SumTotal Systems Q3 2007 Earnings Call Transcript

| About: SumTotal Systems (SUMT)

SumTotal Systems, Inc. (SUMT) Q3 2007 Earnings Call October 30, 2007 5:00 PM ET

Executives

Don Fowler - CEO

Neil Laird - CFO

Analysts

Robert Breza - RBC

Eric Martinuzzi - Craig-Hallum

Nate Swanson - ThinkEquityPartners

Ariel Sokol - Wedbush

Operator

Good afternoon, and welcome tothe SumTotal Systems Third Quarter Earnings Conference Call. At this time, allparticipants have been placed in a listen-only mode, and the floor will be openfor questions following the presentation.

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

Neil Laird

Thank you, Operator, and thankyou for joining us for SumTotal Systems third quarter earnings conference call.Joining me on today's call is our Chief Executive Officer, Don Fowler. On this call we will discussour results, our expected results and may refer to the press release that weissued today at approximately 1:10 pm Pacific Time. You can find a copy of therelease on our website at sumtotalsystems.com under the Investor Relations section.

Before we review the quarter, Iwould like to share the following information. Certain comments made in thepress release and during this conference call are forward-looking statements,including without limitation statements regarding future financial performancefor the fourth quarter of 2007 and beyond, future business operations andproducts and execution of market conditions that include risks anduncertainties.

These forward looking statementsare based on information that is available to us as of today and reflectmanagement’s current expectations, estimates, beliefs, assumptions and goalsand objectives and are subject to uncertainties that are difficult if notimpossible to predict.

These statements are notguarantees of future results and involve known and unknown risks, uncertaintiesand other factors that may cause actual results to be materially different fromthe results expressed or implied by these statements. Do not place any unduereliance on any forward-looking statement or statements.

Actual results may differmaterially from those in the forward-looking statements included in the pressrelease issued today or on this call. Review the Safe Harbor statement setforth in the press release we issued today, and our risk factors disclosedpreviously, including those in our SEC filings such as our Annual Report onForm 10-K for 2006 filed on March the 16th, 2007.

Our quarterly report on Form 10-Qfiled on August of 7, 2007 and our Prospectus Supplement filed on Form 424B2filed on May the 21, 2007 and our Form 8-Ks. We assume no obligation to updatethe information in either our press release or this call. A live webcast oftoday's call as well as a replay are available on SumTotal System's websiteuntil November the 6.

I will now turn the call over to DonFowler.

Don Fowler

Thanks, Neil. Good afternoon,everyone. I want to discuss three topics, our third quarter results, our viewof our business, and changes we are making at SumTotal. Our results for thethird quarter were within our guidance. Revenue was within our range at $29.5million and earnings per share were $0.05 at the midpoint of our range. As thethird quarter is often a difficult one for the software companies, we believethese results are good.

Neil will go over the numbers inmore detail later in the call. But first, I’d like to highlight a few keystatistics. Our subscriptions and support revenue increased 26% year-over-year.Our deferred revenue balance increased 38% over last year. We have beenprofitable for nine straight quarters, and we generate cash from operations.

Additionally, during the quarter,we were able to cross sell our performance management solution into ourexisting LMS customers and sell our LMS into an existing performance managementcustomer. We believe this is an indication that our strategy of selling newtalent management solutions into our customer base is starting to show results.

All of these examples demonstratea good business with lots of opportunities. However, we have seen some changesin our business that are of concern to us. Here is our current view of ourbusiness. In recent weeks, predicting the timing of some large deals has provedto be even more difficult than usual. And a few companies and some of theindustries we serve, such as pharmaceutical, have announced business issues oftheir own.

While, none of these deals havebeen lost, some of the decisions have been pushed out into future quarters. Forhow long we do not know, because it’s dependent on their own businesssituations. And several of the other large perpetual deals that we do see willlikely require more acceptance terms, which will affect the timing of theassociated revenue. A real world example of timing issues is our experiencewith the large retail customer that we have signed earlier this year.

As you saw in our press release,we recently concluded that there are too many risks to confidently includerevenue from this customer and our forecast for Q4. We think it is more likelyto occur in the first and second quarters of 2008; this is disappointing. Althoughunfortunate, it reflects the compensated implementation and projectdependencies not a service or support issue.

