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SLTC > SEC Filings for SLTC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SELECTICA INC

Form 10-Q for SELECTICA INC


14-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in the "Risk Factors" in Item 1A to Part 1 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2012 (the "Form 10-K"). They include the following: the level of demand for Selectica's products and services; the intensity of competition; Selectica's ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; the impact of current economic conditions on our customers and our business; and our reliance on a relatively small number of customers for a substantial portion of our revenue. For a more detailed discussion of the risks relating to our business, readers should refer to 1A to Part 1 in the Form 10-K entitled "Risk Factors." Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements.

Overview

We provide cloud-based software solutions that help growing companies to close deals faster, more profitably, and with lower risk.

Selectica Contract Lifecycle Management (CLM) combines a single, company-wide contract repository with a flexible workflow engine capable of supporting each organization's unique contract management processes. Our cloud-based solution streamlines contract processes, from request, authoring, negotiation, and approval through ongoing obligations management, analysis, reporting, and renewals. It helps companies take control of their contract management processes by converting from paper-based to electronic repositories and by unlocking multiple layers of critical business data, making it available for the evaluation of risk, the exposure of lost revenue, the evaluation of supplier performance, and other purposes. The solution helps to improve the customer buying experience for sales organizations, improve the control of risk and decrease time spent drafting, monitoring and managing contracts, and gain access to previously hidden discounts through the exposure and elimination of unfavorable agreements for procurement and sourcing organizations.

Selectica Guided Selling (GS) streamlines the management and dissemination of complex product information enabling companies to streamline the opportunity-to-order process for manufacturers, service providers, and financial services companies. Our Guided Selling solution can be seamlessly integrated with leading CRM systems, as well as ERP systems like Oracle and SAP, to ensure that the latest product, customer, and pricing data is always being used. This helps to simplify and automate the configuration, pricing, and quoting of complex products and services. By empowering customers, product management, marketing, sales leadership, sales operations, salespeople, and channel partners to generate error-free sales proposals for their unique requirements, we believe our cloud-based solution helps companies to close sales faster, accelerate revenue generation and enhance customer relationships.

Quarterly Financial Overview

For the three months ended September 30, 2012, our total revenues increased by 34%, or $1.2 million, to $4.7 million compared with total revenues of $3.5 million for the three months ended September 30, 2011. Recurring revenues, comprised of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues, totaled $3.0 million, or 64% of total revenues, representing an increase of $0.8 million, or 37%, over the three months ended September 30, 2011. Non-recurring revenues, comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training, totaled $1.7 million, or 36% of total revenues, representing an increase of $0.3 million, or 24%, over the three months ended September 30, 2011. The increase in recurring revenues year over year resulted primarily from new subscription license customers reflecting the shift in business focus and strategy to emphasize our cloud-based solutions. The increase in non-recurring revenues year over year resulted primarily from a higher level of consulting services delivered to our customers.

During the quarter ended September 30, 2012, our net loss totaled approximately $0.9 million, representing a decrease of $1.2 million, or 57%, over the three months ended September 30, 2011. The improvement was primarily due to higher total revenues year over year.

Shift in Business Model

In response to market demand, beginning in 2012, we have shifted our primary business focus from the sale of perpetual licenses to subscription license arrangements for our cloud-based solutions. Our business and revenue model is now focused on recurring revenues. This shift could adversely affect our short-term financial results and cash flows since the financial terms of the subscription arrangements typically require smaller periodic payments over the term of the arrangement versus the larger, initial payments we have historically received under the perpetual license arrangements. However, we believe that the subscription licensing arrangements will help to increase our ability to attract new customers and improve the predictability of our revenues and cash flows by reducing our dependency on the larger, perpetual licensing arrangements. Despite the shift in our business model to focus more on subscription licensing arrangements, which has had the corresponding effect of increasing our recurring revenue, our customers have varied preferences for how they want to deploy our solutions. As such, we will continue to offer and support the traditional software license model that some of our customers still prefer.


Critical Accounting Policies and Estimates

There have been no material changes to any of our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2012.

Factors Affecting Operating Results

A small number of customers continue to account for a significant portion of our
total revenues. We expect that our revenues will continue to depend upon a
limited number of customers. If we were to lose a large customer, it would have
a significant impact upon future revenues. Customers who accounted for at least
10% of total revenues were as follows:

                               Three Months Ended          Six Months Ended
                                 September 30,               September 30,
                              2012             2011       2012          2011
               Customer A          12 %           16 %        13 %          16 %
               Customer B             *           11 %           *          10 %
               Customer C             *           10 %           *             *
               Customer D          10 %            *             *             *



* Less than 10% of total revenues.

