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Callidus Software Inc. (NASDAQ:CALD)

Q4 2008 Earnings Call Transcript

January 27, 2009 at 4:30 pm ET

Executives

Ronald J. Fior - Senior Vice President of Finance and Operations, Chief Financial Officer

Leslie J. Stretch - President, Chief Executive Officer

Analysts

Chad Bennett - Northland Securities

Mark Murphy - Piper Jaffray

Kevin Liu - B. Riley & Company

Michael Nemeroff - Wedbush Morgan Securities

Ted Ketterer - TK Associates

[Greg Spiker - Moss Creek]

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2008 Callidus Software Incorporated earnings conference call. My name is Michel and I will be your operator for today.

At this time, all participants are in listen only mode. We will conduct the question and answer session toward the end of this conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Ron Fior, Chief Financial Officer. Please proceed.

Ronald J. Fior

Thank you. Welcome to Callidus Software's fourth quarter and full year 2008 conference call. With me on the call today is Leslie Stretch, President and CEO of Callidus Software. Shortly after the market closed today, Callidus issued financial results for the fourth quarter and the full year of 2008. 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. These statements, including statements regarding future revenues and margins, on-demand bookings, DSOs, expenses, sales and marketing expectations, strategies, product development, and strategic partnerships involve a number of risks and uncertainties.

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 2007 and Form 10-Q for the third quarter of 2008 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 financial results, and then I will discuss the financials in greater detail. We will conclude with a question-and-answer session.

With that said, I will turn things over to Leslie.

Leslie J. Stretch

Thank you, Ron. Good afternoon everyone. I think for us the highlight of 2008 was that we established the business model that enables us to grow our overall revenues, dramatically increased recurring revenues, generate record cash from operations and made big strides toward sustained profitability.

At the same time, we bought our Company, delivered new products and services and expanded our channel with mid-market coverage. Notably, all of this was achieved against the backdrop of a very uncertain economy.

On the call today I am going to focus on four things: Q4 2008 full year financial highlights, Q4 customer wins, new products and our outlook and focus on recurring revenues and profitability.

Let me start with financial highlights. I am pleased with our quarterly and annual performance.

Fourth quarter total revenues were $27.3 million up 10% compared to the same quarter last year; 2008 annual total revenues were $107.3 million, a record high for Callidus and up 6% from 2007.

When I took over as CEO just over a year ago, I stated the role that we are going to place significant focus ongoing recurring revenues and on streamlining our expenses. We made great progress on both fronts.

Fourth quarter recurring revenues were $11.3 million up 74% over the fourth quarter of the 2007. The net new Annual Contract Value (NYSE:ACV) of on-demand bookings in the fourth quarter was $1.2 million, bringing the cumulative ACV to $26 million.

Keep in mind that we reported net new Annual Contract Value, which is defined as the annual value of contract signed less any cancellations. We do nothing from consulting services in this figure.

Annual recurring revenues were $40.6 million up 70% over 2007. Recurring revenues now make up almost 40% of total revenues up from just over 20% of total revenues a year ago. This is the dramatic and rapid shift. Recurring revenues make it easier for us to plan key investments and to deliver predictable financial results.

We made substantial progress on streamlining of our cost model, 2008 non-GAAP operating expenses were approximately $4.3 million, or 8% lower than they were in 2007, a substantial reduction. The combined of positive effect of higher revenues and lower expenses was illustrated by the $6.1 million of cash regenerated from operations in 2008, a record achievement for the Company. This compares to the $3.1 million of cash we used in operations in 2007, a $9.2 million positive swing.

Increase in cash from operations enabled us to make strategic investments while maintaining a solid level of cash investments on hand. In 2008, we used $9.4 million of cash to acquire Compensation Technologies and $8 million of cash to buy back Callidus stock but ended the year with $41.2 million of cash and investments, an amount that we believe to be substantially larger than the cash position of any of our competitors.

Turning to services and license revenues, fourth quarter services revenues were down 1% to $11.5 million and fourth quarter license revenues were predictably down 34% to $4.5 million, in each case, compared to the fourth quarter of 2007. For the full year, services revenues were up 1% to $49.5 million, and license revenues were down 39% to $17.1 million, in each case, compared to 2007.

Remember that in the beginning of 2008 we indicated that license revenues were declined as we executed aggressively on our cancellations to recurring revenues based business.

We believe that our ability to grow total revenues while license revenues decreased is a clear sign of a shift toward recurring revenues as working well.

A GAAP net loss for the quarter was $4.8 million or negative $0.16 per share. This compares to GAAP net loss of $3 million or negative $0.10 per share for the fourth quarter of 2007. Adjusting for stock-based compensation expense, restructuring expense, amortization of acquired intangible assets and the benefit from income taxes, together were totaling $3.3 million in Q4 2008 and $2 million in Q4 2007. Our Q4 net loss was $1.6 million compared to a loss of $1 million for the fourth quarter of 2007.

Full year GAAP net loss was $14 million or negative $0.47 per share, compared to a net loss of $13.1 million or negative $0.45 per share for the full year of 2007. Adjusted stock-based compensation expense, restructuring expense, amortization of acquired intangible assets and the impact of income taxes together totaling $11.4 million in 2008 and $6.1 million in 2007.

Our 2008 non-GAAP loss was $2.6 million or $4.5 million less than the $7.1 million non-GAAP loss for the prior year, a big improvement. This illustrates the positive effects of increased recurring revenues combined with prudent cost management.

I will now talk about Q4 customer wins and some business highlights. I am pleased that in Q4 we closed the most transactions we have ever closed in a quarter. We brought 31 deals in Q4 comprised of 18 on-demand and 13 on-premises deals.

Our on-demand business we added several marquee customers and have some significant follow on business with existing customers, proving that our on-demand service is applicable across the range of industries in close business in the insurance, financial services, pharmaceutical, telecom, media, and high tech industries. New on-demand customers included First Command, BlueCross BlueShield of Kansas City and ACE.

