather than the rule. Discounting in pricing has always been challenging. It certainly is a challenge in Q4 when that's our biggest selling season and many contracts are up for renewal. But we didn't see anything that was out of the ordinary. There is always an occasional outlier, but I would say overall we are pretty pleased, and it came in as we expected.

George Sutton - Craig-Hallum

I was intrigued by the TLC acquisition. While small, it appears to be a nice way to build out more engaging content. I just wondered if you could talk on a broader basis, how you may use other tuck-ins like this to build out your Next-Gen offerings?

Chuck Moran

Sure. Well, first of all, with the assets that we're getting, we're also getting some great people who have an expertise in the area of creating these engaging full-motion video types of assets. So, we think that, one, now that we have that talent inside and onboard, we certainly could look at growing the libraries themselves by shifting dollars and moving dollars or as we grow our revenues bring some additional investments into those areas on a gross dollar basis, but potentially still keeping within our margin goals.

As we've said before, don't want to look at anything huge. We're going to really be focused on the NETg integration over the next months. But the small types of companies do represent assets in those areas. And a gentleman by the name of John Ambrose, whom you may have heard of and known and was one of the founders of books and the general manager, has stepped up in the organization and will now be on the strategic side in addition to doing some things on the book side.

But we are relinquishing some of his responsibilities on books to spend more time looking ahead for the company, helping us with our strategic thinking and planning and looking for these types of assets. This is one that the TLC asset was one that he found and worked with, along with another gentleman in our company. So, we have a couple of people that do a good job of looking under all the rocks and finding these opportunities, and we're going to continue to do that.

George Sutton - Craig-Hallum

Great. And December you announced plans to integrate your OLSA platform with some total in Saba? Could you just discuss what that might mean for Saba and SumTotal customers and your ability to more broadly appeal to the large corporate market?

Chuck Moran

Sure George. The goal behind OLSA is to really have an open standard, and the benefit for the customers is that when they are using SkillPort, which is SkillSoft's LMS, they are able to do many features and functions that normally you would not be able to do on a third party's LMS. For example, one of the more powerful features we have is a search characteristic, and it allows customers who use SkillPort to search on our libraries. It also allows the population of courses, as they become available, to be automatically repopulated to the customers. So, as we add new courses, they will automatically get access to that.

With the SumTotal and Saba products, with then now accepting OLSA, they no longer will have to limit the customers in terms of their strengths and usage of those types of benefits, populating courses when they become available, doing search features. And the nice thing about that is, then we think that the customer's perspective is that when they are looking at content vendors and say they've already selected the SumTotal or Saba LMS, we feel that we will have an enhanced competitive position because the customer does not have to look at just content anymore, but they can look at the technology that we invest heavily in and give them those search features, give them those entitlement rights to courses as they become available.

And in the prior years, when we didn't have OLSA, this technology, customers would have to really give that up. So then, our courseware has one less thing or our competitive position has one less thing to offer because we can't do searches seamlessly, and you cannot do that repopulation. There are other companies that we're in discussions with in terms of their interest in adopting OLSA, NetDimensions is one that has already done it now, and we're in discussions with companies like SAP and Saba and so forth. So, the benefit to those LMS providers we think is it enhances the usage of content and courseware. It limits or reduces the work on the folks that comply with OLSA, so that they don't have to respond to company requirements asking them to do the work, and all the activities that were in SkillPort they can now get them seamlessly.

George Sutton - Craig-Hallum

Great. Last question for Tom, if I could. Tom, what's your next milestone with respect to the merger completion? Is it getting the 2004-2005 audits?

Tom McDonald

It's completing three years worth of audit. The 2004, 2005, 2006 needs to be completed. So, NETg is diligently working to complete those years. But that's the next milestone, getting all those three years complete.

George Sutton - Craig-Hallum

Thanks guys.

Chuck Moran

Okay.

Operator

(Operator Instructions). Our next question is coming from Jeff Silber with BMO Capital Markets.

Jeff Silber - BMO Capital Markets

Thanks so much and good morning. My question is actually just the follow-up from the last one. After you get the audits, what else is needed to be done in order to get this deal closed?

