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Callidus Software Inc. (NASDAQ:CALD)

Q1 2009 Earnings Call Transcript

April 30, 2009 at 4:30 pm ET

Executives

Leslie Stretch - President and CEO

Ron Fior - SVP of Finance and Operations and CFO

Analysts

Mark Murphy - Piper Jaffray

Michael Nemeroff - Wedbush

Kevin Liu - B. Riley & Company

Dan Rise - Northland Securities

John Zaro - Bourgeon Capital

Gregg Speicher - Moss Creek

Ted Ketterer - TK Associates

Operator

Welcome to the Callidus Software Incorporated First Quarter 2009 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 be facilitating a question and answer session toward the end of today’s conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Ron Fior, Chief Financial Officer. Please proceed.

Ron Fior

Welcome to Callidus Software's first quarter 2009 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 first quarter of 2009. 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 2008 on file with 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 Stretch

Thank you Ron. Good afternoon everyone. On the call today I am going to focus on four things: Q1 financial highlights, Q1 customer wins, new products, outlook and focus on recurring revenues and profitability.

Let me start with financial highlights. First quarter total revenues were $25.9 million down 8% compared to the same quarter last year reflective of the challenging economy.

I am pleased though within this difficult environment we generated $11.7 million in recurring revenues, which is the most we have ever done in a quarter. 11.7 million in recurring revenues, which are comprised of on demands subscription and on-premises maintenance revenues represents a 41% increase, as compared to the same quarter last year. The growth in recurring revenues was propelled by the year-to-year increase in on-demand subscription revenues.

First quarter recurring revenues represented 45% of total first quarter revenues as compared to 29% in the same quarter a year ago, a rapid shift. Recurring revenues make it easier for us to plan key investments and to deliver more predictable financial results

Turning to services and license revenues, first quarter services revenues were down 29% to $11.3 million, and first quarter license revenues were predictably down 25% to $3 million, in each case compared to first quarter of 2008.

Remember that in the beginning of 2008, we indicated that license revenues would decline as we executed aggressively on our transformation to recurring revenues-based business. Although first quarter license revenues declined year-to-year by 25%, total first quarter revenues only decreased by 8% year-to-year, which is illustrative of the benefits of our growth in the recurring revenue business.

On GAAP net loss for the first quarter was $2.8 million or negative $0.10 a share. This compares to GAAP net loss $2.6 million or negative $0.09 per share for the first quarter of 2008.

First quarter non-GAAP net loss was $1.5 million or negative $0.05 per share, compares to non-GAAP net loss of $1.1 million or negative $0.01 per share for the same period last year. Non-GAAP net loss excludes stock-based compensation expense, restructuring expense and amortization of acquired intangible assets. A reconciliation of GAAP to non-GAAP results are included in our press release.

And now to the Q1 customer wins and business highlight: I am pleased to be adding several new marquee customers. While also signing some significant follow-on business with existing clients.

In our on-demand business we had a good win at Vodafone,Italy. We were also in fact even outselling existing on-demand customers and converting on-premises customers. On-demand follow-on and conversion business included Concentra and Lexis-Nexis.

An exciting part of our on-demand business, was the successful introduction and selling of three new software to service products. TrueMBO, TrueQuota and Callidus Plan Communicator. I will comment in more detail about these products shortly.

Turning to our on-premises business, we had some significant wins in the first quarter. We closed business with new customers such as Vodafone, Spain and Vodafone, Netherlands.

And we have now signed 10 Vodafone operating companies in 10 different countries. We also closed add-on business with several existing customers, including Westpac Bank in Australia, Blue Cross and Blue Shield in Michigan and Vivo in Brazil.

I am please that we had a strong quarter in terms of [go-lives],16 customers, nine demand and seven on-premises customers went into production on our solutions in the first quarter.

Let me talk about new products. We continue to execute on an ambitious product roadmap. Yesterday, we announced the Callidus Monaco Suite, which is the latest release of Callidus on-demand. The Monaco release is a major achievement for Callidus Software and its customers. With its intuitive user interface, its depth of sales performance management and its breath of pervasive performance, it outpaces our competitors and expands our product leadership.

The Monaco Suite is a multi-tenant offering that provides robust functionality for all aspects of sales and pervasive performance management at a competitive price-point on demand. In addition to our compensation calculation, reporting analytics and embedded workflow capabilities, the Monaco release offers objective management through the TrueMBO product, quota management through the new TrueQuota software and planned distribution through Callidus plan communicator.

As I said earlier, I am thrilled with the successful launch in quick customer uptake of these new products in the first quarter. The Monaco Suite is easy to purchase and its simple to implement and use. And we are very pleased with customer and industry analyst reaction to Monaco, which was reflected in yesterday’s press release.

