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Selectica (NASDAQ:SLTC)

F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

August 14, 2008 5:00 pm ET

Executives

Scott Wilson - IR

Brenda Zawatski - Co-Chairman

Jim Pardee - Interim CFO

Jim Thanos - Co-Chairman

Analysts

Lilly Wu - TGRA

Jack Howard - Steel Partners

William Myers - William Asset Management

Tony Pollak - Maxim Group

Operator

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the Selectica first quarter fiscal 2009 financial results conference call. (Operator Instructions) So, this conference is being recorded today on Thursday, the 14th of August, 2008. I will now turn the conference over to Mr. Scott Wilson for Selectica. Please go ahead.

Scott Wilson

Good afternoon, everyone. Joining me on today's call are Selectica's Co-Chairs, Brenda Zawatski and Jim Thanos, and Interim CFO, Jim Pardee. Before we begin, I would like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue and earnings per share and future plans, opportunities and expectations of the Company.

These predictions, estimates and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the call. These risks are detailed in today's press release, as well as in our quarterly and annual reports filed with the SEC, which you're encouraged to review.

Statements included in this conference call are based upon information known to Selectica as of the date of this call, and Selectica assumes no obligation to update this information contained in this call.

In addition, I would like to point out that we will present certain non-GAAP information on this call and refer you to the reconciliation of GAAP to non-GAAP information included in today's press release, which is also available on the Investor Relations section of the Selectica website.

Today, we'll plan to go through the recent quarter's financial result, update you on recent events and changes at the Company and give you our thoughts about what is ahead and what the steps will be.

And with that, I'll turn it over to Brenda Zawatski.

Brenda Zawatski

Thanks, Scott. Good afternoon, everyone. For the first quarter of fiscal 2009, our revenue was $3.8 million compared with a revenue of $4.3 million that we reported the same period one year ago.

In the most recent quarter, the split was 70% license revenue, I'm sorry, 20% license revenue, 37% maintenance revenue, and 43% professional services and other revenue. By business unit, the first quarter fiscal 2009 revenue for sales on the Configuration business was approximately $2.0 million or 52% of the total.

Revenues from our Contract Management Business totaled approximately $1.8 million or 48% of the total revenues. This was a 32% growth versus the same period last year. Consolidated gross margins were 67% in the quarter, with the Sales Configuration business delivering a 74% gross margin and Contract Management delivering a 60% gross margin.

Total operating expenses for the Company were $4.9 million compared with $6.4 million in the prior year period. Excluding charges related to restructuring, litigation settlement and our stock option investigation, total non-GAAP quarterly operating expenses were $4.4 million compared to $4.5 million in the prior year.

Consolidated R&D spending for the quarter was $1.1 million, a slight decrease from the $1.2 million in the same period a year ago. Sales and marketing was $1.8 million compared to $1.9 million for a year ago, and our general and administrative expenses were $1.5 million compared to $1.4 million in the same period a year ago.

GAAP net loss in the quarter was $2.6 million, or $0.09 a share compared to a net loss of $2.3 million or a loss of $0.08 a share in the same period of the prior year. On the balance sheet, we ended the quarter with $33.3 million in total cash, cash equivalents and investments.

As we have said in the past, our customer list is a testament to the strength of our solutions. This quarter, we signed significant new contract management deals with two Fortune 500 companies. One was a world leading online retailer, and the second was a leading developer of technologies for the global marketplace. One of these was initial deployment of a contract management solution, while the other was a competitive displacement.

I believe that the selection of our solutions by these leading global companies validates the strength and leadership of our contract management offering. In addition, Forrester Research has recently issued a report that also reinforces the value our contract management solutions.

I'm pleased by the growth that we see in this business and look forward to the ongoing development and expansion of it.

Now, let's talk about the state of the business. As you know, we've had to make some hard decisions and significant changes for the Company in the past few months. I would like to give you an update on what has taken place and a look at what is ahead for us and what our likely next steps will be.

At the beginning of July, we announced a significant restructuring of the Company. This included making some senior leadership changes in the Company, including the departure of the CEO and General Managers for both of our businesses, as well as the elimination of G&A staff for the Configuration business.

Coincidentally, but unrelated to the restructuring, the CFO left to accept a new opportunity at a much larger company. The timing of these changes reflects in part that the Company has successfully worked through its stock options and patent infringement issues that was been a major overhang on the business. We're now poised to move forward.