We have incurred significant losses since inception and, as of September 30, 2012, we had an accumulated deficit of approximately $263 million. We believe our success depends on the growth of our customer base as well as market growth for our CLM and GS solutions.

Results of Operations:

Revenues
                                     Three Months Ended                   Six Months Ended
                                        September 30,                       September 30,
                                2012        2011       Change       2012        2011       Change
                                               (in thousands, except percentages)
LiRecurring revenues           $ 2,960     $ 2,162     $   798     $ 5,596     $ 4,335     $ 1,261
Percentage of total revenues        64 %        61 %        37 %        63 %        60 %        29 %
Non-recurring revenues         $ 1,695     $ 1,370     $   325     $ 3,235     $ 2,950     $   285
Percentage of total revenues        36 %        39 %        24 %        37 %        40 %        10 %
Total revenues                 $ 4,655     $ 3,532     $ 1,123     $ 8,831     $ 7,285     $ 1,546

Recurring revenues. Recurring revenues consist of subscription license sales, maintenance revenues from previously sold perpetual licenses, and hosting revenues. Our recurring revenues during the three and six months ended September 30, 2012 increased by $0.8 million and $1.3 million, respectively. Subscription revenue growth continued to drive the growth in recurring revenues as well as the growth in total revenues for the three and six months ended September 30, 2012. Subscription revenues grew to $1.0 million for the quarter ended September 30, 2012, compared to $0.5 million for the quarter ended September 30, 2011, representing a 114% increase year over year. Subscription revenues for the six months ended September 30, 2012 increased $0.9 million, or 98%, to $1.8 million, compared to the six months ended September 30, 2011. Maintenance revenues only grew $0.2 million and $0.4 million, respectively, during the three and six months ended September 30, 2012, compared to the three and six months ended September 30, 2011. In addition, hosting revenues were $0.1 million for both the three and six months ended September 30, 2012, and were flat compared to the same periods in the prior year. These results reflect the shift in business focus and strategy to emphasize our cloud-based solutions. Recurring revenues continue to account for over 60% of our total revenues and we expect this trend to continue going forward.

Non-recurring revenues. Non-recurring revenues are comprised of perpetual license sales and revenues from professional services for system implementations, enhancements, and training. Non-recurring revenues during the three months ended September 30, 2012 increased by $0.3 million compared to the three months ended September 30, 2011. This increase was primarily due to a higher level of consulting services delivered to our customers. Non-recurring revenues during the six months ended September 30, 2012 increased by $0.3 million compared to the six months ended September 30, 2011. This increase was primarily due to two perpetual license deals executed during fiscal year 2013.

                                 Three Months Ended          Six Months Ended
                                    September 30,              September 30,
                                  2012          2011         2012         2011
License                        $        -      $    23     $     394     $   115
Professional services               1,695        1,347         2,841       2,835
Total non-recurring revenues   $    1,695      $ 1,370     $   3,235     $ 2,950

We expect non-recurring revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on new license revenue and the number and size of new software implementations and follow-on services to our existing customers. We expect recurring revenues to increase in absolute dollars and as a percentage of total revenues as we continue to emphasize our cloud-based solutions. This will depend in part on the number of maintenance renewals, and the number and size of new subscription license contracts. In addition, maintenance renewals are extremely dependent upon economic conditions, customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in revenue are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms, and additional services.


Cost of revenues
                                  Three Months Ended                          Six Months Ended
                                    September 30,                              September 30,
                          2012          2011          Change         2012          2011          Change
                                               (in thousands, except percentages)
Cost of recurring
revenues                $     407     $     257     $      150     $     738     $     512     $      226
Percentage of
recurring revenues             14 %          12 %           58 %          13 %          12 %           44 %
Cost of non-recurring
revenues                $   1,347     $   1,278     $       69     $   2,574     $   2,316     $      258
Percentage of
non-recurring
revenues                       79 %          93 %            5 %          80 %          79 %           11 %
Total cost of
revenues                $   1,754     $   1,535     $      219     $   3,312     $   2,828     $      484

Cost of recurring revenues. Cost of recurring revenues consist of costs associated with supporting our data center, the cost of bug fixes, maintenance and support, and salaries and related expenses of our support organization. During the three and six months ended September 30, 2012, cost of recurring revenues increased $0.2 million, compared to the three and six months ended September 30, 2011 primarily due to an increase in license and support costs in our data center, as well as higher compensation expenses in our support organization.

