1. Q3 2007 Selectica Earnings Conference Call - Final. | Goliath Business News
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Q3 2007 Selectica Earnings Conference Call Final.
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Publication: Fair Disclosure Wire
Publication Date: 08-FEB-07
Delivery: Immediate Online Access
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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the
Selectica third quarter 2007 earnings conference call. [OPERATOR INSTRUCTIONS]
I would now like to turn the conference over to Tony Rossi of Financial Relations Board. Please go
TONY ROSSI, IR, FINANCIAL RELATIONS BOARD: Thank you, operator. Good afternoon, and
welcome to Selectica's third quarter fiscal year 2007 conference call. With us today from Management
are Steven Bennion, Chairman and CEO, Bill Roeschlein, Chief Financial Officer, and Terry Nicholson,
Chief Operating Officer of the Contract Management business. Before turning the call over to Steve, I'd
like to read the Safe Harbor Statement. Statements contained in this call that are not truly historical are
forward-looking statements within the meaning of section 21E of the Securities and Exchange
Commission Act of 1934, including statements regarding Selectica's expectations, beliefs, hopes,
intentions, or strategies regarding the future. The forward-looking statements included in this call are
based upon information available to Selectica as of the date hereof. Selectica assumes no obligation to
update any such forward-looking statements. Actual results could differ materially from current
expectations. Factors that could cause or contribute to such differences could include but are not limited
to the factors discussed in Selectica's annual report on form 10-K. At this point, I will turn the call over to
Steven Bennion. Steve?
STEVE BENNION, CHAIRMAN, CEO, SELECTICA: Thanks, Tony, and thanks to all of you for joining us
on today's conference call. As indicated in our press release today, we're not in a position to report our
full financial reports for the third quarter due to the ongoing independent review of our historical stock
option grants, however, we can report selected financial data that would not be impacted by stock option
Fundamentally, we were pleased with our performance in the third quarter, as we were able to achieve
our three primary objectives: continue growing the contract management business, rationalize the legacy
contract pricing and configuration pricing and quoting business in a way that allows us to continue to
providing select service to our installed base, and reduce our expense levels through significant
restructuring actions. On a sequential quarter basis, our total revenue increased 23% to $3.7 million from
$3 million last quarter. The increase was primarily attributable to higher revenues from the CPQ business
as well as continued growth in our Contract Management business, which reflects solid progress on the
vision for the Company we detailed in our last conference call. We added a number of new Contract
Management customers during the quarter across a range of industries, including telco, services, and
2. Q3 2007 Selectica Earnings Conference Call - Final. | Goliath Business News
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We believe our success in the enterprise Contract Management market can be traced to competitive
advantages in five key areas. . First, our time to value. We can deploy in 90 days or less which is half to
one-third of the average duration of the industry standard. Second, we have the best solution. We have
features like dynamic contract creation through a wizard function and effects for loading legacy contracts
into an indexed and searchable format. These are features that no other solution offers. Best of all, our
solutions work. We have achieved 100% success in our implementations. Third, we are highly adaptable.
Our solutions are architected for a high degree of configurability without sacrificing scalability. Fourth, our
horizontal solution is highly configurable and allows us to compete for business across all industries. And
finally, we have the process expertise. For more than ten years, we have been providing best of breed
solutions to the world's largest companies, which is a track record that few other players in the Contract
Management industry can point to.
We have good reason to believe that our momentum will continue. We see a number of catalysts that we
believe will help drive continued growth in this business. First from a macro perspective, the Contract
Management market continues to grow with more companies putting Contract Management near the top
of their IT spending priorities. Second, we have a growing list of referenceable customers, which is
critically important for winning new business. Third, we are starting to get more attention from industry
analysts. We recently completed a very successful analyst tour in which we were able to demonstrate the
value of our contract management solution to reach firms such as Aberdeen Group, AMR, Forrester
Research and Gartner. We expect that the increased awareness within the analyst community will have
a positive impact on lead generation in the future.
Fourth, while we were able to reduce our overall staffing costs during the quarter, we also made a
number of hires at all levels of the company to add personnel with contract management experience.
These include engineers, product managers, marketing managers, and sales reps that have had a great
deal of success in the Contract Management industry. To put this in context, for the most part, our early
success in Contract Management was generated without a great deal of resources to support this
business as our engineering sales and marketing departments were primarily focused on the legacy
CPQ solutions. Now that we have added contract management industry veterans that thoroughly
understand the market, we believe our ability to grow the business has been significantly enhanced.
