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Callidus Software, Inc. (NASDAQ:CALD)

Q4 2012 Earnings Call

February 7, 2013 4:30 PM ET

Executives

Ronald Fior - Senior Vice President, Finance & Operations and Chief Financial Officer

Leslie Stretch - President and Chief Executive Officer

Analysts

Nate Schneiderman - Roth Capital

Brian Schwartz - Oppenheimer

Scott Berg - Northland Capital Markets

Chad Bennett - Craig-Hallum

Kevin Liu - B. Riley

Operator

Good day, ladies and gentleman, and welcome to the CallidusCloud's fourth quarter and fiscal 2012 yearend earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Ron Fior.

Ronald Fior

Welcome to CallidusCloud's fourth quarter 2012 conference call. With me on the call today is Leslie Stretch, President and CEO of CallidusCloud. Shortly after the market closed today, Callidus issued financial results for the fourth quarter 2012. The press release was posted on the wire and is available on our website at callidussoftware.com.

We would like to remind you that during the course of this conference call, we will make forward-looking statements including predictions and estimates regarding our market opportunity and business strategy, our SaaS billings and business, estimates of first quarter and full year 2013 total revenues, first quarter recurring revenues, services revenues, perpetual license revenues, operating expenses, legal expenses related to pending patent litigation, margins and profits, stock-based compensation and restructuring charges as well as sales and marketing expectations and strategies, product development and strategic partnerships and estimated operating results for the first quarter and the full year of 2013.

These statements involve a number of risks and uncertainties. Our actual results may differ materially from any future performance suggested in our forward-looking statements. We refer you to the company's Form 10-K for the year 2011 and the Form 10-Q for the first, second and third quarters of 2012 on file with the SEC for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. We expressly disclaim any obligation to update this forward-looking information.

On today's call, Leslie will begin with comments about our overall business, and then I will discuss the financials in greater detail. We will conclude with a question-and-answer session.

With that said, I'll turn things over to Leslie.

Leslie Stretch

Thank you, Ron. Good afternoon, good evening, everybody. Today I'm going to focus on five key topics: firstly, our performance in Q4 and 2012; secondly, our customer growth and diversification; thirdly, investments and disinvestments planned for 2013; fourthly, our product roadmap and some exciting new development; finally, our projections for Q1 and the full year.

Q4 2012 was our largest SaaS bookings quarter in our history. We added a record 118 net new subscription customers, including one of our largest ever commissions deals. At the same time, we removed approximately $2 million of quarterly run rate operating expenses, as a result of cost cutting actions, synergies from our acquisitions and the removal of underperforming sales and marketing roles. This sets us up for profitable growth in 2013.

Our SaaS revenue growth rate was 15% for the quarter and 23% for the year. Our Billings growth was 20% for the quarter and 24% for the year. Whilst I was less happy with our bottomline performance, the reality is, the several one-time events contributed to the Q4 outcome, and Ron will cover these in more detail.

I was very pleased with our cash collections in the quarter and the results and effect on our day sales outstanding. Our cash increased to $29.2 million, an improvement of over $5 million dollars from our original outlook of $23 million to $24 million.

While we'll use some cash dealing with our final earn-out obligations in Q1, and our one-time build-operate-transfer payment of our India operations, I expect us to show positive operating cash flow in all four quarters in 2013.

I'll now review the performance of each of our clouds. Notable new logos in the Selling Cloud included, Dow Jones, for commissions; Florida Healthcare Plus, for commissions; Blue Coat systems, for commissions; WS financial, for commissions; O2 Telefónica in the U.K., for commissions; NaviSite, for Sales Performance Management, our coaching solution; Biogen Idec, for Sales Performance Management; Electronics For Imaging, for Configure, Price and Quote; Experian in the U.K., for Configure, Price and Quote; and Northern Light Technologies in Australia, for Configure, Price and Quote. First Data in the U.S. and RWE in the U.K., were two key commissions conversions to SaaS in the quarter.

On commissions in 2012, we processed over $723 billion of revenue, and calculated and reported over $44 billion of commissions for our customers. Configure, Price and Quote is now generating more than 46,000 quotes a month with an aggregate value of more than $3 billion, extending the reach of our Selling Cloud to multiple new users.

In the Marketing Cloud, notable new logos included ValueSelling Associates, for enablement; NexJ, Racepoint, EBARA Technologies, for marketing automation; our largest customer increased their subscription in the Marketing Cloud.

In Q4, using LeadFormix, our customers sent out more than 22 million e-mails, processed 14.4 million web visitors, and identified more than 4.5 million, otherwise anonymous web visitors. In the month of January 2013 alone, LeadFormix sent 8 million e-mails, a 550% increase on January 2012.

In the Learning Cloud, new logos included AppNexus, Zumba Fitness, Marketwire, OpenText, TELUS, an existing commissions customers; Cleaver-Brooks, an existing workload customer; Quantum, an existing enablement customer, Yellow Pages in New Zeeland and Oxford Instruments in the U.K.