We also effected when up signing and renewing existing customers. On-demand follow on business and in install based included Mercks, Citrix, Seagate and LabPool, additionally we had a significant on-demand renewal up sell with a very large pharmaceutical customer.

At $26 million of cumulative Annual Contract Value and almost 74,000 subscribers, we believe we are unequivocal leader in the sales performance management on-demand base. We are larger and growing faster than any of our competitors.

Turning to our on-premises business, we had some significant wins in the fourth quarter. We closed business with new customers such as AXA Mexico, BlueCross BlueShield of Michigan, BlueCross BlueShield of Tennessee and [PTC Era] an Insurance Company in Poland. It was closed through our resell partner ICM Advisory. We also closed out on business with several existing customers, including Unitrin Kemper, Medtronic, Amgen and BlueCross BlueShield of North Carolina.

Incentives are always critical, but during a financial crisis, incentives are more important than ever and the consequences of insufficient incentive management are punitive to companies. The continued attraction of such great brands to Callidus proves that our customers recognize that we address mission critical business problems.

We talk about new products and all the business highlights. We continue to execute on an ambitious product road map. We launched the Pervasive Performance Suite, a 100% multi-tenant SaaS solution that enhance as our Sales Performance Management capabilities and importantly extends our rich further into bonus and multi management.

The highlight in the Pervasive Performance Management Suite is the introduction of two new products, TrueMBO and TrueQuota.

TrueMBO offers robust sales service and work flow capabilities that enable managers across the Company to assign, approve and review performance objectives and to calculate bonus results. TrueQuota empowers sales organizations to distribute quota targets to the entire team while taking into account historical seasonality trends and quota over assignment guidelines.

We also released the next generation of our TrueComp suite which was highlighted by the enhanced TrueProducer product. This release extends our producer management capabilities with sophisticated reporting analytics, improved credentialing functionality and web services to simplify integration.

This week we will introduce TrueChannel for Telco, a product which addresses the on-boarding and management of distribution channels. TrueChannel of the Telco represents a great opportunity to sell to customers and as a value added upsell to our existing approximately 40 Telco customers.

This is a very important part of the direction. The business problem of on-boarding authenticating, managing, measuring and paying third party channels were the key issue for many kinds of businesses. We have had success in the insurance business for this solution set and now we are poised to have the same experience in Telco with TrueChannel for Telco.

This is a much broader opportunity and alongside the Pervasive Performance Solution of TrueMBO extends our reach well beyond the commissions and Sales Performance Management space where we already lead.

In the fourth quarter, we received third party validation of this leadership. For the third year in a row, Gartner rated us positive in its North American market scope for insurance, incentive compensation management applications. We are the only Company to be ranked positive in both the horizontal and insurance Gartner incentive compensation markets scope reports.

Breaking news these quarters is that our TrueComponent Suite won SearchCRM.com’s 2008 Product of the Year and Sales Force Automation Category. This is a very prestigious award indeed; in fact it was won by SalesForce.com last year.

Let me turn to our outlook and focus on recurring revenues and profitability. As I mentioned earlier, I am excited about the progress we have made in substantially growing our recurring revenues. We ended 2008 with recurring revenues comprising almost 40% of our quarterly total revenues and we plan to increase that percentage in 2009 entering each quarter with a large amount of revenues already on the books enables us to be much more effective in achieving profitability and planning our investments.

As you know, we have been laser focused on managing expenses and in 2008 we reduced our non-GAAP operating expenses by approximately $4.3 million or 8% when compared to 2007 and we generated an annual record, $6.1 million of cash from operations.

With $41.2 in cash and investments and no debts, we are well positioned for sustainability and for strategic investments. This is a challenging market for everyone and we think we have a better position than many companies and we use that as our advantage when considering organic and inorganic growth opportunities.

Consistent profitably is a top priority at our Company and we will manage the business prudently. We are keeping a close eye on the macro-economy and are prepared to make the necessary adjustments to our operating model. To that end, we took the action last week that we previously announced to eliminate a number of roles that no longer core to the immediate future of the business, as well as reducing excess capacity in our services organization.

Now, let me turn the call back over to Ron to go through the financial results in more detail.

Ronald J. Fior

Thanks, Leslie.

I am very pleased with our financial performance over the past year. Despite the challenges of the economic environment, we continued to make progress on all of our key financial operating objective, including revenue growth, margin improvement and cost control.

Our 2008 revenues of $107 million are a record for the Company. On-demand margins for the year improved to 39% in 2008, a substantial improvement from the negative 57% recorded in the prior year.

We are pleased with the improvements in our services business in 2008, and with the reductions in our operating cost which were down over $2 million on a GAAP basis and over $4 million on a non-GAAP basis from the prior year.

In addition to improvement in these operating metrics, we continue to grow our recurring revenues which are up over 70% for the year, reflecting the 375% increase in on-demand revenue for the same period. For the year, recurring revenues accounted for 38% of total revenues, compared to 24% in 2007. We expect continuing strong contribution from recurring revenues.

Now, I will walk you through our Q4 result in more detail. Unless I mention otherwise, the comparative percent increases or decreases are as compared to the same period of the prior year.

Let us start with bookings. During the quarter, we added $1.2 million in net new Annual Contract Value to our on-demand business. This compares to $6.5 million in the fourth quarter of 2007. Net new ACV represents the annual value of contract signed less any cancellations. It should be noted that Q4 2007, included a single multimillion dollar Annual Contract Value transaction that caused that quarter’s net new ACV to be higher than a more normalized quarter. Excluding cancellations, our gross ACV bookings for the quarter were $2.1 million.

During the quarter we recorded two cancellations that reduced our net ACV by approximately $900,000. The primary cancellation resulted from a customer disagreement that is ongoing and which I will discuss in a bit more detail momentarily.

In the other, much smaller situation, we had a large existing customer deciding to continue with on-premises implementation and cancel their on-demand pilot project.