Let me turn to our outlook and focus on recurring revenues and profitability. As I mentioned earlier, I am pleased with the 41% increase we had in year-to-year recurring revenues, $11.7 million in first quarter recurring revenues is the largest amount of quarterly recurring revenues Callidus has ever done.

The key objective of our business model is to drive recurring revenues. The critical indicator of the health of our recurring business is net cumulative, annual contract value or ACV.

I am pleased to report that we increased net ACV in the first quarter. Ron will discus this in more detail. We have been lately r focused on managing expenses and in the first quarter of 2009, we reduced our non-GAAP operating expenses by approximately $740,000 or 6% when compared to the first quarter of 2008. With approximately $38 million in cash and investments and no debt, we are well-positioned for sustainability and for strategic investments.

This is a challenging market for everyone but we think we are better positioned than many companies and will use that to our advantage when considering organic and inorganic growth opportunities. Achieving consistent profitability is a top priority of our company and we will manage the business prudently, keeping a close eye on the macro economy and are prepared to make the necessary adjustments to our operating model as required.

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

Ron Fior

Thanks Leslie. The economic environment continues to present challenges to our business, but I am pleased we have remained focused on our key financial operating objectives, including revenue growth and margin improvement and we have been successful in controlling our costs.

Total revenues for the quarter decreased as anticipated, however, the quarter did produce some promising highlights. Recurring revenues reached a record level of $11.7 million, an increase of 41% over the prior year. Recurring revenues represents 45% of total revenue for the quarter.

Services margin continued to improve to 17% for the quarter. And on a non-GAAP basis excluding stock-based compensation and amortization of acquired intangible assets, services was 18%. This compares to Q4 services margin of 6% on a GAAP basis and 12% on a non-GAAP basis.

Total operating cost are down again from their Q4 level by $2.6 million on a GAAP basis and $1 million on a non-GAAP basis, reflecting the changes we made at the end of the 2008.

Now, I will walk through our Q1 results 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’s start with bookings.

We believe that cumulative annual contract value is a key indicator of our financial condition and operating performance. As such, we have decided that from this point forward, during these calls we will provide you with the cumulative annual contract value measured as of the date of earnings call.

By making this change, we will be able to report to you the most current update of addition and cancellation to our cumulative ACV.

As of today, our cumulative annual contract value for our on-demand business is $27.4 million. Cumulative annual contract value represent the total annual value of all our on-demand contracts less cancelled annual contracts.

Since our last earnings call, we have added $1.9 million in new annual contract value and 0.5 million of annual contract value was cancelled. While the couple of our smaller customers fell victim to the economy resulting in the termination of their ACV, we are pleased that our net cumulative ACV increased even in this current economy.

On the license booking side, there was license transaction of over $1 million in the quarter. This compares to one transaction in the first quarter of 2008 and zero in the prior quarter.

Let's look at total revenue. Total first quarter revenues were $25.9 million, down 8% from the prior year, down 5% from the previous quarter. By geography, 82% of first quarter of revenue was generated in North America, this compares to 81% in the first quarter of 2008.

By vertical, total revenues for the first quarter breakdown are as follows:

Insurance 26%, banking 13%, high technology, manufacturing and life sciences 30%. Telecommunications 27% and retail and distribution 4%.

The insurance and telecommunication market continue to be resilient. We believe our result and customers roster in these industries illustrates that we are that the de facto standard for these important segments.

Now looking at the recurring business. Recurring revenues for the quarter were $11.7 million up 41% due to the growth in our on-demand subscription revenue, which is up over a 130% compared to the same period last year. Recurring revenue gross margin for the first quarter was 51%, down from 60% in the prior year and 56% in the prior quarter.

During the quarter, we had a record number of customers go live with our on-demand services. As these customers transition from implementation to operation, additional resources were utilized to ensure a smooth transition. While we expect to use less of these transition resources in the coming quarter, we continue to invest in new services offerings and the mid market. We expect our overall recurring margin to fluctuate based in part on the level of these investments.

Recurring revenues represented 45% of our total revenues for the quarter. This compares to 29% for the same period last year. This significant increase illustrates the progress we have made in our transformation to the recurring revenue business over the past year.

Lets talk about the services business. Services revenues for the quarter were $11.2 million, down 29% from the same period last year as expected.

In the near-term, we continue to expect downward pressure on our services revenue. In addition to the decrease resulting from the shorter on-demand implementation cycles and the increase in partner led implementations, during the quarter we completed several on-demand in our on-premises customer implementations, which will not be replaced immediately with new projects.