Litmos' Open API architecture enables other companies to manage users and share learner's data. We had more than 3 million API request in month alone in Q4. We had over 60,000 unique logins in Q4, and there are currently over 30,000 courses with more than five times that number of modules in Litmos mobile learning today.

In the Hiring Clouds, new logos included TELUS, The Venetian Group, PricewaterhouseCoopers; and Kaiser Permanente, an existing commissions customer. 46,450 new candidates signed up to the Hiring Cloud in 2012.

We signed our highest number of partner reseller source deals in Q4, and our largest single resell commissions deal of over seven figures. Since joining the salesforce.com ISV partner program in Q3, there have been 26 reseller contracts from the program. In total we signed two seven-figure-plus contracts and several six figure contracts in Q4. Our total transaction count was 408.

Let me talk about commissions and key events. In December, for the second year running, we were named a leader in the Gartner Incentive Compensation Management MarketScope for Insurance. This follows on from our success in Q3, where we were the only vendor given the highest possible rating in the broader Sales Performance Management MarketScope.

This latest strong positive award from Gartner, further endorses our Incentive Compensation Management leadership position. The report reveals that CallidusCloud has four-and-a-half times the combined number of insurance customers of our nearest commission's competitor. Across all industries, we are witnessing greater awareness of our proposition than ever before, as evidenced by the increase in our web traffic.

Our website had 46,000 more visits in 2012 than in 2011. This urge in traffic contributed to an overall increase of 49% in the number of sales opportunities generated in 2012 compared to 2011. We measure this using our own LeadFormix Marketing Automation solution.

Additional awareness in marketing events included Oracle OpenWorld in San Francisco, the Aberdeen Marketing Conference in Boston, the Sales 2.0 Conference in San Francisco, the SalesForce Productivity Conference in Atlanta, and DevLearn in Las Vegas.

Let me now talk about customer diversification and cross-selling. In 2012, we added a record number of 600 new subscription customers. We ended the year at 1,773 customers, significantly beating our forecast of 1,500 customers for the year

In 2013, our goal is to add another 1,000 customers. Our acquisitions have all performed well and the growth rates of these businesses are high. Our core retention 2012 was 95% on a dollar basis and 92% on a customer basis.

We do have some attrition this year due to our restructuring at one customer. The non-renewal of this one large contract scheduled for Q2 was negatively impacting SaaS revenue by approximately $4.5 million across the latter part of the year will remove one of our lowest margin customers.

To give you some perspective, this specific contract generated recurring revenue gross margins of approximately 30% in 2012 compared to our target of over 70%. And in Q4 of 2012, our non-GAAP recurring revenue gross margin percentage would have been 68% versus the reported 65%, if this contract were excluded. As a result of this non-renewal, we expect SaaS revenues to be relatively flat Q1 to Q2, and our full year forecast had this non-renewal baked in.

Stepping back, we're now at a stage, where we have a much larger volume of customers than before. At the end of 2012, over 1,000 customers have an average selling price on the 100,000 annual contract value, and only eight customers with over 1 million annual contract value exist.

Our customer concentration risks have reduced correspondingly. In our early transition to SaaS, we depended on a small number of large hosted customers. Now, the waiting of large customers has become less critical. Those early customers were characterized by high-touch and expensive service arrangements covering both infrastructure and people cost.

Reduction of customer concentration is a hallmark of our successful transition to the SaaS model, and is the key reason we are more comfortable giving more detailed forward-looking guidance starting in 2013.

Let me talk about investments and disinvestments for 2013. 2012 was a transformational year for the company. We added many new products and many new customers. Most importantly we teed ourselves up for another growth year in 2013, with an opportunity to show margin expansion again, together with profit every quarter.

I'll remind you of our management compensation goals for 2013, to help you understand the focus. EBITDA of $8 million to $10 million, SaaS revenue growth of 25%, recurring revenue gross margins of 70% or greater by yearend, and net day sales outstanding of 80 or less.

2013 is important year for us to reap the benefits of our acquisition strategy. All the acquired products are growing well, and our integration plans are progressing. We now have an opportunity to benefit from key synergies, integrating product and operational data centers. We've already taken some cost actions in Q4, removing, as I said, approximately $2 million of quarterly operating costs related to these and other opportunities.

I expect R&D spend to be flat for the year, and marketing spend to be down from the Q4 run rate in 2012. Our operational environments will see cost reductions of an additional $1 million annualized as we Sunset Service Providers no longer needed, as we consolidate into two main environments. These will be recognized in the second half of the year.

In addition to cost cutting actions and the synergistic reductions related to the acquisitions, we moved the bottom performing 10% of our sales force, freezing the opportunity to upgrade on our coverage, quality and the process. We increased our sales force capacity by over 40% during 2012.

We've been able to drive efficiencies in sales performance, and as a result have increased our annual contract value quota assignment by more than 40% to 2013. I do expect us to increase our investment in sales capacity in the second half of the year, but we will do so within our profitable growth framework.

Let me talk about the product roadmap and some exciting new developments. I'm extremely excited about the product directions of the company. This year we're completing an end-to-end integrated sales and marketing suite that meets our customers demands and fulfills one of the key goals of our prior acquisition strategy. We will see this quarter, a production release of MySalesGame, our strategic incentives module, and they're trailing with early adopters.