On the license booking side, there are no license transactions over $1 million in the fourth quarter. This compares to two transactions in the fourth quarter of 2007 and one in the prior quarter. As we focus more and more on recurring revenues whether they are for on-premises or on-demand, the number of larger license deals will continue to diminish. Excluding transactions under $100,000, our average license bookings in Q4 was approximately $350,000. This compares to $1.1 million in Q4 of 2007. Remember, this number can vary greatly from quarter to quarter depending on the number of $1 million plus deals we complete.

Let us look at total revenue. Total fourth quarter revenues were $27.3 million, up 10% from the prior year and down 3% from the prior quarter. By geography, 88% of fourth quarter revenue was generated in North America. This compares to 70% in the fourth quarter of 2007. EMEA, seems even more impacted by the economic woes to date than the Americas. By vertical, total revenues for the fourth quarter break down as follows: insurance 29%, banking 12%, high technology, manufacturing and life sciences 30%, Telco 24%, and retail and distribution 5%.

Let us look at recurring revenues. Recurring revenues for the quarter were $11.3 million, up 74% due to the growth in our on-demand subscription revenue, which is up over 330% compared to the same period last year. Recurring revenue gross margin for the fourth quarter was 56% consistent with prior year. Recurring revenues represent 41% of our total revenues for the quarter. This is up from 26% for the same period last year.

Over the past year or so, we started offering a service in our on-demand group that provides customers with day to day management of their compensation plan, including row writing etc.

In Q4, these encounter for approximately $800,000 of our on-demand recurring revenue. This service is attractive to customers and we believe it helps with the stickiness of the overall on-demand offering.

While we are investing in this new business, we call business operations, as well as investing in the mid-market we expect the growth in overall recurring margin percentage to be tempered.

Services revenues. Services revenues for the quarter were $11.5 million, down 1% from the prior year. Services gross margin for the fourth quarter was 5% down from 12% in the fourth quarter of 2007.

On a non-GAAP basis, excluding stock-based compensation and amortization charges totaling $793,000 in 2008 and $206,200 in 2007. Our fourth quarter services margin decreased to 12% from 14%.

Q4 2008 margins were adversely affected by an ongoing dispute with one customer I referenced earlier, for which we have recorded a loss in contract of approximately $790,000 during the period. Although we believe we have met our contractual obligations with this customer, we have for accounting purposes, written off all amounts to due from the customer resulting from services performed. If it were not for this dispute, our GAAP and non-GAAP services margins for Q4 2008 would have been 12% and 18% respectively.

We are very pleased with the progress we have made this past year to improve our services business. We will continue to monitor our utilization closely in an effort to continue this trend in the coming year.

License revenues. License revenues were $4.5 million for the quarter, down 34% from the prior year period. License gross margin in the quarter was 96% consistent with prior quarters. The decrease in license revenues reflects our continuing shift and emphasis towards our business model.

Overall gross margin. Our overall gross margin for Q4 was 41%, down from 46% in the prior year, primarily due to the increase mix of recurring and service revenues as compare to license revenue and also reflecting the loss in contract I discussed a moment ago.

Overall operating expenses, which include $1.3 million of stock-based compensation and $1.2 million of restructuring expenses, were $16 million in Q4, up 3% from the prior year. Stock-based compensation by-line item is disclosed as a footnote to the income statement included in our press release.

The restructuring expense resulted from our most recent headcount reduction effort, which we began in Q4 of 2008 and completed this month. I would also point out, we have posted on our website a reconciliation between the GAAP and non-GAAP financial measures for your information.

Sales and marketing expense was $7 million, down from $7.6 million in Q3. The decrease was attributed due to a decrease in third party commission. You may recall we closed a large license transaction with the assistance of SAP in the prior quarter which entailed the third party commission, a reminder that the direct commission expenses for our on-demand transactions are deferred and recognized along with the on-demand revenue over the non-cancelable term of the contract.

Research and development. Research and development spend for the quarter was $3.6 million, down approximately $200,000 from Q3. The decrease resulted primarily from lower personnel cost, including a reduction of third party contractor expense.

General and administrative expense was $4.1 million, up $600,000 from the prior quarter. The increase is primarily attributed to bad debt charges recorded in the current quarter. Bad debt charges in the quarter total approximately $590,000 and included two charges that were greater than $200,000. One related to the previously discussed customer dispute and the other resulted from a customer’s bankruptcy filing.

I would note that historically our bad debt write offs had been extremely small. For example, in the full year 2007 we wrote off approximately $100,000.

I have been very pleased with our ability to control cost over the past year. Our total operating costs for 2008 were down $2.2 million, a decrease of 4% over the prior year. On a non-GAAP basis excluding stock-based compensation expense and restructuring expense totaling $7.4 million in 2008 and $5.3 million in 2007, the savings are in even more impressive $4.3 million.

We believe that the fact that we are able to decrease cost at the same time as we increase revenue by $6 million in this difficult economic times is an indication that we are on the path to achieving sustainable profitability.

Let us look at the business model. From a business model point of view, we continue to see the impact of the growth in on-demand in the relative percentages of revenue. Recurring revenues accounted for 41% of total revenues in Q4 2008. This compares to 26% for the same period last year or an increase of 58%. At the same time, the contribution from license decreased from 27% to 16%. For the year, recurring revenues contributed 38% of our total revenues which again reflects us 58% increase from the prior year.

On the operating expense side, as a percent of total revenues, sales and marketing was 26% as compared to 27% in Q3. Research and development was 13% consistent with the prior quarter; and G&A was 15% up from 12% in Q3.

Interest and other income and expense. Interest and other income and other expense net in Q4 were approximately $200,000. Our interest income for the quarter was approximately $100,000. This income was offset by a loss recorded on the valuation of our auction rate securities.

In prior quarters we have been reporting the auction rate securities net of the unrealized loss, which was recorded in the equity section of our balance sheet. Given the passage of time, and other factors under the relevant accounting guidance we now need to record the decrease in fair value of our auction rate securities as an other than temporary loss to our income statement. The net loss recorded during the quarter for the decrease in fair value of our auction rate securities was approximately $300,000.