We expect cost of recurring revenues to increase in absolute dollars and to remain relatively flat as a percentage of recurring revenues in fiscal 2013.

Cost of non-recurring revenues. Non-recurring cost of revenues is comprised mainly of salaries and related expenses of our services organization, fees paid to resellers, costs of purchased third party licenses sold to customers as part of a bundled arrangement, and certain allocated corporate expenses. During the three months ended September 30, 2012, these costs were flat compared to the three months ended September 30, 2012. During the six months ended September 30, 2012, these costs increased by approximately $0.3 million, or 11%, compared to the six months ended September 30, 2011 primarily due to the increase in the use of third-party consultants used for our system implementations.

We expect cost of non-recurring revenues to increase in absolute dollars in fiscal 2013 as we continue to build our customer base, grow our professional services organization and utilize third-party consultants on system implementations.

Gross Profit and Margin
                                          Three Months Ended          Six Months Ended
                                            September 30,               September 30,
                                         2012             2011       2012          2011
Gross margin, recurring revenues              86 %           88 %        87 %          88 %
Gross margin, non-recurring revenues          21 %            7 %        20 %          21 %
Gross margin, total revenues                  62 %           57 %        62 %          61 %

Gross profit was $2.9 million, or 62% of revenues, during the three months ended September 30, 2012, compared with $2.0 million, or 57% of revenues, during the three months ended September 30, 2011. This increase was primarily due to a higher level of consulting services delivered to our customers

Gross Margin-Gross margins represent gross profit as a percentage of revenue. Gross margins during the three and six months ended September 30, 2012 and 2011 were affected by the factors discussed above under "Revenues" and "Cost of Revenues."

We expect that our overall gross margins will continue to fluctuate due to the mix of services we provide, whether the services are performed by our professional services employees or third-party consultants, and the overall utilization rates of our professional services organization. In addition, our gross margins will be impacted by timing of service and license revenue recognized from perpetual licenses and will continue to be adversely affected by lower margins associated with service revenues.


Operating Expenses

Research and Development Expenses
                                     Three Months Ended                  Six Months Ended
                                       September 30,                       September 30,
                                2012        2011      Change       2012        2011       Change
                                               (in thousands, except percentages)
Research and development       $   861      $ 810     $    51     $ 1,792     $ 1,706     $    86

Percentage of total revenues 18 % 23 % 6 % 20 % 23 % 5 %

Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publication efforts and certain allocated expenses. Research and development expenses were flat during the three and six months ending September 30, 2012 compared to the same period in 2011.

We expect research and development expenditures to increase modestly in absolute dollars over the next year as we continue to invest in research and development in the U.S as well as in our Ukraine research and operations center.

Sales and Marketing
                                      Three Months Ended                    Six Months Ended
                                        September 30,                        September 30,
                                2012        2011        Change       2012        2011        Change
                                                (in thousands, except percentages)
Sales and marketing            $ 1,726     $ 1,415     $    311     $ 3,245     $ 2,594     $    651
Percentage of total revenues        37 %        40 %         22 %        37 %        36 %         25 %

Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses. For the three and six months ended September 30, 2012, sales and marketing expenses increased $0.3 million and $0.7 million, respectively, compared to the same periods in 2011. The increase is primarily due to increased sales and marketing headcount, our 2012 annual Fusion conference, our recently updated website and new logo, as well as other trade show expenses.

We expect increases in sales and marketing expenses in fiscal 2013 in absolute dollars and as a percentage of total revenues.

General and Administrative
                                    Three Months Ended                  Six Months Ended
                                      September 30,                       September 30,
                                2012      2011      Change        2012        2011       Change
                                              (in thousands, except percentages)
General and administrative     $  698     $ 843     $  (145 )    $ 1,568     $ 1,774     $  (206 )

Percentage of total revenues 15 % 24 % (17 )% 18 % 24 % (12 )%

General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. During the three and six months ended September 30, 2012, general and administrative expenses decreased by $0.1 million and $0.2 million, respectively, compared to the same periods in 2011. This was primarily due to lower accounting fees as well as lower legal expenses in connection with our Settlement Agreement as discussed in Note 7 of the Notes to Condensed Consolidated Financial Statements. We expect modest increases in general and administrative expenses in fiscal 2013 compared to fiscal 2012 in absolute dollars.