At C3, our Customer Conference in May, we will unveil our new reporting roadmap. There are interface plans and a new discrete territory module and a new quota module. Our CTO office is focused on sales mobility on self-service capabilities to drive increased adoption of our suite.

Let me turn to the outlook. Given our continued growth and plans to improve our operational leverage, we are teed up to be profitable each quarter in 2013, whilst we grow. In Q1, I expect us to achieve revenues of between $25 million and $26 million, and this show a small non-GAAP profit.

Of between $105 million and $110 million of projected full year 2013 revenue, we expect to show around $4 million to $5 million of non-GAAP operating profit for the full year. Importantly, we plan to generate positive cash flow from operations each quarter, and this would map to our EBITDA goals for the year.

I'll now hand over to Ron, to take you through the financials in more detail.

Ronald Fior

Thanks, Leslie. Let me start by identifying our non-GAAP adjustments upfront, and then do all discussions and comparisons on a non-GAAP basis.

Our non-GAAP adjustments to operating income include stock-based compensation, acquisition cost that are not capitalizable, patent litigation defense cost, restructuring cost, the one-time India transfer fee, amortization of acquisition related intangibles, and the benefit from a purchased acquisition related adjustment.

In addition to these items, our non-GAAP adjustments to net income include adding back any interest expense on our convertible note. Amortizations of convertible note issuance cost and adjust for a tax benefit from the release of valuation allowance. A copy of the press release and financial table, which includes the GAAP to non-GAAP reconciliation, and other supplemental financial information can be viewed and downloaded from our Investor Relations website.

2012 was a year of significant progress for CallidusCloud. Recurring revenues which include both, SaaS and recurring maintenance revenue, grew to a record level of $70.9 million, driven by a 23% growth in SaaS revenues. Our cumulative annual contract value grew 27% from the prior year to a record $66 million.

We intended to disclose our cumulative ACV only on an annual basis going forward. For the full year, our SaaS billings grew 24%. We continue to make progress, improving our recurring revenue gross margin, exiting the year with a 65% recurring revenue gross margin, up from 60% in Q4 of 2011.

For the year, our recurring revenue gross margin improved from 54% in 2011 to an annual record of 63%. During the year, we made a couple of additional strategic acquisitions that further broadened our market opportunity and expanded the horizon for growth in 2013 and thereafter.

Total revenues for the year were $95 million, up 13% from the prior year, reflecting the increase in SaaS revenues of 23%, the increase in services and other revenues of 16%, and the expected 12% decrease in maintenance revenues.

Now, let's move on to our results for Q4. Unless I mention otherwise, the comparative percent increases or decreases are as compared to the same period of the prior year. We closed out the year with a bang, recording our highest gross ACV booking quarter since launching our SaaS business in 2006.

Despite projecting a decrease in cash for the quarter, we were actually able to increase our cash balance from the prior quarter by $2.6 million through a focused collection program. During the quarter we also initiated substantial cost cutting actions to ensure profitable growth and cash generation in 2013. I will talk about this more when we discuss our forward outlook.

Total revenue, total fourth quarter revenues were $25.2 million, up 12% from the prior year, primarily due to a 15% increase in SaaS revenues over the same period. SaaS revenues grew by approximately $2 million from the prior year. SaaS billings in Q4 defined as SaaS recurring revenue, plus the change in SaaS related deferred revenues were up 20% year-on-year. Our SaaS billings growth for the full year was 24%, despite the one-time attrition event that we discussed in our Q2 call.

Looking beyond the billings calculations, which can fluctuate quarter-to-quarter based on renewal activity and one-time events, it's worth noting that our new gross ACV bookings were up 73% compared to the prior year. And as I mentioned earlier, cumulative ACV is up 27% over the prior year. We believe this growth is further validation that our investment in our sales force is paying off.

Now, let's look at the recurring business. Recurring revenues for the quarter were $18.5 million, a 9% increase from the prior year. This increase was fueled by growth in our SaaS revenue, which totaled $14.6 million, up 15% compared to the same period last year, but tampered by our declining legacy maintenance business. Maintenance revenue of $3.9 million was down as expected by 9% from the prior year, primarily due to the conversion of license customers to on-demand.

Non-GAAP recurring gross margins during the quarter were 65%. This is up 500 basis points from the 60% attained in Q4 of 2011. Our objective is for recurring revenue gross margins to exceed 70% in the coming year. Recurring revenues represented 73% of our total revenues in the fourth quarter, consistent with the prior quarter.

Services and other revenues for the quarter, which included $1.1 million of license revenues, were $6.8 million, up $1.2 million from the prior year and up $394,000 from Q3. License revenues contributed $730,000 to services and other revenues in Q4 of 2011 and $2 million in Q3 of 2012.

Non-GAAP services and other margins were 20%, down from 29% in Q3 and down from 27% in the prior year quarter. Excluding license revenues and its related cost our non-GAAP services business margin was 7%, down from 18% in the prior year and up from breakeven level in the prior quarter.