The customer, the third-partydevelopers and our team are working together to ensure that the solution worksin the customer's environment and that the end result meets their needs. We arecommitted to delighting this and every other SumTotal customer.

Additionally, during the last fewquarters, we have had execution challenges in a few areas of our business.First, our performance management business is taken longer to ramp than weexpected. Although, we believe it is a good business and we have made progress,we have recognized that we need to make some changes in that area to be moresuccessful. But we still brought in 21 deals in the third quarter more than wehad in the first half of the year.

Second, the changes that we havemade to our international business are still in the early stages and only justbeginning to show progress. We are confident that the changes we made were theright ones, but in the short-term we remain disappointed with our slower thanexpected ramp in international.

The end result of all of this isthat our revenue is not growing as rapidly as we had forecast. Because of ourincreased uncertainty, we believe it is appropriate to set a more conservativeview of our outlook for the fourth quarter than we have previously mentioned.

You may wonder why we didn't reduceour guidance further when we met for the earnings call three months ago. To beclear, when we started the quarter and through the vast majority of the quarter,there were enough deals in the pipeline to meet the forecast. Within the lastfew weeks, however, a number of these deals have been pushed out.

Now, let's talk about changes weare making in our business. We are taking the following three steps to helpaddress our long-term opportunity. We believe these steps will increase theconsistency and predictability of our results and our growth rate goingforward.

First, as you saw in the pressrelease, we planned to hire Ray Villareal, as Senior VicePresident of Field Operations to lead our sales, marketing and supportoperations. Ray will bring a wealth of experience including several executivepositions at WebEx, Compaq and some startups. We expect that the addition ofRay will further strengthen our management bench.

Second, we are creating twodistinct business units to increase our strategic focus on those markets. Eachteam is responsible for focus on our product market and sales initiatives toaddress issues unique to each business unit. This structure is also designed toestablish a profitability focus on each key market and to ensure continuingfocus on best-in-breed products for our key market sectors.

The learning and talentmanagement business will be run by Sanjay Dholakia,and the performance management business will be run by Jon Ciampi.Both talented executives have a long history with SumTotal, and I believe theyhave what it takes to make their businesses successful.

Third, webelieve it is appropriate at this time to restructure our business, so that itbetter fits our projections. This restructuring will reduce expenses byapproximately $4 million a year and will be fully implemented by the start ofthe first quarter.

We plan tocontinue to invest in our core markets, which are international mid marketsubscriptions and performance management as well as our core enterprise LMSmarket. Although we have near-term challenges to address, I believe thatwe have put measures in place so that when we get through them we will have astronger company with a model that gives us the growth and visibility we alldesire.

Now, let me turn it over to Neil forthe details on the financials.

Neil Laird

Thank you, Don. In response tomany requests to provide better visibility on the trends in our business, werecently provided you with some bookings data. And I am going to start byupdating this through the end of the third quarter.

We are providing this data on anannualized basis, since individual quarterly numbers for bookings fluctuategreatly as a result of seasonality and the timing of the deals and do notnecessarily reflect the underlying business trends.

Now, I am going to give you a lotof data here, but it should help you with the models, and it’s what people haveasked for. So for the last 12 months, our bookings were $124 million, up from$104 million than the previous 12 months and up from about $121 million throughthe end of June, which we shared with you before.

This $124 million includes $117million of LMS business and $7 million of performance management business. Andthis represents 19% year-on-year growth. Our revenue on the same basis was $120million over the last 12 months, and this grew 11% from $107 million in theprevious 12 months. So our bookings have grown by $20 million over the past 12months, and revenue has grown by $13 million. That’s a $7 billion difference.

And if you look at the balancesheet you will see the deferred revenue increased by $10 million, which morethan covers the difference. The rest of the difference is essentially due tothe timing between bookings and billings. So, what’s the difference between arobust 19% growth in bookings and the more modest 11% increase in revenue?

So, let’s look into a little bitof detail at the components and bookings. Our perpetual licensed bookings overthe past 12 months are $29 million. That’s up from $22 million the previous 12months; that’s a 32% increase. However, one large deal that we have talkedabout before accounts for over $5 million of this perpetual license increase.So, if you take that out, it leaves us with about an 8% growth in the rest ofthe perpetual license spaces.