Fees Related To Comprehensive Settlement Agreement

Fees related to our Comprehensive Settlement Agreement consist of a $0.5 million charge for consulting services during each of the three months ended September 30, 2012 and 2011, as part of our settlement with Versata, as discussed further in Note 7 of the Notes to Condensed Consolidated Financial Statements.

Loss on Early Extinguishment of Note Payable

Loss on early extinguishment of note payable relates to a $0.5 million charge during the three months ended September 30, 2011, resulting from the Versata note payoff, as discussed further in Note 7 of the Notes to Condensed Consolidated Financial Statements.

Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest earned on cash balances and short-term investments, interest expense on our note payable to Versata, foreign currency fluctuations, and other miscellaneous expenditures. During the three and six months ended September 30, 2012 and 2011, interest and other income (expense), net was immaterial for all periods presented.


Provision for Income Taxes

During the three and six months ended September 30, 2012 and 2011, we did not
record an income tax provision.

Liquidity and Capital Resources

                                                      September 30,       March 31,
                                                          2012              2012
                                                             (in thousands)
 Cash, cash equivalents and short-term investments   $        12,052     $    16,076
 Working capital                                     $         3,733     $     5,405



                                                             Six Months Ended
                                                               September 30,
                                                             2012         2011
                                                              (in thousands)
     Net cash used in operating activities                 $ (3,858 )   $ (2,279 )
     Net cash provided by (used in) investing activities   $     92     $ (1,496 )
     Net cash used in financing activities                 $    (59 )   $    (34 )

Our primary sources of liquidity consisted of approximately $12.1 million in cash and cash equivalents as of September 30, 2012, $6.0 million of which was received from our short-term credit facility. This compares to approximately $16.1 million in cash, cash equivalents and short-term investments as of March 31, 2012, $6.0 million of which was also received from our short-term credit facility.

Net cash used in operating activities was $3.9 million for the six months ended September 30, 2012, resulting primarily from our year-to-date net loss of $1.6 million, a $1.2 million increase in accounts receivable, net, and a $1.0 million decrease in accrued payroll and related liabilities.

Net cash used in operating activities was $2.3 million for the six months ended September 30, 2011, resulting primarily from our year-to-date net loss of $2.7 million, a $0.8 million decrease in deferred revenues and a $0.2 million decrease in other accrued liabilities and other long-term liabilities. These decreases were offset by a $1.0 million decrease in accounts receivable, net and $0.4 million in non-cash charges for depreciation and stock-based compensation expense.

Net cash provided by investing activities was $0.1 million for the six months ended September 30, 2012, resulting primarily from proceeds from maturities of short-term investments partially offset by capital asset purchases.

Net cash used in investing activities was $1.5 million for the six months ended September 30, 2011, resulting primarily from short-term investment purchases.

As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from liquidity and credit concerns. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.

Net cash used in financing activities was not significant for the six months ended September 30, 2012.

Net cash used in financing activities was not significant for the six months ended September 30, 2011, resulting from our $4.3 million payments to Versata, offset by credit facility borrowings of $4.7 million.

We expect to incur significant operating costs for the foreseeable future. We expect to fund our operating costs, as well as our future capital expenditures and liquidity needs, from a combination of available cash balances, internally generated funds, and our short-term credit facility. We have no outside debt other than our short-term credit facility, and do not have any plans to enter into any additional borrowing arrangements. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, and our ability to manage costs.

We believe our cash and cash equivalents balances as of September 30, 2012 are adequate to fund our operations through at least September 30, 2013. However, given the significant changes in our business and results of operations in the last 12 months, the fluctuation in cash and investment balances may be greater than presently anticipated. After the next 12 months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.


Contractual Obligations

We had no significant commitments for capital expenditures as of September 30, 2012.

We do not anticipate any significant capital expenditures, payments due on long-term obligations, or other contractual obligations other than the repayment of our credit facility balance. However, management is continuing to review our cost structure to minimize expenses and use of cash as we implement our planned business model changes. This activity may result in additional restructuring charges or severance and other benefits.

Our contractual obligations and commercial commitments at September 30, 2012, are summarized as follows:

                                       Payments Due By Period
                                        Less Than       1-3         4-5        After 5
Contractual Obligations:    Total        1 Year        Years       Years        Years
                                                 (in thousands)
Operating leases           $   572     $       249     $  322     $     1     $       -
Credit facility              6,000           6,000          -           -             -
Total                      $ 6,572     $     6,249     $  322     $     1     $       -

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