Income taxes. The provision for income taxes resulted in a benefit of $282,000 in Q4. This was primarily the result of a refund of research and development and alternative minimum tax credit which we elected to accelerate in a lieu of bonus depreciation in accordance with the housing and economic recovery act of 2008.

In making the election, the Company will receive a cash benefit from the current utilization of carry forward credit in exchange for relinquishing a larger NOL otherwise generated by bonus depreciation.

Employees. Our total headcount at December 31st, excluding contractors, was 424 employees, down 28 from the end of September as a result to the recent restructuring activity. The last phase of the reduction was completed in January of 2009. In total, the headcount reduction included just over 50 employees split roughly evenly between services and operation.

Restructuring cost for Q4 totaled approximately $1.2 million and are expected to generate improve gross margins in the services area with higher utilization and approximately $600,000 of quarterly operating savings.

Balance sheet and cash flow. We finished the quarter with $41.2 million in cash and investments. This is a decrease of $4.5 million from September. Our net accounts receivable balance at September 31st was $22.8 million, up $4.8 million from September 30th. Days’ sales outstanding for the quarter were 69 days, up 14 days from Q3. Excluding the impact of the changes in our deferred revenue, DSO would have been 68 days, reflecting the current quarter increase in deferred revenue.

Total deferred revenue, including both short and long term increased $2.9 million since September 30th. This increase is related to the timing of renewals combined with the addition of new Annual Contract Value and maintenance transactions.

During the quarter, we repurchased $1 million shares of our stock for $2.8 million. This brings the total amount repurchased under the Boards’ authorization to approximately $2 million shares for a total of approximately $8 million. It should also be known that during the quarter we made our final payment for the purchase of compensation technologies of approximately $1.9 million and capital expenditures were approximately $600,000 in the quarter.

During the year, we generated $6.1 million in cash from operation, a substantial improvement from the prior year when we used over $3 million of cash in operating activities. The cash generated from operations for the year was offset by the $9.4 million used for the acquisition of compensation technologies as well as the $8 million for our share repurchase plan.

We continue to hold approximately $4.3 million in auction rate securities secured by student loan. We will continue to carry these auction rate securities until we are able to sell them. At the time of sale, we will record a realized gain or loss from the sale. Given the lack of liquidity at this time, these investments are classified as long term.

Now, let us turn into Q1. 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 call. In this tough economic time and given the uncertainty of the financial market and their impact on customers’ buying plan, it is important for us to be cautious with our projections and spending.

For Q1, we are expecting total revenues to be between $24 million and $25.5 million. This would represent a decline of 15% on the low end of the range and 9% on the high end compared to the first quarter of 2008. Total revenue is made up of recurring, services and license revenues. While we do not give guidance on annual contract value bookings for our on-demand business, this quarterly booking can be lumpy. We do however expect our net new bookings to be up from the $1.2 million in Q4 of 2008 put down from the net new ACV bookings in Q1 of 2008 which totaled $5.4 million.

Please remember that with our transformation to a recurring revenue model, even modest levels of net new annual contract value bookings increase our cumulative backlog which means future revenue growth. This further allows us to better align our cost structure. Operating expenses are expected to be between $14 million and $15 and include approximately $2 million of stock-based compensation.

During the quarter, we completed cost cutting measures to reduce excess capacity and services and eliminate certain other operating position. We currently expect to generate approximately $600,000 of quarterly operating savings as a result of those actions. For the full year in 2009, we are expecting recurring revenues to exceed $50 million. This would represent growth of over 23% compared to 2008. We are not providing full year guidance on total revenues and expenses or earnings per share.

Before we open it up for questions, I would like to remind you we will be presenting at the Wedbush Morgan Securities conference in New York and the SRA Technology conference in San Francisco this early March.

With that said, I would like to open the question-and-answer session. Operator, could you please prompt for questions?

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Chad Bennett - Northland Securities.

Chad Bennett - Northland Securities

First, Ronald can you give us expense in the overall subscription in support business, the gross margin breakdown between the two segments and kind of, it sounds like due to the investment in this up side of the business, we are going to be kind of steady state here for a while. I am just trying to get a sense of what steady state.

Ronald J. Fior

Yes, I think what we said was that the, actually if we look it for the full year, it was around 42% just on a non GAAP basis. The recurring margin in the on-demand piece was right around 42% so it has been running between 40% and 50% and we would expect that to be stable at that level. The total recurring revenue is the function of maintenance margin which runs in the 80% to 82% level and then the on-demand piece which as I just said is that 40% to 50% level. So, we would expect it to be relatively consistent in that level.

Chad Bennett - Northland Securities

Okay and do you care to get the maintenance number, revenue number in the quarter?

Ronald J. Fior

Sorry, do you mean the absolute number?

Chad Bennett - Northland Securities

Yes.

Ronald J. Fior

Yes, I do not mind doing that. Maintenance ran $5.3 million and on-demand was around $6 million.

Chad Bennett - Northland Securities

And then the professionals or I should say the service side of the business actually ticked up decently, I imagine that is a function of maybe some decent license bookings and implementation there. I guess it seems like you are right sizing the service organization to a certain quarterly number that I would think you would have some visibility on. Can you give us a sense of what type of confidence you have in sustaining service revenue levels at current quarter rates or even dropping down a little bit and what really drove service revenue during the quarter that we just ended?

Ronald J. Fior

Yes, I mean I think that, you stated it pretty accurately in that we are really focusing on kind of getting a core level and looking at the right mix between employees and contractors so we can dial it up or dial it down depending on the amount of work that we get in. I would say that this current quarter's number was probably a little bit higher than what we originally expected which was good and part of that was because of some good progress on some of the contracts that we were involved in including one that is a fixed fee one or we do percentage of completion. I would expect that, our utilization has actually went up this last quarter to I think over 70% so we would expect to try to keep it up over that level as we go forward.

Chad Bennett - Northland Securities

Okay and can you give me a rough mix of how much is service maybe this quarter and going forward as related to on-demand versus perpetual or on premise?