Services were also up $32 millionup about 7%. Support bookings increased to $36 million up about 6%. So, we havean overall business excluding our subscriptions business this is growing about7% to 8% annually. Our subscriptions business over the past 12 months was $27million up from $19 million in the previous 12 months; that’s a 44% increase.

Additionally, as Don mentionedthe increase in perpetual licenses is primarily at the high end, and thesetypically come with terms the delay of revenue recognition, and also, the moveto subscriptions deals at the lower and middle end of the market also delaysrevenue recognition.

So, we have got a subscriptionsbusiness that’s growing at over 40% with the revenue increase at a much lowerpercent, and the rest of the business has been growing at about 8%, if youexclude the one large deal. And that’s what's reflected in our 11% overallgrowth rate in revenue.

At the end of the third quarter,our deferred revenue was $35 million, comprising $16 million in support, $9million in subscriptions, and $5 million each for license and services. Andsupport now represents 46% of our deferred revenue as apposed to a 64% number12 months ago.

So, moving now onto the thirdquarter, the revenue was within our guidance range, but up only 9% on a GAAPbasis and 7% on a non-GAAP basis compared to the third quarter of 2006. Subscriptionsand support revenue grew 28%, GAAP and 26% non-GAAP, and this is what continuesto drive the company’s growth.

However, services revenue was flat,and license revenue was down sequentially. At the same time, the deferredrevenue for licenses and services was increased $6 million as a result of biddingsfor large contracts on which we can’t take revenue.

As Don mentioned, we had severalnew deals for licenses that did not close. For example, there were two largedeals we expected to close in the third quarter but not take revenue in thethird quarter that we moved out of the budget for the customer, and we willlikely delay until sometime next year.

Additionally, for example, twoother deals that within our third quarter revenue forecast that also delayed.Both of them are subject to further discussions this year and is difficult toknow when that will close. So at this point, it’s difficult for us to know ifthere is a slowdown in our business or these are specific to the individualclients that our business has been impacted, and we have adjusted our revenueforecast and our expense levels accordingly.

Gross margin in the third quarterwas 57% on the GAAP basis and 65% non-GAAP. These levels are unchanged from thesecond quarter, and each are up approximately 2% from the comparable margins ofthe third quarter of 2006. We've seen a good improvement in our service grossmargin as a result of better utilization of resources given the number of largeprojects we are working on.

This margin was 42% in thequarter compared to 31% in the second quarter and 29% in the third quarter oflast year. In the fourth quarter, I expect the margin again to be around 40%,but on a go-forward basis, it is more realistic to forecast this in the mid30%.

Subscriptions and support grossmargins were 67% in the third quarter, which was unchanged from the priorquarter, when compared to 70% a year ago. As we have discussed before, thismargin has reduced, as we investing in our on-demand infrastructure. However, Ibelieve, the level has stabilized, and as the revenue grows from this part ofour business, then the margin should increase steadily back to the 70% level overtime.

Operating expenses were wellcontrolled in the quarter although up from $17.7 million in the second quarterto $18 million in the third quarter. This included a settlement accrual for$400,000 and without this one time charge expenses would have been lower.However, the expenses are 11% higher than the third quarter of 2006. And as Iwill discuss shortly, we are taking actions to bring these expenses more inline with our projected revenue growth.

Our non-operating items wereslightly favorable, and the result of all of the above is a non-GAAP net incomeof $1.5 million right in the middle of our $1 million to $2 million range, andit’s up 36% from the third quarter of last year.

Our diluted earnings per share ona non-GAAP basis of $0.05 compared to $0.04 a year ago. On a GAAP basis, ournet loss narrowed to $2 million or $0.06 per share compared to $2.7 million or$0.11 per share, both basic and diluted, which is the number a year ago. Andyou will find a reconciliation of these non-GAAP to GAAP measures in our pressrelease.

Our cash flow continues to bevery good. We generated $2.1 million in cash flow from operating activities,and that brings our nine month total to $11.1 million. Cash, cash equivalentsand short-term investments decreased in the quarter by $1.5 million, as we use$2.1 million to buy back stock, $1 million for capital expenditures, and $1.4million in debt repayments.