While working though these issues, the Company has been making investments in order to reinvigorate its Configuration business and generate new license revenues. In our view, the investments that were made didn't deliver the returns or prospects that were significant enough to continue the -- warrant the continued investment.

While there's never a good time to make major changes and disrupt the business efforts, the Board had heightened sense of urgency and decided to make some hard choices.

Since, we announced the restructuring and leadership changes, we have made significant cuts in our operating expenses, such as eliminating approximately $1 million in annual salary and benefit costs. We have assessed the opportunities for both of our businesses, have refocused our configuration business on the core product and its upcoming release, selectively added revenue generating resources to our contract management business, and are working with an adviser to help us assess unsolicited inquiries for our sales configuration business. We still currently operate two district businesses, Contract Management and Sales Configuration.

There's very little overlap between the two businesses. There's little common code in the solutions. We have minimal leverage of our resources between the two units, and the touch points at the customer level are entirely unique.

Contract Management is typically sold into the General Counsel's office, while Sales Configuration is sold into the sales and operations side of a customer. First, for our Sales Configuration business, we continue to spend a significant amount of time reviewing the business opportunities. We strongly believe that this is a viable business, but have concluded that the solution may be more attractive to customers as part of a broader suite of larger providers, such as Oracle, IBM, or SAP and others. While the Selectica solution is widely recognized as the gold standard for configuration solutions, the larger providers are delivering solutions that are good enough for a lot of customers at the present time. We are working quickly to understand the value of this business.

The investments I have previously made haven't delivered what we believe is an adequate return. As a result, as we announced early in July, we have downsized this business and taken out more than $1 million in annual costs.

We have eliminated spending on marketing campaigns, taken out sales in G&A costs. In addition, we are in the process of selling the building in India associated with this group. We will maintain our Engineering and Professional Services group while taking a critical look at everything else. This makes sense to us because our engineers are the IT for this business and, and Services group is entirely billable and profitable.

At the present time, we're moving forward with a new version release of the Configuration Solution that is expected to be delivered in September. Thereafter, our team will continue to work on future product enhancements and new releases. We have reiterated our commitment to our current customers and have received positive feedback from them on our plan.

I think it's very important to acknowledge the power and success of our Configuration Solution with our customers. For example, at Cisco, we have supported approximately $40 billion of annual product orders for more than 7,000 products and more than 1.1 million product constraints with no configuration errors reported. This is a significant improvement for Cisco, and we believe that they are very pleased with our performance.

Likewise, Bell Canada, we have supported more than $20 billion Canadian dollars in revenue with high throughput for complex configuration and again, no configuration errors.

Overall, we have processed more than $150 billion in orders annually and support more than $1 billion business rolls. The Configuration business currently has a solid maintenance stream from existing customer base. The challenge for this business is generating new license revenue.

Our plan there is to be more optimistic in new sales situations. Most importantly, while we have already moved quickly to make significant changes in this group, we have not ruled anything out for future businesses.

Now, let me talk about the other distinct business, our Contract Life Cycle Management Group. We believe this is already a solid and growing business with tangible, immediate opportunities.

In fact, our recent industry report from Forrester, after a thorough assessment of all competitive offerings from a wide variety of vendors, has validated our solution by naming Selectica as a leader of the pack for its current CLM offering, which is a huge improvement from our previous rating in the bottom half of all vendors back in March of 2006.

We expect to continue to make selective investments in the CLM unit, but at a measured pace with a much more focused effort. Our focus is exclusively on revenue-generating activities that will deliver tangible returns. For example, we recently announced the hiring of David Naughton as the sales VP of this business. David has many years of direct experience in contract management, and his leadership is extremely valuable to us. Similarly, we have added inside sales capabilities to help us extend our customer coverage.

On the marketing side, we redefined and refocused our outward-facing activities so they are best aligned with our sales teams' immediate needs. Going forward, we anticipate additional resources will be hired in India to take advantage of the lower cost workforce and use local currency generated the sale of the building. This will help us save some tax repatriation costs.

Today, we believe the contract management pipeline needs improvement to reduce quarterly revenue volatility. There are new business opportunities that we don't know of and others that we need to be aware of earlier in the cycle.

To smooth out this lumpiness due to the six month sales cycle, we need to constantly refresh our Contract Management opportunities. Once we are engaged in a process, as the Forrester report indicated, our solution is strong, and our win rate is great.

For reasons I have already highlighted, we anticipate that the contract management business will be the growth engine for the Company going forward.