Chuck Moran

After we get the audits SkillSoft needs to close the debt financing that we will be doing and going through the appropriate mechanical steps in order to do that. So, we are going to, as we get closer to seeing the light at the end of the tunnel in terms of when we can get the audits, we will then start that process, so we can try and do some things in parallel. But that typically takes three to four weeks to close.

Jeff Silber - BMO Capital Markets

And are we going to be notified as the company reaches these milestones, or are we just going to be notified once the deal is closed?

Chuck Moran

We don't want to just piecemeal the street in giving them blow-by-blow step. So, we think that when we can give something that's meaningful and tangible and it isn't just another step in the thing, but we can probably put some estimates as to when the thing is targeted to close, we think that would be more appropriate than giving you a blow by blow description.

Jeff Silber - BMO Capital Markets

That is fair. I appreciate that. Again just getting back to the NETg acquisition and I know you are not giving any official guidance, but how has the reaction been internally on both sides? You have got a few months to kind of adjust this.

Chuck Moran

Well, I think it's been quite positive overall on the SkillSoft side. I think, it's been received well in the NETg side, but albeit I would not put myself up as an expert in that area. But we do spend a fair amount of time talking with individuals at NETg. Obviously, there's some nervousness on the NETg side too and a little bit on the SkillSoft side. Because there is certainly going to be a tremendous amount of great people from two companies joining and we are not going to have the ability to keep and hire everyone which everyone knows.

So, you have to temper the enthusiasm of it being the right thing for the customers with people maybe having to face a fact that they may have to move on. So, it's I think been received as well as other mergers or acquisitions can be received, and we are managing as best we can in light of the uncertainties which we acknowledge are there.

Jeff Silber - BMO Capital Markets

Okay. And have you seen employee turnover trends change markedly at all or if at all either at your company, or are you hearing anything about what's going on in NETg?

Chuck Moran

Well, we have not seen anything markedly at our side. And we do hear that there will be some and there have been some people leaving NETg. But since we are not at liberty to say the numbers and frankly it is not our position to say whether that's consistent with past practices or not, we will just say that it has happened. But it's something that we expect and it is part of life.

Jeff Silber - BMO Capital Markets

Okay, great. And I just got another question on the guidance. Again I know it's without NETg. Tom, if I were to look at the quarterly ramp up in fiscal year '08 comparing it to fiscal year '07, I know we've got to take out the SmartCertify impact that was a little greater in '07. And then we've got to add this new acquisition that you put in. But excluding those, should we pretty much see the same type of quarterly ramp up on both the top line and the bottom line?

Tom McDonald

Well, definitely on the top line, I think how the last year compares. As you said, the only thing that you really have to take into consideration is the SmartCertify deferred revenue impact. We are going to replace those revenues but when we replace it with the order intake, that order intake will follow the same seasonality we have.

So, it might be where the revenue might be a little more even over the year this year on that replacement as compared to last year with SmartCertify that was a little heavier in the first half of the year because of that deferred revenue. And on the bottom line, I would think the bottom line pretty much should follow last year's ramp.

Jeff Silber - BMO Capital Markets

Okay, fantastic. Thanks again.

Chuck Moran

Okay.

Operator

Thank you. Our next question is a follow up coming from George Sutton with Craig-Hallum.

George Sutton - Craig-Hallum

Sorry to belabor this, but with respect to NETg, we received and you have given 2005 revenue estimates. And I'm just curious, I know you haven't seen '06 numbers yet, but as a competitor, would you assume that NETg is a growing business? Should they have seen some growth in 2006? Thanks.

Chuck Moran

I would have to say that I don't know if it would be, they certainly are a great competitor and I think they did a good job subsequent to the announcement of the deal. But I'm sure the announcement of the deal had somewhat of an impact on their ability to close business, simply because it's probably a fact of life. So, I wouldn't necessarily say they are growing, but without seeing the '06 numbers, I can't give you a definitive yes or no. Just my gut would be that they probably weren't.

George Sutton - Craig-Hallum

Thanks guys.

Operator

Thank you. At this time, I would like to turn the floor back over to management for any further or final remarks.

Chuck Moran

Thank you, operator, and thank you all for participating in the call, and we will look forward to either talking with you at the CSFB Conference or on our next quarterly conference call. Bye.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

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Source: SkillSoft F4Q07 (Qtr End 1/31/07) Earnings Call Transcript
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