Our cash-and-cash on investment'sposition net of debt was $39 million, which is unchanged from the end of thesecond quarter. Receivables are lower by $1.2 million, and our DSO improvedfrom 72 days to 70 days.

Deferred revenue declinedslightly sequentially by about $1 million as the third quarter is a seasonallylow quarter for maintenance renewals. However, a year ago the seasonal declinewas $2.7 million, and the balance is up 38% from a year ago.

Now, I need to go onto theguidance for the fourth quarter. And I think the most significant thing is thatwe are not forecasting any revenue from the large retail deal until 2008. Donhas already discussed the reasons for this change in forecast.

Additionally, the delays I talkedabout in other deals closing has caused us to forecast a flat to down quartersequentially, on licenses and services. I expect that our services and supportrevenue will continue to grow and increase sequentially from $16 million toapproximately $17 million in the fourth quarter.

However, I think services will belower dropping from $8 million to $7 million, and the license revenue projectionsomewhere between $4 million and $6 million, essentially flat of the mid pointof that number.

So, on a GAAP basis, revenue is forecastbetween $27.8 million and $29.8 million, with a net loss between $3.2 millionor $0.10 per share and $2.2 million or $0.07 per share. On a non-GAAP basis,revenue will be a little higher at $28 million, between $28 million and $30million with a net income of $0.5 million or $0.02 per share and $1.5 millionor $0.05 per share on a diluted basis. And again, the reconciling presidingitems between the GAAP and the non-GAAP measures are in the press release.

Given this outlook, we are alsotaking actions to reduce our cost structure by approximately $4 million peryear. We will complete this by the end of the quarter, so there will be, itwill take full effect from the start of 2008. We will take a one-timerestructuring charge during the quarter and rollout is still be in worked outthat will be in the region up to $1 million.

After the reductions take effect,R&D should be at about 16% of revenue, sales and marketing at 27% ofrevenue and G&A at 12%. The services margin of 35% and our subscriptionsand support margin should improve to about 69% on their way to the 70% margin,I have talked about before.

So these actions will restructureour business to reflect a slower revenue growth rate and it showed that we wereprofitable with the change in revenue mix.

So, now I will pass the call backto Don, who will give you some more detail on the quarter.

Don Fowler

Thanks, Neil. During the quarterwe had many successes in all areas of our business, which confirms theunderlying strength of SumTotal. First, let me talk about performancemanagement. As you know according to our Talent Management strategy, you seeability to leverage our relationships with our existing customer base to sellnew product.

During the quarter, we had anumber of examples of selling total performance to our LMS customers includinga large USairline, a large Australian Bank, and we added our LMS offering at a leadingdrilling services company and existing performance management customer.

In the third quarter, we booked21 performance management deals, more than we had in the first half of theyear. Granted that number represents a small percentage of the opportunity thatwe have, but it shows, we are gaining momentum. And we are continuing to sellour integrated offering.

During the quarter, we addedJenny Craig International, a large automobile chain and a large financialservices company. Now, let’s talk about our LMS business. In North America, we won several expansion deals including the American ManagementAssociation, The Defense Ammunition Center, a large pharmaceutical company anda large financial services company. And our international deals included Femsa,Toshiba Medical Systems, Vodafone, Jumeirah and a large European pharmaceuticalcompany.

Finally, I would like to mentionthe progress that we made in our subscriptions business. As I mentioned at thestart of this call, our subscriptions business grew 26% year-over-year. We sawwins both in our small and medium size sector, where our results on demandsolution fits their needs and budgets as well as with large customers, whochoose our solutions for discreet short-term projects.

While we acknowledge theoperational issues that we have experienced, I want to make sure that we have communicatedto you that we continue to win in the marketplace. I believe we have the rightteam, the right products, and the right structure to get us back on-track andbuild on our leadership position within Talent Management.

Operator, please poll forquestions.

Question-and-Answer Session

Operator

(Operator Instructions). Thankyou. Our first question is coming from Robert Breza of RBC. Please go ahead.

Robert Breza - RBC

Hi, good afternoon. Thanks fortaking my questions. One quick question as it relate to the $4 millionrestructuring benefit. You said about $1 million one-time charge, should weexpect that to be non-cash or cash; can you kind of help us there? And thenDon, as you look at the business you talked about, not sure of the slowdown orcustomer specifics.