Our services margin was much lower than we expected, primarily due to the expanded scope of a couple of fixed-fee projects, where we decided it was important for us to satisfy the customer. The impact on Q4's results was approximately $750,000. These projects are winding down and we expect the impact on Q1 to be minimal.

While we will continue to provide fixed-fee pricing on certain strategic customer implementation projects, we have also implemented additional approvals, which should help limit this exposure, as we continue to move towards more of a time and materials model.

Our overall non-GAAP gross margin for Q4 was 53%, up slightly from 52% reported in the prior-year period. The improvements made in our recurring gross margins were partially offset by a decrease in our services and other margins. We expect that our overall non-GAAP gross margin in 2013 will continue to improve.

Operating expenses, Q4 total non-GAAP operating expenses were $15.8 million, up 39% from the prior year, primarily reflecting the impact of the acquisitions that were not included in prior year's result. Non-GAAP operating expense was up approximately 14% from Q3.

A significant portion of these increased costs were timing related or one-time, and are not anticipated to recur in Q1. This included approximately $300,000 in selling cost, resulting from record bookings and higher commissions related to accelerators; and $600,000 of G&A cost related to the timing of annual audit and compliance fees; as well as a one-time increase in our bad debt expense, as our focused collection efforts normally improved DSO's, identified some additional uncollectible accounts.

As Leslie and I mentioned earlier, we have taken substantial cost cutting actions that will yield in excessive $2 million in quarterly operating expense savings starting in Q1 of 2013.

Adjusted EBITDA, our non-GAAP operating loss for the quarter was approximately $2.4 million compared to operating income of $305,000 in Q4 2011, and an operating loss of $597,000 in Q3 of 2012. Adjusted EBITDA for the quarter was a loss of $2.8 million, reflecting the following adjustments from our non-GAAP operating loss: the add back of $1.4 million in depreciation and amortization expense; the deduction of $859,000 in transfer fees, paid to transfer our Hyderabad employees from our subcontractor; $554,000 of restructuring cost, related to cost cutting action taken during the quarter; and $363,000 in patent events and acquisition costs. Our adjusted EBITDA for the prior-year quarter was a loss of $553,000 presented on the same basis.

As was noted in Leslie's remarks and in our November 2012, 8-K filing, our management incentives for 2013 are based in part on attaining a range of $8 million to $10 million of adjusted EBITDA for the full year.

EPS and non-GAAP EPS. Our GAAP loss per share for the quarter was $0.25 compared to $0.13 a year-ago. Our non-GAAP loss for the quarter was $2.9 million or $0.08 per share compared to $0.01 profit, a year-ago. GAAP and non-GAAP loss per share is calculated based on 36.4 million basic weighted average shares outstanding.

Balance sheet and cash flow. We finished the quarter with $29.2 million in cash and investments, well above our projected balance for the quarter of $23 million to $24 million, primarily due to our focused collection efforts. This is an increase of $2.6 million from the prior quarter.

The increase in cash reflects an increasing in capital of $9.7 million, primarily drive by $6.4 million decrease in accounts receivable and a $3 million increase in deferred revenues, partially offset by payments of $3.1 million for the purchase of capital equipment and earn-out payments made on one of our acquisitions. Our net accounts receivable balance at December 31 was $22.7 million.

Day sales outstanding for the quarter was 93 days, down 16 days from Q3. Excluding the impact of changes in our deferred revenue, DSO would have been 87 days, down 20 days from the prior quarter. We are very pleased with the substantial improvement in our DSO, and expect to continue this trend in the coming year. Our ongoing target is a net DSO of 80 days.

Total deferred revenue, including both short and long-term increased by $3 million to a record $39.2 million as compared to the prior quarter. SaaS deferred revenue is $29.6 million, up $3.2 million sequentially with the balance related to maintenance and services. SaaS deferred revenue is up 25% year-on-year.

Employees, our total headcount at December 31, excluding contractors was 613 employees, up 118 from Q3 at 2012, primarily due to the conversion of over 100 contractors to employees as part of our exercising the build-operate-transfer agreement for our new Hyderabad office.

Now, I would like to move on to the forward-looking financial outlook. I want to remind you, the safe harbor language provided at the beginning of the call. Further it should be noted that we plan to update any guidance only during our quarterly conference calls. Given our progress as a SaaS company and our increased visibility, we are providing estimates for both revenues and non-GAAP operating profits for the first quarter and the full year.

For Q1, we are expecting total revenues to be between $25 million and $26 million, representing an increase of approximately 14% to 18% compared to the first quarter 2012. Our Q1 guidance assumes our SaaS revenues grow over 20% year-over-year. We expect maintenance revenues to be essentially flat with Q4, and services and others expected to see a small decrease from Q4.

Non-GAAP operating expenses for Q1 are expected to be between $13.2 million and $14.2 million. On the low end, this represents a 16% decrease from Q4, and on the high end a 10% decrease. This includes the benefit of cost cutting actions in excess of $2 million quarterly, offset by the beginning of the year uptick in the FICA payroll tax and the cost of our annual sales reward trip.