And finally, our pipeline of contract management opportunities continues to build. In particular, we are
having success moving upstream and we are beginning to compete for business with enterprises that
would yield significantly larger deal sizes than we have seen in the past. Collectively, we believe these
factors will help us continue to generate, steady, consistent growth in the Contract Management
business in future quarters. In addition, we have a number of potential deals with a telecom-focused
sales management application that we are pursuing with our joint venture partners in EMEA and Asia
Pacific. We are in advanced demonstrations and negotiations with some prospects and these deals, if
completed, could also represent revenue in the coming quarters.
Moving on to other significant items in the third quarter, we completed the relocation of our corporate
headquarters as well as other restructuring actions. As a result, we recorded a restructuring charge of
$6.3 million in the quarter, with $5.9 million being a non-cash charge. We also capitalized approximately
$600,000 of fixed assets, which was primarily related to the relocation of our corporate headquarters. As
a result of the restructuring actions, we believe we have reduced our break even level, excluding
extraordinary legal expenses to $4.2 million in quarterly revenues. We have made significant progress in
this regard. To put this in perspective, in the fourth quarter of fiscal 2006, our break even level was $6.2
million in quarterly revenues, approximately 50% higher than it is now.
We also continued to implement our share repurchase program. During the third quarter, we spent $3.5
million to repurchase approximately 1.9 million shares of our common stock at an average price of $1.85
per share. This left us with approximately 28.5 million shares outstanding at the end of the quarter. I
should note that our stock repurchase program has been temporarily suspended. The 10B5-1 program
we had been using to repurchase stock expired at the end of the year. Given the ongoing stock option
investigation, we are now in a blackout period that prevents us from initiating a new 10B5-1 program.
At December 31st, we had $60.3 million cash, cash equivalents, and in-depths and no long-term debt.
Now before we open the call to questions, I would like to note that we cannot make any further
comments regarding the ongoing investigation of stock option grants or the patent infringement litigation
we are engaged in. That being said, we are happy to answer any questions about the performance of the
business or the strategic changes we have made to focus on contract management. We are ready for the
OPERATOR: [OPERATOR INSTRUCTIONS] And the first question is from Lilly Wu with TGRA Capital.
Please go ahead.
LILLY WU, ANALYST, TGRA CAPITAL: Yes, hi. I wanted to get a breakdown on the $3.7 million. How
much of that came from CPQ and how much from contract revenue? -- I mean, Contract Management?
BILL ROESCHLEIN, CFO, SELECTICA: This is Bill Roeschlein. Approximately $600,000 was Contract
Management with the remainder from CPQ.
LILLY WU: Okay. And you mentioned that both of them saw growth, is that -- the contract revenue
growth on a sequential and a year-over-year basis?
3. Q3 2007 Selectica Earnings Conference Call - Final. | Goliath Business News
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BILL ROESCHLEIN: The sequential increase in Contract Management was over 100% and there was a
15%, approximately 15% growth in CPQ sequentially.
LILLY WU: Okay, all right. Great. In terms of the cash, can I go over that one more time. I'm wondering
what I'm missing here. The cash seems to have gone down $7.5 million in the quarter; is that correct?
And $3.5 million went for buybacks.
BILL ROESCHLEIN: That is correct.
LILLY WU: Okay. So of the $4 million in operations, basically I'm looking at if the revenue at $3.7 million
and say a close margin of 50%, that's a gross profit of $1.8 million, operating expenses of $5 million, so
that's a cash usage of about $3.2 million, and then you get interest income of about $750,000. So no
matter how I add it up, I see cash usage around $2.5 million. Just now you said restructuring had a $0.4
million cash component. So even then, that's about $2.8 million. I'm not sure how does the $4 million get
used in operations. Was there other unusual one-time outlays in the quarter that was atypical?
BILL ROESCHLEIN: So what I can tell you. There's certain things we can't talk about because of the -LILLY WU: I understand, yes. But I'm just -- I'm not even getting into the ballpark of -BILL ROESCHLEIN: I know, I know. What I can tell you is $600,000 for fixed assets, $400,000 for
restructuring that was related to -LILLY WU: Right.
BILL ROESCHLEIN: -- personnel. We also -- We took the charge for the building in December, because
we moved near the holidays, so there's two months of rent that really can't be counted toward that
restructuring. So that's another $400,000 of expense. And really beyond that, I can't -LILLY WU: Okay. So those were the only $600K fixed assets, $400K in restructuring, and $400K in
unusual rent payments, but besides that everything was core operations?
BILL ROESCHLEIN: That's fair to say.