What more investigation I guess,do you need to do to kind of get your arms around the issue. Obviously you aretaking the prudent steps in reducing your cost. But what else, do you need todo from your perspective talking to your sales force, partner’s, etcetera, thatkind of get your hands around the outlook as we go into '08?

Don Fowler

Neil will go first on therestructuring charge.

Neil Laird

All of the cost reductions werepeople related, and that will all involve cash, I think the timing of whichwill be most in the current quarter, a little bit probably going into the firstquarter.

Don Fowler

And with respect to what we aredoing to really get our arms around, is this a slowdown, or is this somethingunique to customers. We’ve examined the pipeline that we have very carefully.We have been doing that; we continue to do that, and with each and everysituation we try to dig into it and take a hard look. I’ll just give you anexample. We had a pharmaceutical situation that was going right to the 11thhour. I mean, they told us we had the business. We had exchanged all the redlines and contracts and because of a financial reversal that they are fromexperienced and announced, we had to defer out a year or so. And so that’sclearly reflective of some issues in the pharmaceutical industry that we allknow exists. Healthcare has got some industry issues as well.

So, we rushed those things, butfinancial services and the rest, and we've had some deals that have carriedover and cause us concern. We don’t see signs of economic weakness there, butwe are watching very carefully and monitoring it. And between that and talkingto the partners and sources out there, that’s what we are doing.

Robert Breza - RBC

And maybe just as a follow-up ifI may. Neil, any guidance you can help us with as we look out into 2008. I knowobviously, with the Wal-Mart, or the large retailer pushing out, thenaccounting for a large delta between the street revenues and where you areguiding.

Any guidance you can help us? Imean I know you said the first half is that should we think about it equally orlittle bit more backend loaded to the first half of '08 or any guidance will behelpful. Thanks.

Neil Laird

Well, most people know its publicinformation, and that’s an $8 million deal. I would expect the first half ofthe year we will get all of that revenue most of it in the first quarter, butwe will accept that was $2 million in the second quarter. So, it’s probablygoing to be 5 in Q1 and 3 in Q2, 6 and 2. At this stage, I don’t really know.

So, that some input beyond thatwhat I try to do with that booking data is to show that in the last 12 months,outside of our subscriptions business, it’s been about an 8% bookings growthrate depending upon which category, and I’ve no reason to believe.

I have no information to say thatit will be more than that next year. I have no information to say that it wouldbe less, perhaps just giving you the historic run rate. The subscriptionsbusiness though has grown by over 40%, and as we go into next year, and wecontinue to see that ramp, we should start to see that part of the businessgetting revenue ramps similar to that bookings ramp. I think that should giveyou something on which you can build some models.

Robert Breza - RBC

Great, thank you.

Operator

Thank you. Our next question iscoming from Eric Martinuzzi of Craig-Hallum. Please go ahead.

Eric Martinuzzi - Craig-Hallum

Thanks. I want to talk about theorganizational changes that you’ve announced. Could you talk to me about howthe sales organization; who do they report in to, Ray? And where did Sanjay andJon, touch the sales organization.

Neil Laird

Okay. So, Ray Villarealis the Senior Vice President of Field Operations, which includes all salesactivities, marketing activities and customer support activities. So, hemanages the field facing activities. As he did at WebEx, where he ran fieldoperations and at Compaq, where he ran the enterprise solutions, and he ranglobal alliances for them. He also ran the Asiaorganization at Tandem Computers many years ago.

So, the salesorganization reports in that way. Sanjay and Jon are responsible for the strategyand the go-to-market plans and the profitability for each of theirbusinesses, and they sit down on a quarterly basis with the sales organizationand discuss the programs, the results and the tuning that needs to go on inorder to achieve the results.

Eric Martinuzzi - Craig-Hallum

Do they have other sales people thatare sort of allocated to them, or maybe a better question is within Ray'sorganization. How many salespeople do you have, and are they pointed towardsthe different business units?

Don Fowler

So, we have currently in therange of 50 quarters carrying salespeople. They are in Ray's organization. Thereare zero of the account executives, who work exclusively in one market sectoror the other. They sell both product lines. On the other hand, we have smalland mid market activities, and they principally work on the on-demand type ofactivities.