GAAP operating expenses are expected to be between $17.6 million and $18.6 million, and are expected to include $2.7 million in estimated stock-based compensation, approximately $830,000 in amortization of acquired intangible, approximately $500,000 in restructuring cost, and approximately $380,000 in patent litigation defense cost on top of the non-GAAP expenses.

At the midpoint of our guidance, we would expect to be profitable on a non-GAAP operating basis for the quarter, generating up to $500,000. During the first quarter, we expect to generate cash from operations, but expect our cash balance will drop approximately $3.5 million to $4.5 million, due to earn-out payments on acquisitions and the accrued transfer fee we must pay our subcontractor in Hyderabad to transfer their employees to Callidus.

For the full year, we are projecting our full year revenues to be between $105 million and $110 million. This represents double-digit revenue growth for total revenue. We are projecting $4 million to $5 million in non-GAAP operating profit for the year. We expect to generate cash from operations in each quarter of 2013 and generate positive cash flow for the full year.

During this quarter, we will be attending the Northland Tech Conference in New York and the ROTH Conference in Dana Point. We hope to see you there.

I would now like to the open the question-and-answer session. Operator, will you please prompt for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Nate Schneiderman with Roth Capital.

Nate Schneiderman - Roth Capital

I wanted to just clarify on some of the expenses that led to the profitability shortfall in Q4, just to make sure I'm crystal on that. So in the gross margin area, was the only expense that you were not planning these extra fees to satisfy the fixed cost customer or/and I believe you said it was $750,000 but can you verify that? And then also can you clarify the level of operating expenses that exceeded your expectation? And how much did it exceed your expectation and what caused that to happen just on the OpEx side?

Ronald Fior

The first part is actually is correct. It's basically a couple of customers there. And it is in the gross margin item. It is about $750,000 that we did not expect. That's pretty well it. And those projects, actually as I said in my notes, were actually winding down. So we don't expect there to have minimal impact on Q1.

From an operating expense point of view, I think what you have there is roughly around $900,000 of expenses that I didn't plan on. The first piece was obviously in the sale side. I mean, we performed really well and there were some accelerators that we didn't count on. People exceeded their numbers, it was very good. It's a good answer.

The other piece was really related to the timing of our audit and SOX things and fees and those actually with their annual events, both cost actually came in a little early than anticipated, expect there to be savings in Q1, because of that.

And then the third item really was just the bad debt expense and you saw our improvement in our accounts receivable. We literally called every single customer and went through these things with a fine toothcomb and when you do that you sometimes find some things that you didn't really realize. And that's where we had additional bad debt.

Nate Schneiderman - Roth Capital

I just was hoping that you could clarify your thoughts on the guidance, both on revenue and on the pro forma operating profitability. There were several quarters in 2012 that you seemed to come up a little bit short of what you were expecting and I just wanted to get a sense of the level of conservatism in this guidance and to what extent you buffered yourselves from potentially unexpected events that do seem to occur?

Ronald Fior

Well, I think we gave the guidance with that knowledge, with that experience in volume, is the answer for that.

Leslie Stretch

I mean, really there's not more to that. I mean, you can see the restructuring charges that have already been taken as well as the projected restructuring charges for Q1. Those things have happened, where we've consolidated, we've looked at the acquisitions made to make sure that they're rationalized. We've taken out other cost and people cost, contractor cost throughout all the departments. Those are the things that we've done and they're actually done.

Ronald Fior

So we've taken out an aggregate, somewhere $8 million of OpEx for the year. And we still got work in progress, because of the things would come our way. We still have multiple datacenters as those contracts tail out. So that comes our way. I think we mentioned a bit of that in the prepared remarks. And so it's a good opportunity here for us.

Leslie Stretch

And remember that even in the operating cost and in the gross margin cost, we are in fact having an uptick in FICA in the year, probably close to $75,000, and so that's running through that. And yet our guidance is at range and operating cost that shows a drop of $2 million.

Nate Schneiderman - Roth Capital

And I guess final question area for you. I know your performance targets are detailed in an SEC filing, but are you comfortable with analysts modeling 25% SaaS revenue growth or do you advise us to skew more conservatively than that?

Ronald Fior

I don't know how to answer that. I'll be disappointed if we don't achieve those goals. That being said, you need to decide for yourselves what's a reasonable number and we all love to beat numbers.

Operator

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz - Oppenheimer

Few questions here. One is just kind of an update and then I've got a strategic question for Leslie and then I guess financial assumption question for Ron. So I guess, Leslie, just kind of an update out there and feel then, just kind of curious as I guess is really more of a macro question for your environment.

Your numbers are real good here in the fourth quarter, at least the metrics with the record number of customer adds and your bookings. Some of the work that we're doing here ourselves in our survey work, we are actually starting to see Sales Performance Management interest levels tick up as an application spending category here among enterprises in 2013.