LILLY WU: Okay. All right. Well, great, thanks for the clarification. Oh, I'm sorry. One last question was, I
know you can't speak about the ongoing investigation, but do we even have a ballpark time of when we
get might get up to date on the filings and the investigation, at least in some kind of announcement one
way or another. Are we talking another three months? I thought a consultant firm was retained on a 60day or something basis, there should be some kind of deadline, right? They can't take forever.
STEVE BENNION: This is Steve. This is being managed by the audit committee, the Board of Directors
by special committee and they have special counsel and so forth, and it's a very extensive examines, as
you know, we can't comment on when it will be done. What we are doing, we are all working very hard to
cooperate with this and try to get it done just as quickly as we can. And that's really all we can say about
LILLY WU: Okay. All right. Great. Thanks.
OPERATOR: Thank you. Our next question is from [Steven Wolf with Platform Asset Management].
Please go ahead.
STEVEN WOLF, ANALYST, PLATFORM ASSET MANAGEMENT: Thank you. Hey, Steve, and Bill, how
you doing. Appreciate the update. Would love to have an update on what the prospect is for further
professional service engagements in the CPQ business? And if you give us any update on the CPQ
STEVE BENNION: Sure. We are continuing to provide services for our large customers in the CPQ
business. On a quarterly basis, that just continues to happen. So for example, we recently had a weeklong product planning session with one of our large customers and they got a 36-month road map for the
next phase of their project. In addition to that, we are working with a couple of business partners who
might also be interested in providing some services into the installed base. We don't necessarily want to
be a services company and certainly driving the services, the license percentage up and the services
back down is part of our business model objective. We are also transitioning a number of our service
professionals to our contract management market. We're continuing to provide really good service to our
installed base. We are working with partners to expand the alternatives that customers will have for
services, and we're working very hard on various contract management projects, including quite a bit of
STEVEN WOLF: Okay. One last question -STEVE BENNION: I'm sorry, about renewal maintenance and so forth, and that's pretty much on
schedule. The customers are very happy with the Selectica systems and so the maintenance revenue,
we're working very hard to make sure our customers are satisfied with the performance and the product
road map and so forth. We keep the maintenance slow.
4. Q3 2007 Selectica Earnings Conference Call - Final. | Goliath Business News
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STEVEN WOLF: Understood. And with respect to the current vacancies on the Board, can you give us
an update on the status of filling up those current vacancies?
STEVE BENNION: We added Bob Jurkowski and Brenda Zawatski to the Board recently. Vince Ostrosky
continues to serve on the Board along with Jamie Arnold, our Audit Committee Chair, and myself. We do
on a basis that makes sense, the Board does have a nominating committee and we'll be looking at
whether or not it would make sense to add another director so, but we don't have anything currently to
STEVEN WOLF: Okay. Thank you.
STEVE BENNION: Thanks.
OPERATOR: Thank you. And the next question is from Rengan Rajaratnam with Sedna Capital. Please
RENGAN RAJARATNAM, ANALYST, SEDNA CAPITAL: Just a follow-up on the last question about the
Board vacancies. What's the feeling from management about having some investor representation on the
STEVE BENNION: I think we are certainly open to considering that. We're always open to hearing from
investors. We understand there are some points of view and we would be happy to get our board
committee together and have some discussions around that topic, but I would have to defer that to the
nominating committee of the Board.
RENGAN RAJARATNAM: Okay. Thanks very much.
STEVE BENNION: Thanks, Rengan.
OPERATOR: Thank you. A next question is a follow-up from Lilly Wu. Please go ahead.
LILLY WU: Yes, hi. I was wondering if I could get a bit more detail on the contract management business
side since that's definitely one of the more promising areas where you have clear product advantage. Is
there some metrics you could give us in terms of the number of customers you signed now versus a
quarter ago or, yes -- some type of -- yes, so we could track how that business is going?
STEVE BENNION: That's a great -- all of them are great questions, but we're very happy to talk about
that. Let me just begin with some comments and then ill like to turn it over to Terry Nicholson. We had a
sales training meeting this week beginning on Tuesday. I sat through that. I have to say it was far and
away the best sales meeting I've ever attended. We have some very focused marketing, corporate
marketing, product marketing, and we finally have pretty much our team assembled. As I mentioned,
they are industry veterans and really senior people. I think a lot of that is because we were able to bring
onboard Terry Nicholson, who is probably -- without question one of the most experienced executives in
this industry. I would have to say the marketing people Terry was able to attract to the company have just
done a stellar job. So from my perspective, I am thrilled and delighted about the progress we've made
over the last several months given the fact that we've only been at this for about four months or so. We
don't like to announce the...
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