And then for both North America and International, what I just said is theway they approach it. So the account executives that cover large enterprises,so both products and then the small and medium size business are principallyfocused on. They sell both products, but they are focused on the on-demand typesolutions.

Eric Martinuzzi - Craig-Hallum

Okay. And then a follow-upquestion, actually not a follow-up question. New topic here, the buyback youspend $2.1 million. How many shares does that equate to, and what is yourprojection for Q4 shares outstanding?

Neil Laird

That represents about $400,000shares I believe. And if you can give me a projection for the stock price. Ican tell you, how much we might buyback. I mean, I have no idea. It will dependupon the market conditions.

Eric Martinuzzi - Craig-Hallum

Okay. Thanks.

Operator

Thank you. (OperatorInstructions). Our next question is coming from NateSwanson of ThinkEquity Partners. Please go ahead.

Nate Swanson - ThinkEquity Partners

Hi, I have couple of questions.But I’ll start with one of the bright spots for the quarter. The performancemanagement business sounds like you saw a nice rebound there. Can you talkabout competitively, who you are receiving in the 21 deal that you closed andalso just give us an overview of how many of those were large enterprise dealsversus more aimed at the small and mid enterprise and also timing as to whenyou expect revenue contribution of those deals will start to flow in Q4, orshould we look out to Q1 and Q2? Thanks.

Neil Laird

Okay. So, the lion share ofperformance management deals we compete on, we see success factors. We seeselectively depending on the conditions of the account either other LMSvendors, who have performance management solutions. In particular, if it’s inthe integrated situation, we will see Saba andPlateau. Besides success factors occasionally we will see Authoriaand others, but almost every deal we see success factors. Most of thetiming of these deals…

Don Fowler

Yeah. I think, as I indicated inthe guidance, I think, our subscriptions and support revenue will grow from $16million to $17 million in Q4, and that includes the start of these deals.Typically we close the deals in the third quarter. We got of about half aquarter or two months of revenue in the subsequent quarter and then the fullimpact in the next quarter.

Neil Laird

And as you can tell for my commentsNate, while there were a couple of large enterprise customers that bought theproduct. We see a lot of mid market customers in this area.

Nate Swanson - ThinkEquity Partners

Okay. And in terms of the largeenterprise market, I guess specifically talked about the cross sales. What typeof ASP’s are you seeing in large enterprise are they 100k deals or 500k ormillion dollar deals? I guess I am just wondering in terms of the size theopportunities that you are seeing in the pipeline.

Don Fowler

These tend to be smaller deals,than our LMS. That's just typical of it being mid market, but typically theyare between 100,000 and 250,000 and perhaps towards the low end of that.

Nate Swanson - ThinkEquity Partners

Okay. That's helpful. Secondly,in terms of the Wal-Mart business, can you talk about what the delays are interms of recognizing revenue and also, is that just license revenue or is thatboth impacting license and the services line?

Neil Laird

So, let me talk about the revenuerecognition first and then Don can talk about the project. So, because this isa, we’ve discussed this before, but this is a deal, where we are delivering itin a different database than we normally sell, we have to demonstrate that wehave a functional system before we can start taking revenue.

Once we have demonstrated that,we will be able to start taking revenue on a percentage of completion basis.But we’ve to get to that first milestone before we can start taking revenue. Wewill take license and services revenue basically proportionately. So, licenseand service revenue are delayed equally in terms of that deal.

Don Fowler

With respect to the projectitself, you might recall, as Neil said, this involves a different database. So,there was a substantial amount of work to be done to interface to the newdatabase that work has completed. And it now enters the phase that was the onethat cause the risk that we became concerned about because it’s a very complexproject, there was the issue of the quality assurance testing and doing thattesting in an environment that’s acceptable to Wal-Mart, and they were havingdifficulty to the large retailer.

So, and they were havingdifficulties with the facility, and that has slowed down the project andourselves. The third-party that’s involved and Wal-Mart are all workingarm-and-arm on this project. But the QA issues pushed up; it’s all aboutgetting the environment that matches their internal environment. So, that thetest can be done to demonstrate the functionality. So, that’s where thecomplication arose.