Ronald J. Fior

It is roughly anywhere between $2.5 million to $3 million. It is somewhere around that area that is related to on-demand versus the rest is all on implementations.

Chad Bennett - Northland Securities

Okay. A few different charges during the quarter related to other bad debt or customer contract issues, I guess in this environment as we basically every quarter come up on renewals, I guess on the on-demand side specifically. Is this a one quarter phenomenon or is it something structurally that we are going to have to deal with both on the bad debt side which really is not necessarily related to renewals but also on just renewing on demand contracts.

Leslie J. Stretch

I think the both of our review happened in the December quarter. We got the really large renewal, we mentioned in the script there, and we had most of our large month’s review we did not have time to renew on the maintenance front which is quite good. Well, I actually think there is that is quite strictly characteristic of each quarter that we should expect. We are going to…, it is a very tough environment economy and we are going to trying to spot them ahead of time and plan for them and we are ramping up the sales force and the quotas with that so the way we go to business is based on some assumptions. Stop thinking about some assumption and attrition in this economy but it is very unpredictable and actually we have got through probably the biggest renewal.

Our two biggest quarters will be this quarter and Q1 at least based on our history that what we have so far. But you know so far we are seeing good renewals and as we said we actually renewed our largest single on demand customers so that was very important to us. On the bad debt side, we had over the years, we hardly write off anything historically. Unfortunately, right around at the end of the quarter there, all of a sudden a couple of people showed up and the next thing you know it is a tougher times. So we are a little more concerned about it and we are obviously paying a lot of attention to it and make sure that we are all over our account receivable. I hope it does not happen again in the next quarter but I can not foresee that side of it.

We have done also look through the mix of customers that we have got and we look through the names and their public situations and I look pretty confident that we are on track.

Chad Bennett - Northland Securities

Okay and then just one last question. How much do you have left or do you have a couple million dollars left on the buyback and do you plan on being back on the market once you are able to?

Ronald J. Fior

So far this quarter I think we bought back roughly 240,000 shares this quarter and spend about $600, 000. I think we got about a million and a half or so maybe a little more than the half left, I do not have the exact number in front of me.

Operator

Your next question comes from Mark Murphy - Piper Jaffray.

Mark Murphy - Piper Jaffray

Thank you Leslie, any thoughts on exactly acquisition of incentive, I am kind of wondering how you would characterize the impact of the changing landscape and maybe any kind of opportunity that it could open up for you. You know any potential opportunity or changes out there? Thanks.

Leslie J. Stretch

That was a good question. Kind of it is a bit of the space but it is relatively small still. I think you know it is good luck for them to make a move and we wish them luck. I think it is probably the right thing to do. Private companies of that size at this time that is probably all we think about that. I think from our perspective, we are a $107 million company, recurring revenues are growing very significantly for us through very difficult economic times.

I think we got a lot of strength in the balance sheet and we can use that quite effectively for the bigger things so I think we have alluded to that a bit in the script. That is what we all we could say publicly at this stage. I think we are after this biggest fish to fry but with regards to that particular move, yes or no to that and congratulations to them and good luck.

Mark Murphy - Piper Jaffray

And Leslie, our question on the deal pipeline, can you talk about at a high level, how is it the pipeline looking into the first half of 2009 and how confident are you that the deals that are there whether they are license deals or recurring deals that they will materialize and as you look back on the fourth quarter, do you feel as though your sales team were fairly accurate, I guess in historical context, were they accurate in being able to predict which deals are going to close and which ones were not?

Leslie J. Stretch

Yes. I will ask a question I think In Q4 yes, I think we were pleased with the top line revenue and we are pleased with what we are able to do. The gross of ACV was better than the net because of the issues that we had with a couple companies and one of them declared bankruptcy and there are some other issues outside of our controls. The gross bookings were okay. The licenses were okay. I was surprised actually, we have some little bit of upside. We went over the top of the guidance, I think we signed one deal in Mexico City on the very last day of the quarter which I would not have predicted would have come in. So I think it really quite well in a very hostile environment.

I think looking forward, we have the similar softer metrics and ratios of pipe line to real deals.. I think there are some differences now on the positive side, we have more products, and we are expanding our footprint. The commissions are a nice important business problem to solve but there are very big business problems around that. The on boarding of distributors, the measures of distributions and so on.

We fanned that out in the insurance space and now we are finding that out in the Telco space with the TrueChannel product that we are playing around with a couple of customers where we actually launched this week. That is really a big business problem and I hopeful that would bring us an incremental pipeline alongside true target. So there are some incremental opportunities in the pipeline. I expect to see the pipelines filling out with opportunities there.

We have already had some early indications of good interests and demand. The issue for me is going into the pipeline and inspecting. Basically to answer your question we got the same ratios in the funnel today. The issue is spotting the winners and losers. Spotting the companies in each sector that is going to be successful without a strong balance sheet. We are going to weather the storm. We are going to be able to carry out the investment.

You do not find out until you well in to the campaign because projects still get run. People still go through the motions. The key is can they complete? In Q4 we had a very successful campaigns, sales campaign and management campaign around to find out, get to the economic buyer and find out if they can complete. Do that and will support your campaign. If you can not do that we are going to be skeptical rightly so. We see a very good pipeline is what I am trying to say.

Our job is to scrub that and scrub that relentlessly much more so than we would in normal times. These are not normal times. Having said that, I feel pretty confident we have given a full year picture of recurring revenues which shows very nice growth on that side of the business.

Mark Murphy - Piper Jaffray

Leslie, I guess in the context of the recurring revenue, we have heard your comments and you have been speaking to of fairly wide range in terms of net new ACV in the first quarter. Any thoughts on what are the natural quarterly run rate for the net new ACV should be in the course of 2009 considering how tough the macro environment is and what are the odds that there is a quarter in there somewhere, where the cancellations are kind of outweighing the gross ACV?

Leslie J. Stretch

I think we go back to the earlier discussion where we had one of the big renewal closures is now behind us which is an important milestone. I do not think we are going to get to that point even if the economy deteriorates further. So I think the range we gave is pretty wide but our main goal is to add net new cumulative ACV.