Let's turn to look at next steps. The next steps that we're working on are to dig down into next layer to address the cost structure and to continue to improve efficiencies where we can. Some examples of this are we're relocating our San Francisco facility to a lower cost location that will save us roughly half the rental cost.

R&D growth moving in India, canceling of the Configuration User Group Conference, and more closely monitoring our G&A expenses. We're in the process of determining the future of our Company and haven't ruled anything out. While our assessment is underway, and detailed strategic plans being finalized, we will maintain our existing businesses, continue outstanding customer service and make appropriate investments to ensure continued product leadership.

We are focused on rapidly improving our financial metrics such as top line growth, improving our bottom line results and stabilizing our cash balances. At this early stage, our expectations for fiscal 2009 revenues are not to be significantly different than the previous years. Beyond that, we will not be providing any further guidance at this point.

This concludes our prepared remarks. Jim Pardee, Jim Thanos and I will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Lilly Wu from TGRA. Please go ahead.

Lilly Wu - TGRA

Yes, thank you. So, the elimination of about $1 million in annual salary expenses -- presumably that will begin to be evident starting from the second fiscal quarter, is that correct?

Brenda Zawatski

That's correct, Lilly. Also, we will have some restructuring costs that may offset that in the second fiscal quarter.

Lilly Wu - TGRA

Okay. So, if we look out maybe two or three quarters from now, we can expect OpEx to be below $4 million a quarter, is that correct? Do we have a target for where the operating expense can be?

Brenda Zawatski

At this time, as I said earlier, we really haven't concluded on our full operating plan budget.

Lilly Wu - TGRA

Okay. And just to reiterate, it sounds as if one of the key possibilities for the CPQ business is actually a sale of the business. Is that correct? I think you referred to there are offers which are being evaluated and currently the focus is mostly on preserving the Professional Services capability as opposed to growing revenue there?

Brenda Zawatski

I think to answer the first part of your question, we haven't ruled anything out in terms of opportunities with the Configuration business. And we want to preserve both the intellectual property, which is our Engineering Group, and our Professional Services team, which bill out at a very high percentage utilization rate.

Lilly Wu - TGRA

Okay. But it sounds like the future sales focus is really on CLM, not on CPQ. So CPQ, if anything, we should just expect that while you're evaluating options, that will just be stable from quarter-to-quarter, but in fact not a lot of effort is being put into find new leads or to grow that business? Am I understanding that correctly?

Brenda Zawatski

It's correct in that we've taken out the sales and marketing efforts. However, we are opportunistic in terms of potential incoming opportunities in that area.

Lilly Wu - TGRA

Okay. For the CLM business, is that business at this time cash flow positive or profitable on a stand-alone basis?

Brenda Zawatski

Yes, Lilly, you can find that information in the queue. A lot of it depends allocations of the corporate overhead.

Lilly Wu - TGRA

Okay. The queue will clearly indicate if CLM is a cash flow positive business on a stand-alone basis? It hadn't in the past filings.

Jim Pardee

Lilly, this is Jim Pardee. The queue does not show business segment cash flows, just consolidated cash flows.

Lilly Wu - TGRA

Right, that's what I thought. Okay. Fine, I'll circle back later, thanks a lot.

Operator

All right, thank you. (Operator Instructions) Our next question is from the line of Jack Howard with Steel Partners. Please go ahead.

Jack Howard - Steel Partners

Hi, Brenda.

Brenda Zawatski

Hi, Jack. How are you?

Jack Howard - Steel Partners

Good. How are you?

Brenda Zawatski

Very well, thank you.

Jack Howard - Steel Partners

I had it on speaker, so I didn't -- did you say who the banker was you guys hired?

Brenda Zawatski

I did not, but it is Needham.

Jack Howard - Steel Partners

Okay. And is there a range of values that the India property could be worth? Is it millions of dollars or a million dollars or…?

Brenda Zawatski

It's roughly $2 million, Jack.

Jack Howard - Steel Partners

Okay.

Brenda Zawatski

I'd say plus or minus 10%.

Jack Howard - Steel Partners

And then with the expense cuts that -- the many expense cuts that you detailed, is it possible that the Company will be cash flow neutral with those expense cuts that were made?

Jim Pardee

Jack, it's Jim Pardee again. We are reviewing and updating the operating plan, the expense budgets, and it's just too early to have an answer to that.

Brenda Zawatski

We're scrubbing everything, Jack, and we just haven't had a chance in the last several weeks to get through everything in time for the call.