So my question is really, what are you hearing from your sales reps, from the customers that you're talking to about your vision around Sales Performance Management. Just wondering is there still a lot of evangelizing that's going on out there in the sales process and maybe you could help us a quantitative way and let us know how attach rates have been on new deals and any additional color on where you think we are in terms of SPM as a end-market adoption? Then, I've got a couple follow-ups.

Leslie Stretch

So we added a lot of sales people in the year in 2012, based on our confidence of the broader suite. And our payment levels were high. Hence our ability to assign a 40% increase in closer goals this year is the highest assignment that we've ever given.

What's been happening is that the expansion of the suite and the story around sales affecting business sales performance is much more potent at the high executive level in our customer base, and also in the marketplace generally. When people see the coaching solution, I believe this year we'll see our largest Sales Performance Management margin.

And when people see that either with or without the commission solution, with or without the new strategic incentives module, which is the sales gain product that we've shown you. It's very compelling. It's very, very compelling, but also, when they think about the ability to connect up to a marketing suite from the same vendor, that's also a compelling story. Our sales people have more enough to sell. The cross-selling is increasing. We still are really focused on new signings. Cross-selling is increasing very nicely, but we're still focused on signing new customers in each of the clouds.

So we're very confident, hence the assignment of such a large goal this year. We've got enough sales people in our product to see us through the first half of the year. We've also got a commitment to make money and add cash in the year. So that is part of our financial envelope, just as we saw a lot of reaction in sort of the cash in the second half of last year. So we've improved that.

So we're probably not going to add too many new sales heads in the first half of the year, we're extremely busy with what we have. But the second half, it's a different story. In terms of customer take on, it's significant to lay out a goal of a 1,000 new subscription customers, because we've been ramping over the past years. A year-ago in Q4, we did 103 net new, and we did 180 this last Q4. And we would like to get us into the 200, 250 range across the clouds.

And So I think we can get there. The momentum is there already in Q1. We've signed a record number to this point in the quarter of new subscription customers. So I think we'll get there. Geographically, where we've obviously concentrated mostly in the U.S, we've been doing well in Europe.

We got a new leader in Europe. We signed one of our largest telco deals on the last say of the quarter, SaaS deal in Europe, great new customer, so very, very pleased with Europe. Coverage around the rest of the world is pretty thin for us, we're focused here. Every dollar we spend on sales here we get a positive return on.

Brian Schwartz - Oppenheimer

And then, Leslie, if I could just follow-up maybe just ask you a tactical question. You don't response some of that commentary. You've got four different clouds here, and I think in your introductory comments you were very positive. I think you said that they are all growing very well. Certainly the Selling Cloud is much larger numbers than the other. Is it possible to give us any color or commentary on growth rates or momentum of the different clouds? And then just wondering how you guys think about allocating your resources to each cloud?

Leslie Stretch

They're outgrowing very fast, very fast race. In the case of the Learning Cloud, it's hundreds of percent growth off of a small base. Let me just take you through, the Learning Cloud is really about self service, telesales promotion of the solution. There is not a heavy way, high cost sales force involved there. And it's about mobile learning.

The Hiring Cloud, at leave aside, because that's a self service business. That's a jobs board. In fact today, its two jobs boards. Piece of our investment in Q4 was to release sales stars version of the jobs board. If you go to salesstar.com, you'll see the beta version live today. And so that's a self service business. So you've got those two clouds that are essentially like very light touch.

Our sales force is focused on Marketing Cloud and Selling Cloud. And what you'll see, our customer event this year is integrated sales and marketing suite. Because we don't believe that marketing automation should be procured separately from the key elements of the Selling Cloud.

And the Selling Cloud was compelling for our customers, as they can buy Configure, Price, and Quote, commissions, Sales Performance Management, coaching portal and other elements from one service provider. That's the key for us, an integrated solution at a better price point. So growth rate there is very healthy. That's were the bulk of our SaaS business is. The growth rates, though, in Marketing Cloud, very healthy indeed, again off of a smaller base. But these acquisitions are really contributing meaningfully to the bookings and the revenue now.

Brian Schwartz - Oppenheimer

Just wondering, Ron, what your expectations are here for the maintenance revenue drag and the P&L here in 2013? How much you're expecting that business to decline? And when do you think that that potentially could stabilize around its decline? And if I maybe squeeze in a third question here on the maintenance revenue, when do you think as a percentage of total revenue that maintenance will dip under 10% and no longer be meaningful?

Ronald Fior

I think, historically, it's been dropping around 10% a year. And a significant piece of that is in fact going into conversions. That being said, surprisingly there is a fair number of license deals out there, in Asia-Pac, in Latin America. And those have actually filled some of the maintenance.

It might actually slow down this year. I mean it's hard to say. I mean, we have conversions kind of occur, they're not like consistent. You can't say there's one every quarter. There might be one or two in one quarter and none in the next. So I think probably an 8% to 10% decline in the actual maintenance number this year is probably where it's going to be.

Going forward, it's going to take another year to, I suspect, before it drops. Obviously, we have a $105 million to $110 million in the forecast for this year. When you think about we have $16 million roughly of maintenance this last year, you probably got another two years before it drops, one-to-two year's max.