Neil Laird

Yeah, I don’t think it’s a matterof not being -- it's a combination of - - it’s a complex product; its takinglonger and everyone working to achieve it. But code is complete. It's now inQA, and just when we have evaluated the overall risks, and we felt that it wastoo risky to be sure of getting it accepted in December.

Nate Swanson - ThinkEquity Partners

Okay. That’s helpful. Then goingto the bookings versus revenue, you gave us a lot of data, and that’s helpful. Iam just wondering couple of things. First, in terms of bookings, how do youdefine bookings? Is that revenue to be recognized over the next 12 months or isthat over the term of the contract?

Neil Laird

It's 12 months.

Nate Swanson - ThinkEquity Partners

It is 12 months. Okay. And thenmaybe I missed it, but did you breakout subscriptions revenues versus supportfrom that line?

Don Fowler

Yes, I did. The subscriptions,yes, I did. And I am just going back to make sure you get the right numbers.

Nate Swanson - ThinkEquity Partners

Yeah.

Don Fowler

So, the support number was $36million, and the subscriptions just $27 million.

Nate Swanson - ThinkEquity Partners

Okay. For what time period?

Don Fowler

For the total 12 months ending, thelast 12 months. So it’s $124 million total, which the perpetual license is 29,services 32, support 36 and subscriptions 27. And the key point is thesubscriptions fees is 44% higher than the year ago. So, that’s where the growthis coming.

Nate Swanson - ThinkEquity Partners

Okay. And then just lastquestion. Going back to your performance management, are you still sellingperformance management on a perpetual license basis?

Don Fowler

We’re selling it on a perpetuallicense basis and on a subscriptions basis. I think that the bulk of ourbusiness is it's the subscription market, and that is most of the cases. But insome situations, particularly in an integrated solution, where the customerprefers the perpetual license for the LMS, they may also choose the perpetuallicense for the performance management system. That’s an advantage to us insome sales.

Nate Swanson - ThinkEquity Partners

Okay. And would those dealstypically including on premise deployment as well?

Don Fowler

Typically yes.

Nate Swanson - ThinkEquity Partners

Okay, that's helpful. Thank you.

Operator

Thank you. (OperatorInstructions). Thank you. Our final question is going to Michael Nemeroff of Wedbush. Please go ahead.

Ariel Sokol - Wedbush

Hi guys, thisis Ariel Sokol speaking for Michael Nemeroff.

Don Fowler

Hi, Ariel, howare you doing?

Ariel Sokol - Wedbush

Doing verywell. For the quarter, is it possible for you guys to break down thesubscriptions and support revenue line?

Don Fowler

Yeah, it’scertainly possible. If you're just talking about the sales, I got it for you.Do you have any other questions, Ariel, while I am finding it.

Ariel Sokol - Wedbush

Sure. It is --would you want me to get out I guess, of the bookings, subscriptions, how muchis that related to LMS versus performance management?

Don Fowler

For thebookings, it was $170 million that was LMS and the $7 million that wasperformance management. I don’t have here the breakout of thesubscriptions between the two different components. So, I can’t give you that, Iam sorry at the moment.

In terms of the split betweensubscriptions, and I’d say that it’s about $9 million is support, and the restis subscriptions so that would give you about $7 million on subscriptions.

Ariel Sokol - Wedbush

Perfect. And last question. Thenin terms of the product roadmap taking out 2008, what kind of products willSumTotal have at the end? Would you say -- I know in the past you guys havetalked about recruiting for example?

Don Fowler

So, we have two main focuses. Thefirst is in LMS area, where we are coming out with a new version of the LMS tosupport the on-demand business. We will come out with enhancements in thelearning LMS space, and then we also in performance management have both newfunctionality coming out and a focus on expanding the compensation capabilitiesthat we already have in that product line.

Those are the main focus areas.We do not at this time anticipate any focus on things outside of our own coremarkets performance management learning. So recruitment would be something wewill think about down the road.

Ariel Sokol - Wedbush

Perfect. Thank you so much foryour time.

Operator

Thank you. I will now turn thefloor back over to Mr. Fowler for any closing remarks.

Don Fowler

We thank everybody for your timeand attention today. We look forward to continued dialogue as the quarterproceeds. Thank you very much.

Operator

Thank you. This concludes today'steleconference. Please disconnect your lines at this time.

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