If we get through this year and through this economy continue to add quarter by quarter net new ACV, I think that would be quite good because the environment is not easy. Now, having said that, we got some pretty nice deals that we are working on so I am very hopeful.

Ronald Fior

Now, I would just make the comment is we are obviously being conscious and the reality is we have not been doing this for a ton of years. We only have been doing this for just around 2 years so we have not really experienced much attrition at all. I mean, historically in our maintenance business, we experienced very little attrition and it is a pretty sticky product. Now if that same of trend applies here we should not experience too much attrition. We have got 60 some customers and we have not lost very many of them. We lost I think 3 of them last year through acquisition by Oracle and ASP but other than that we lost maybe a couple, period, including this quarter.

Leslie J. Stretch

People would [68:55] us then we got bigger problems. There is a part of the business that tends to be stopping, interestingly one of these attritions you mentioned earlier, we are unfortunately one of our clients hit the wall and turned into a bankruptcy arrangement. They are continuing with our service and I just tell you how strong the proposition is. How instrumental is on our business.

Mark Murphy - Piper Jaffray

Okay and then Ron, one last quick if I can the… I think as we try to model hopefully our revenue for 2009 I understand you are not providing that level of detail yet but probably the biggest variable is going to be the license revenue line and it is seems as though given how awful the macro environment is that many people think that if some of the application segments of such as ERP.I think people are thinking license sale or license bookings could drop you know 20 or 30% or more in 2009 and I think that the sense that you are in the less mature area, a better growth market, and a leadership position but then you are also in the business model that is trying to transition more I should say succeeding in transitioning more to our recurring revenue trends. Is there anyway you can just help us at a high level, think about what the license picture could look like in 2009?

Leslie J. Stretch

I think there is still demand for licensing and recessionary times are not times for dogma. Running around and telling people let me go one way to deliver what I have got is not particularly mature and effective in my opinion and we have demand for those solutions. We signed a license of quite a decent sized license in Mexico on the last day of the quarter I told you there is demand. We are going to serve that demand. However, we need to just do things that are effective in recessionary times. So subscription pricing for on premises licenses and things we are going to experiment with a couple.We have always maintained that we wanted to get to that consistent break even to profitability point before you flip the switch on that. So I think we will continue to see demand for on premises and we have customers who can not amass enough of the capital. Do we have an offer from us and we will have a subscription offer from us and it will be quiet effective and appealing, compelling in the current climate.

So it is going to be very hard to predict which is kind of why we do not call it out. I think this level of demand should sustain probably through 2009.

Leslie J. Stretch

I mean historically, we just do not know what the answer is on those further quarter by any means but I mean if you look us over the last year or so since we really cranked up the on demand we seem to have been able to manage somewhere in that kind of 3 to 4 or kind of $5 million range of on premises business so even it went down a little bit it is still going to be relatively significant at least for the first part of the year. I do not know if that gives you a little bit better sense?

Operator

Your next question comes in the line of Kevin Liu - B. Riley & Company.

Kevin Liu - B. Riley & Company

Looking at the on demand business, you mentioned one customer that you said is to go back towards the on premise deployment. I was curious what the reasoning behind that was in terms of the size of the on demand deals in the pipeline. What do you guys think today versus what you can for the past 3 quarters?

Leslie J. Stretch

The customer went back, that was just a historical, they are already on premises and it was dabbling, having an experiment it does not mean that they will never comeback to the software as a service model but to [73:01] particularly customer in a particular industry…

Ronald J. Fior

Very large customer.

Leslie J. Stretch

Very large, particularly in certain associated components behind the firewall so we just complied. Comply and we made money and that is what we did In terms of going forward I think really what we are saying is, we have angled the sales force and the quotas which is a dial up annual contract value. There is special incentives in place to continue improved annual contract value and I personally believe that in the current climate it is a more compelling proposition and our customers do not have to buy their license and amass capital for that and in that associated infrastructure, they can just sign up for the service.

I think it will be fine and we have gone through the first major quarter renewals. We got some significant ones this quarter. We are really in pretty good shape.

Ronald J. Fior

I would make one comment on the side of the deal. Obviously as we gave you the numbers of deals that we close in each of the categories whether it is on premise or on demand, probably the biggest change that I saw in this last quarter and I just do not know for sure whether it will be the same in Q1 was that on premises side, the average license was actually a fair bit smaller and the average implementation or the average kind of customer implementation was smaller which is actually good news for us as opposed to always being in this big elephant that we have to hunt over the past years.

In the on demand, I do not think there is really any change in the next size or the deals that have a pretty broad range in that area.

Kevin Liu - B. Riley & Company

And then looking at the opportunity for the business outside, I was kind of curious which customers of yours today are utilizing that, as the smaller ones you just do not have the resources in house or do you actually have some of the larger enterprises that utilizing these ops?

Ronald J. Fior

Can I ask you a question? We have both. We have smaller ones. We just do not have any composition admin or sole operation and look for how often they might get it from us. We got large ones and we have a very large one which will come when we need in the operations contracted in the quarter which is really good business for us and it is a large recurring revenue also makes us more in connect with the customer. Let us just help them more to spot more opportunities.

Kevin Liu - B. Riley & Company

And then just lastly, in terms of looking at the pipeline by verticals I was curious when you look at the target on the insurance side this quarter. Is that going to continue the lead on here in 2009 or do you see some other verticals taking out?

Leslie J. Stretch

I think that the insurance, we have actually organized the sales force a little bit differently this year with a pure global insurance focus so that is a global market. We got into some very good customers in the US and a couple in Europe but it was a global in market that we want to address. So I think, I expect that it would still be a major market for us.

We are under penetrated and the producer administration tool which is really how it first ran out in 2008 so we expect to see more of that in 2009. And then the Telco space we got 40 global Telco customers who are really very dependent on our service. I think the opportunity is there for software as a service and also for the new TrueChannel product for Telco which is about managing and on boarding the distribution relationships and channels.