Ronald Fior

I think an additional comment is that for many of our on-premises customers, we haven't raised maintenance fees for several years. So there is a program in place as of January this year to begin a structured, very sensible raise of maintenance fees between 3% and 7% for all those customers.

They do continue to get delivered really where it should updates to the code. So that's going on at the moment. That represents an opportunity. It's relatively small, but it's between $500,000 and $1 million of upside for the maintenance business this year. And our regime there is to introduce that this quarter and to make agreements, and in some cases multi-year agreements with those customers. We still have some large on-premises customers who need to be supported. They're going to get rich updates for the code. And they're not going away.

Brian Schwartz - Oppenheimer

And then last one from me, and then I'll hop in, in the queue, and it's for Leslie out there. And there's certainly been a lot of news out there that one of the competitors in your space has been aggressively building out a business down market. And I was just wondering, how Callidus, how you guys think about an opportunity down market? Would it ever make sense for your business to move down market with a lighter weight product or do you think you stay focused on really going broader with your future product sets?

Leslie Stretch

I think we actually took some customers away from one of the down market, SaaS players that you mentioned in Q4, because when they get to the certain level, I don't think that they deliver a good solution. But really our volume play to a certain point, where our calculating commissions for 10, 20, 30 sales people is not a rich endeavor. And that's a fact. And so our volumes play is learning, coaching CPQ where sales force of any size needs those tools.

So I don't think where that enamored. We've had our time with bottom-end of the market from making money point of view is not super good for us. And we're focused on really the upper-mid market for the commission solutions. But more and more, we are selling a compendium of a solution. We're selling a suite. And that's really the big difference creator.

So I don't know why you would buy a commission solution from a single-threaded company. That's facsimile of our data model of 10 years ago, I don't know why you do that but. What you want to do is to get Configure, Price, and Quote from the same vendor, market automation from the same vendor, perhaps learning from the same vendor, and commissions without Sales Performance Management and true Sales Performance Management of the depths that we do it. It just doesn't make a good value proposition at that low end.

In some of our largest pipeline deals this year, will have the Sales Performance Management module coaching alongside their commissions and we'll assign our largest coaching deal this year.

Operator

Your next question comes from the line of Scott Berg with Northland Capital Markets.

Scott Berg - Northland Capital Markets

I've got a couple here. First of all, Leslie, can you clarify on the removal of $2 million of annual costs from the models, as can you split up the cost areas in terms of headcount or how should we better view those costs, I guess, and exactly what they were?

Leslie Stretch

So primarily, it came from the acquisitions. We had built up our stall with the acquisitions and the acquired products, was to understand the products, work with vendors in some cases and key personnel who had other plans, and with sales people who had other plans. So we've been able to take advantage, without getting into true specific an answer, if you understand, we've been able to take advantage of that. Now, we couldn't earlier in the year. Because when it comes to earn-out structures, they're very specifically setup. And so Q4 was the time for us to stop and exercise.

Ronald Fior

And the other part of that, Scott, is actually as I mentioned in the cost, where the averages were, those were one-time. So those are actually areas, where obviously G&A, you're going to have the $600,000 is going to come off. The sales and marketing side, you're going to have the $300,000 come off. So those were actually in those lines also.

Scott Berg - Northland Capital Markets

And then on the large customer loss that you highlighted, the one that's not very profitable. First of all get that right that it was about $4 million to $5 million worth of annual, I assume SaaS revenues? And then from a modeling perspective, I assume that was pretty linear throughout the year? And we just expect that the drop in the revenue begins in the third quarter, is that accurate?

Leslie Stretch

It actually begins in the second quarter, spins out through the year. There was a customer that had changed the structure of their sales force significantly in the time that we've been servicing them, reduced the self headcount. And it was a long-term negotiation. And it was already a very low margin arrangement for us.

We want every customer, but we were unable to get to a price point. It would have made any financial sense for us anymore. So that situation, we got some benefit in Q1, other then Q2 onwards, it tails out. But we more than booked enough to cover us in Q4 already. And of course, we're going to book in Q1 again.

Brian Schwartz - Oppenheimer

And is the $4 million to $5 million impact on an annual basis is the right number to use?

Ronald Fior

It's $4.5 million for the last three quarters.

Brian Schwartz - Oppenheimer

And then lastly on the sales headcount side, you talked about moving out to the bottom 10%, the underperformers you talked about the larger sales headcount additions during the year. Can you update us on where your sales count heads added or ended for the year? And did you meet your 45% goal by the end of the year.

Leslie Stretch

Yes, I think we went up from, for the low 30s at the start of the year to in the 60 range. And then we removed the bottom performing group. And so we're rounded by the mid-50s at the moment.

Brian Schwartz - Oppenheimer

It sounds like you're anticipating not backfilling those maybe the ones that you removed from the organization till maybe the second half of the year, is that correct?

Ronald Fior

Yes, we need to operate within our financial envelope. And we saw a very high attainment in the core group of sales people. So we were able to assign more quota. They are very capable guys and they will be able to do it and overachieve as they did last year. But we marked overachievement by a core group of people. And they're carrying man-size quotas this year, as a result, but they will still be very well.