Jack Howard - Steel Partners

Yes; and I know you've been busy, and I thank you guys for everything you guys have done. In our view, great the stuff you've done and stepping up and all of the time, I know you've put into it. That's all I had. Thank you.

Brenda Zawatski

Thanks, Jack.

Operator

All right, thank you. Our next question is from the line of [William Myers with Miller Asset Management]. Please go ahead with your question.

William Myers - William Asset Management

Yes, I guess since the Contract Management business seems to be -- since you have such a great product there, would you consider selling that business if there were an appropriate offer, or do you really want to keep that business and do it internally?

Brenda Zawatski

Well, we wouldn't rule anything out at this point, Bill. We're looking at all of our options.

William Myers - William Asset Management

Okay. So, it could be on the table if someone was interested?

Brenda Zawatski

It's fair to say we haven't ruled anything out.

William Myers - William Asset Management

Okay, thank you. Thank you very much.

Operator

All right, thank you. Lilly Wu, please go ahead with your follow-up question.

Lilly Wu - TGRA

Yes, actually on the balance sheet, I noticed there's a $5.8 million payable to Versata. I had recalled that there were -- is that the $200,000 that is owed to them every quarter? Because originally, there was a bullet payment on the final Versata settlement, and then $200,000 to be netted against any joint licensed sales per quarter, and of course there haven't been any. So, is that $5.7 million just accrual of all the $200,000 that are owed going forward?

Brenda Zawatski

Yes. It is, Lilly. That's exactly what that is, and the present value of the money that we still owe Versata.

Lilly Wu - TGRA

Okay, okay. There's no joint sales activity in reality going on there, right? So, the payment would be just the fixed $200,000 every quarter?

Brenda Zawatski

As far as we can tell right now, that's correct.

Lilly Wu - TGRA

Okay.

Brenda Zawatski

We don't see anything in the future with them right now.

Lilly Wu - TGRA

Okay. And the license revenue that was in the first quarter, the $756,000, could we assume that that was pretty much entirely CLM?

Brenda Zawatski

There was some CPQ revenue in the first quarter. The license revenue, yes, there was $184,000.

Lilly Wu - TGRA

Okay. And the CLM sales now, they're all in traditional software sales with any upfront license fees? There's no subscription sales at this point, is that correct?

Brenda Zawatski

Not in this quarter, this particular quarter, Lilly.

Lilly Wu - TGRA

Okay. All right.

Brenda Zawatski

It could be up front license sales, doesn't mean that we recognize them in the given quarter; and we've had many such transactions. You know, large transactions where we weren't able to recognize the revenue in our current quarter.

Lilly Wu - TGRA

Okay. All right, thanks a lot.

Operator

All right, thank you. (Operator Instructions) With no further questions registered, this will conclude the question and answer session. Management, please continue with any closing comments. I'm sorry, we did not just get a question. [Tony Pollak] with the Maxium Group. Please go ahead.

Tony Pollak - Maxim Group

Yes, could you give us an idea of when Needham was engaged, and have you received any time table from them when they thought they would have some sort of action?

Jim Thanos

This is Jim Thanos. Let me tell you exactly where we are with Needham. We, in fact, aren't quite 100% engaged with them. We are in the contract stage. We've agreed on the final contract language and expect to have it closed by Monday or Tuesday next week.

Tony Pollak - Maxim Group

Okay. Will you make an announcement on that?

Jim Thanos

We weren't planning to.

Tony Pollak - Maxim Group

I think you should. I think that's very significant in terms, obviously, of the total Company. So, I think it is an event that should be reported to the stockholders.

Jim Thanos

Okay, thank you.

Brenda Zawatski

Thanks. That's why we're talking about it. We also are weighing up the business impact of sales or prospective sales that we have.

Tony Pollak - Maxim Group

Okay. Thank you.

Operator

All right, thank you. Mr. Wilson, please continue with any closing comments.

Scott Wilson

I would like to thank everybody for joining us on the call today, and will we look forward to reporting back to you in three months' time.

Operator

All right, thank you. And ladies and gentlemen, that does include the Selectica first quarter fiscal 2009 financial results conference call. If you would like to listen to a replay of today's conference in its entirety, you can do so by dialing 1-800-405-2236 or 303-590-3000, and put the access code 11117852. Those numbers again, 1-800-405-2236 or 303-590-3000, and put the access code 11117852. We would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.

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