That is a really big business problem. Commissions are very important and we got a $100 Million business centered around that but there are adjacent spaces here that we are getting real demand and real interest and so we focused on our R&D effort on that as well.

Operator

(Operator Instruction) Your next question comes from the line of Michael Nemeroff - Wedbush Morgan Securities.

Michael Nemeroff - Wedbush Morgan Securities

Hey guys. Thanks for squeezing me in here. Most of my questions have been answered just a couple, Ron, related to the expenses associated with the bad debt and the customer, did I hear you right that there was about 500 K of that expense that is in the G&A line and then you said there was 790,000 of expenses associated with the customer dispute that was in there?

Ronald J. Fior

Yes, the 590 K, it was 590 K for the bad debt that is in the G&A line.

Michael Nemeroff - Wedbush Morgan Securities

That is in the GNA line, okay.

Ronald J. Fior

Seven hundred and ninety is actually in the cost of services.

Michael Nemeroff - Wedbush Morgan Securities

Okay. So excluding that would have been look like a pretty good quarter excluding those 2 things in terms of profitability?

Ronald J. Fior

Yes, absolutely.

Michael Nemeroff - Wedbush Morgan Securities

Okay. And then Leslie, in terms of the close rates going forward, what are your assumptions related to the pipeline and Q1 and Q2 specifically given the environment? Are they a lot lower given the guidance is a little bit conservative there?

Leslie J. Stretch

Yes. I think it is just, Michael you know it is very unpredictable. We see the same things as we saw Q3 and Q4 where we see a good pipeline. I mean in Q4 we have a sales force that closed 31 transactions which is the highest we have ever done and my point to them is you can do it once you can do it again and we got the capacity to do it.

The question is going to be just monitoring the economy. How does the consumer recover? How does the economy recover when a new president takes action, that is what is in everybody’s mind and spoke. We are working as hard as ever. It seems to me a quite hard phase but I am pretty hopeful.

Michael Nemeroff - Wedbush Morgan Securities

And then Ron, I do not know maybe I mentioned this, I joined a little bit late during your prepared remarks, the interest income and other line was an expense of about $222,000 non GAAP. What was that? What was that related to?

Ronald J. Fior

I think that was related to the auction rates securities that we had…

We talked about that in the past. In the past we had as a balance sheet temporary loss but because of the time that has gone by now we have to record other than temporary loss and run it through the income statement…

Even though we have essentially the actual losses greater but it is also a put option because part of our auction rates securities, in fact the majority of them is actually are with UBS and we actually have that agreement where we have signed which will pay us the full amount in 2010. I think so, have to wait a couple of years for it but I expect it.

Michael Nemeroff - Wedbush Morgan Securities

So going forward, that interest income line should actually be in that positive going forward related to as balances ,right?

Leslie J. Stretch

The auction rates securities are actually paying us their interest consistently. They are all student loan ones and their with the UBS as the majority of it with another piece with Citi but they are paying their interest like clockwork so we just collect the interest on it.

Michael Nemeroff - Wedbush Morgan Securities

So the 800 K with the customer dispute, the 600 K their bad debt expense, another 222,000 from auction rate securities if you net those together you have actually got a positive gain on the quarter were it not for those 3 things .

Leslie J. Stretch

You are doing the calculations right. We thought pretty good about the quarter, other than we have to deal with this what I call wannas but they are really not, they are obviously not identified exactly as that way…

Definitely are things that we would not expect to happen on a recurring basis.

Michael Nemeroff - Wedbush Morgan Securities

So are there are there any issues like this that better kind of cropping up that maybe we can expect or anticipate going forward. Any other issues like this?

Leslie J. Stretch

I do not see any right now. I mean we look… another things that we look at is remediation. You know how much remediation do we do in our services and there is always some remediation done, got historical tract record and that actually the reserving for that actually went down because of what we saw over the lat quarter so. Do not expect it, you know something could come out of the woodwork but with the bad debt. It was literally one of them we have over almost 300,000of it was occurred actually 2 weeks ago we found out. It was still valid at the end of the quarter but between that and the date we announced it. We found out it was bankrupt so.

Michael Nemeroff - Wedbush Morgan Securities

Leslie, assuming that… if you could just maybe give us a break down on what percentage of the pipeline on new deals is leaning towards perpetual license versus on demand obviously they can change but you know as you see it right now what percentage of maybe in the Q1 and maybe the pipeline for the rest of the year leans perpetual versus on demand?

Leslie J. Stretch

We did if you look back to Q4 we did 18 on demand deals, 13 on the premises deals. I think the natural run rate is probably more of fifty, fifty actually it is really hard to tell at the moment in this current environment but my conviction is beyond the month proposition resonates more because especially now specially now that you do not have to go into a massive capital infrastructure but you still have some very large organizations who typically comes to us and want an on premises solution and we are going to provide it and I hope we provide more of that on the subscription basis.

Michael Nemeroff - Wedbush Morgan Securities

So building on Mark's question earlier about not looking too far forward on guidance on license but I had modeled somewhere in the neighborhood of 50% reduction in the license revenue in 2009 but it sounded like you are expecting that to be a lot significantly less than what I was looking for, I do not know what other models have out there. I think you suggested it could be flat to maybe slightly down. Is that the proper way of thinking about it?

Leslie J. Stretch

We definitely do not have 50% down in our models.

Michael Nemeroff - Wedbush Morgan Securities

Okay, what do you have in your model?

Leslie J. Stretch

I think it is a dynamism because if we can get to the breakeven point on the subscription basis then we start to, we contribute to the, we control the transition to the grade that is what we have doing. So I think that is the key for us, can we get to that point? How quickly can we get to that point given last year starting with 2008, we did quite see the economic difficulties that unravels for everybody. We would have hoped to get further to be honest but I think we have to adapt to the economy at that pragmatically of what was going on. I think now we just look for that point of sustaining breakeven profitable performance on a subscription basis and we can start with that. We are definitely experimenting with more subscription-based license deals that are getting some traction.