Operator

The next question comes from the line of Chad Bennett with Craig-Hallum.

Chad Bennett - Craig-Hallum

So I guess on the $4.5 million of attrition, I guess what changed with this customer and how long were you working with them? And then, I'm assuming this will be $4.5 million that comes out of SaaS deferred, when, basically in the June quarter?

Ronald Fior

It doesn't impact deferred, because it was a quarterly billed contract. What changed was up until the end of the year that we were negotiating and they were looking at a renewal and requested information as a renewal. They graded as A in their vendor assessment for the year. But they changed their structure and had really tight cost comparatives. Our challenge has been historically that we weren't meeting our margin goals from day one of the contract until the last day.

And so it wasn't something that we could get to. There was a fairly heavy custom element through it as well in addition. So it just wasn't part of the business module for future and we didn't get where they wanted to us to get to. Great customer to have, but it wasn't the right thing anymore.

Leslie Stretch

Their sales force had dropped to 25% of the level that it was when we started the deal with them.

Chad Bennett - Craig-Hallum

And what's the $4.5 million? Ron, I think you gave a cumulative ACV number of $66 million, would that be in that number?

Ronald Fior

Yes.

Chad Bennett - Craig-Hallum

So we'd have to back that out. So if we did backed that out, even where you stand today, I think your ACV would be about up. If you did no more business, you'd be up. Assuming ACV translated into SaaS revenue over the next 12 months, you'd be up about 15% year-over-year.

Ronald Fior

Actually that's a very close. I actually calculated 17%. This year if there was no additions and no subtractions this year in our ACV, based on what we have done at the end of 2012, we would grow our SaaS revenue 17%.

Chad Bennett - Craig-Hallum

So the 25% bogie, obviously you got a book business early in the year. But you guys have said many times, that you think that is achievable number and considering somewhat of a volatile execution 2012 you're comfortable with your SaaS growth?

Leslie Stretch

Yes. I mean, our bookings in 2012 were great in record, all way up.

Chad Bennett - Craig-Hallum

Yes, I'm talking more on revenue and below the revenue line. But then on the first quarter, the March quarter cash front, can you quantify how much of that is the earn-out and the transfer fees?

Ronald Fior

The transfer fees are about actually $850,000 to $900,000. We've actually paid those, first part of January. And the balance was related to the acquisition earn-outs and S-gross.

Operator

Your next question comes from the line of Kevin Liu with B. Riley.

Kevin Liu - B. Riley

So I think I heard you had said to seven figure deals closed in the quarter, I was just curious these very kind of multi-module deals, and then also you know which industries that they where in?

Leslie Stretch

Telco and financial services, and actually at the moment one module.

Kevin Liu - B. Riley

I mean, maybe more generally, as you've added these additional clouds, are you actually seeing your solution become more horizontal in nature or are you still feel like Telco Financial Services Insurance, tend to be your strong suites?

Leslie Stretch

No. I think that we are seeing a mix right across industries. So it's really vertical. If were to go through the 180 net new subscription customers, its right across industries.

Kevin Liu - B. Riley

And then with respect to the 1,000 new customer logos you hope to add. I would imagine much of that would come in more so from kind of those self service areas that maybe you could add some more color there? And then if we were to look at in more from kind of a dollars perspective, any sense for how many customers you would necessarily need to add to continue similar gross trajectory in ACV. I guess, just trying to clarify whether it's more customer logo as it are important or not?

Leslie Stretch

No, I think if we have it in the same, I actually think what's going to happen is in the Learning Cloud and the Marketing Cloud, we'll see average selling prices arise a little bit. We're already seeing that, saw that phenomenon in the second half. And yes, you're right. Lot of the customers will come from the self service business by its nature, but we are seeing ASP's rise.

But we made the assumption of the distributions are same, even though I actually think ASPs will rise. And so if we can hit 5,000 customers take on mark, then we should see even better bookings performance than we did last year. I'll go back to the quota layoff. Our quota layoff is record for the company. Quotas assignment, I should say quota assignment is record for the company.

Kevin Liu - B. Riley

And then just one clarification on that customer that goes away beginning in Q2, and we've talked about the revenue side. On the cost side, why should we assume much of that 70% in cost, I guess, that would have been associated with that? I mean, how much of that actually stays on as kind of fixed infrastructure cost for you?

Ronald Fior

It's actually a very small amount, Kevin. We had a large piece of this was people based and that we had to deal with that. So that's all going to come off.

Kevin Liu - B. Riley

And then just lastly with some of the changes you made to the non-productive folks, what's kind of the sales headcount coming end of this year?

Leslie Stretch

That was in mid-50s at a moment, as pure quota-bearing sales. There's obviously more in the sales organization, Systems Engineers Management and so on but mid-50 is quota-bearing.

Operator

And at this time we have no more time for anymore questions. I'll now turn the call over to Leslie Stretch, CEO.

Leslie Stretch

Thank you very much indeed for joining us. I look forward to speaking to you at the end of Q1.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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