Ronald J. Fior

So, logically it would be down a little bit from what we did this last year.

Michael Nemeroff - Wedbush Morgan Securities

Okay, I will leave it at that.

Operator

Your next question comes from the line of Ted Ketterer - TK Associates.

Ted Ketterer - TK Associates

Hey guys, I got a number of questions starting out with SAP and SalesForce. Can you update us on the state of those partnerships and particularly with SalesForce where you are in that or were ramped?

Leslie J. Stretch

Yes, so SAP first what we did, I think our last big transaction we reported was Q3 and we are very pleased with that. We are at so far this quarter and on the next quarter. We are starting to, we have also invested in that channel initiatives which we are a little bit coy about, we have not been public about it but we have invested in some channel leadership which we will talk about probably this week or next week to really focus because the business has come to us from SAP has been, has come to us because of their pushback so we have not really served them and worked closely with them. So we will be changing that slightly. So, I think we will do the similar sort of run rate of good deals from SAP. I think there is one interesting glimmer on the horizon is that in Latin America, we are in discussions which is good and that is what we advice some of the large insurance financial services and Telco deals that we have done down there, Panamex, AXA and VIBO, I think that has caught their attention and that is just three deals so I think we will do more than that in Latin America this year so we got their attention in that region and I think that will makes a lot of sense for us to do something there.

On the SalesForce, we aligned now this quarter with Force.com compound communicator solution and we hope starting for transactions for SalesForce Checkout. Before SalesForce Checkout went live, we released to free customers that will go to pipeline of additional transactions and I hope that we will fall positively on that product over its first full quarter. Now, we got only about for the frontline in Q2. You should expect to see more Force.com coming up on the upcoming week.

Ted Ketterer - TK Associates

Great. You mentioned on the $200,000 bad debt was the Company that declared bankruptcy mid January but they are still using the system?

Ronald J. Fior

Correct. When they got pass that stage of bankruptcy you have a situation where you can get paid through the courts subsequent to the date that they filed their bankruptcy. It is a reorganization.

Ted Ketterer - TK Associates

Okay, so they reorganize? The big customer, the $900,000, sounds like they had quite a few payees as they shut down as far as with you guys?

Ronald J. Fior

You should be careful there. The adjustment in our payees with $900,000 was for two customers in total and that was two customers. The one which was proof of concept and then the other was this customer we had the disagreement.

Ted Ketterer - TK Associates

Okay with the disagreement customer, were they already up and running and paying people on the system?

Ronald J. Fior

They were not paying people on the system.

Ted Ketterer - TK Associates

Okay because I am just trying to figure out whether one could get up, how difficult is the general question then. If someone goes down and they do not renew, what do they do or do they have to fall back on? Should they go back to the old system? Can competitors come in there very quickly and takeover?

Leslie J. Stretch

Yes, we just have not have much experience of that because the attritions been through acquisitions so we have not had much experience of somebody doing that. Typically when you dig deeper, you tend to find their other issues with the company and there is a disinvestment going on but really to be honest, it has hardly happened so we need to get a lot bigger and sell a lot more volumes and understand what happens there but we have had competitors slipping in to the bridge and the few cases where we have difficulties.

Ted Ketterer - TK Associates

Okay and is the dispute capable of being resolved or I mean is it still ongoing or..?

Ronald J. Fior

It is ongoing.

Ted Ketterer - TK Associates

It is ongoing so it could come back?

Ronald J. Fior

We cannot make any other comments on it.

Leslie J. Stretch

We want to hold out for we rode money and we would like to get it and we are going to pursue it.

Operator

Your next question comes from the line of [Greg Spiker - Moss Creek].

[Greg Spiker - Moss Creek]

Just one quick question and then we could follow up. I want to make sure I heard you correctly, the customer disagreement for 790, was that their annual contract value as well or that is that a totally separate number?

Ronald J. Fior

That is completely a separate number.

[Greg Spiker - Moss Creek]

Okay, do you care to give that or the number of payees they have or whatever might be?

Ronald J. Fior

We said the amount between the two customers was $900,000 was the impact on the ACV and that is really…

[Greg Spiker - Moss Creek]

Oh, that is the impact on the ACV, okay. I am sorry, now did you update us on the total number of payees now on on-demand or did I miss that?

Leslie J. Stretch

Seventy four thousand.

Ronald J. Fior

Seventy four thousand.

Operator

(Operator's instruction) You have a follow up question from the line of Chad Bennett - Northland Securities.

Chad Bennett - Northland Securities

Just a follow up here. On your Q1 guidance, maybe this goes back to somewhat of a mix question but are you managing the business, I guess in the first half of the year too concerning the other one item we had in Q4 and the cost cutting which kind of trickles over in the Q1. Based on your mix assumptions, are you managing the business to a breakeven business in the first half of the year or can you give us an idea based on your mixed assumptions what a revenue breakeven level would be considering everything that is going on?

Leslie J. Stretch

We think we were, it was pretty good. I think we are managing the breakeven levels that we dealt with the many issues as we could with the prior quarter.

Chad Bennett - Northland Securities

But Q1 revenue is down sequentially, right?

Ronald J. Fior

Right but we also have you given you guidance on operating cost which is down pretty significant too.

Chad Bennett - Northland Securities

Yes. So, then we go back to mix to some extent, right?

Ronald Fior

Correct. But our goal is definitely to be profitable. That has not changed. We are right on the border right now and the key for us to keep it over on the positive side of that line and generate cash as we did in the past quarter because that was an important. It is the first time since before we were public that we have been able to do that.

Chad Bennett - Northland Securities

Okay. Alright, thanks.

Ronald Fior

Thank you.

Operator

At this time, we have no additional question from the queue. I would now like to turn the call back over to Mr. Ron Fior for any further remarks. Please proceed.

Ronald Fior

Actually, Leslie Stretch will say it.

Leslie Stretch

Okay. Well, thanks everyone. Thanks for listening and joining us on the call. We look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s presentation. This concludes the conference. You may now disconnect. Have a great day.

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