Services gross margin for the first quarter was 17% down from 20% in the first quarter of 2008. While this quarter-on-quarter comparison reflects a decrease in margin when comparing to the 10% services gross margin that we have reported for all of 2008, our first quarter margin of 17% reflects the progress we have made over the last several months, improving the profitability of our services business.

We continue to manage our utilization in headcount carefully in an effort to optimize the profitability of our services business in this challenging economic environment.

License business. License revenues were $3 million in the quarter, down 25% from the prior year period. License gross margin in the quarter was 94%, consistent with the prior year period. The decrease in license revenues continues to reflect our shift and emphasis towards our SaaS business model. Overall gross margin for Q1 was 41%, essentially flat, compared with 42% in the prior year.

Operating expenses. Overall operating expenses, which include $801,000 of stock-based compensation and a $166,000 of restructuring expenses, were $13.4 million in Q1 down 10% 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 headcount reduction efforts initiated during the quarter. Overall operating expenses in Q1 were down were as we had reduced marketing spend related to our annual users group meeting held last quarter. We have reduced bad debt, reduced commissions and stock-based compensation and we also experienced the benefit of headcount reductions made at the end of the 2008. Our total operating costs for the quarter were down $2.6 million from the prior quarter.

Business model. From our business model point of view, we continue to see the impact of growth in on-demand in the relative percentages of revenue. Recurring revenues accounted for 45% of total revenues in the quarter. This compares to 29% for the same period. At the same time the contribution from license decreased from 14% to 12% and the contribution from services decreased from 56% to 43%.

On the operating expense side, as a percentage of total revenues, sales and marketing was 23% as compared to 26% in Q4, research and development was 15%, up 2% from Q4, and G&A was 14% down from 15% in Q4.

Interest and other income and expense. Interest and other income net in Q1 was approximately $30,000. This amount is down significantly from prior year due to lower cash balances as well as lower interest rate.

Employees. Our total headcount at March 31st excluding contractors was 398 employees, down 26 from the end of December, primarily as a result of restructuring activity that we announced last quarter.

Balance sheet and cash flow. We finish the quarter with $37.9 million in cash and investment. This is the decrease of $2.7 million from December. Our net accounts receivable balance at March 31st was $25.1 million. Day sales outstanding for the quarter was 83 day, up 15 days from Q4. Excluding the impact of changes in our deferred revenue, DSO would have been 74 days reflecting the current quarter increase in deferred revenue.

Total deferred revenue, including both short and long-term increased by $2.4 million to $25.5 million. This increase is related to the timing of renewals combined with the addition of new annual contract value and maintenance transaction.

During the quarter we used $2.2 million in cash from operations. Cash from operation was negatively impacted by delay in customer payments. We had one customer payment of over $1 million that was due in the quarter but was paid in April.

There was an additional negative impact of approximately $800,000 for restructuring payments made in Q1, relative to the headcount reduction actions initiated in Q4.

During the quarter, we repurchased 248,000 shares of our stock for approximately $750,000. This brings the total amount repurchased under the Board authorization to approximately 2.2 million shares for total of approximately $8.7 million. I would also note at this time that we have suspended further repurchases under our stock buyback plan.

We received approximately $1 million from stock auction exercise in the quarter. While ell, capital expenditures were approximately $624,000. We continue to hold approximately $4 million in auction rate securities secured by student loans. We will continue to carry this auction rates securities until we are able to sell them.

At the time of sale, we will report a realized gain or loss on the sale. Given the lack of liquidity at this time, these investments are classified as long term.

Now let us turn to Q2. I want remind you of the Safe Habor 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. In these tough times and given the uncertainties of financial markets and their impact on customers buying plans, it is important for us to be cautious with our own projections in spending.

For Q2, we are expecting total revenues to be between $22 million and $24 million. This would represent a decline of 6% on the low end of the range and an increase of 2% on the high end compared to the second quarter of 2008. Total revenue is made up of recurring, services and license revenues.

Operating expenses are expected to be between $12.8 million and $13.8 million and include approximately $1.3 million of stock-based compensation.

Before we open it up to questions, I would like to remind that next week we will be presenting at the AeA Conference in Monterey.

With that said I would now I like to open up 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 Mark Murphy of Piper Jaffray. Please proceed.

Mark Murphy - Piper Jaffray

Thank you, Leslie. Just wondering if you have -- Is there any sense from your field organization of the spending environment being less worse or stabilizing or turning the corner here in late March or based on what you’ve seen so far in April?

Leslie Stretch

Yes. Actually we had a reasonable start in the current quarter. So I don’t know if we can say the trend is getting better or worse. But what we see is, for our solution its very, very sticky and I think in the small and mid-market we see people drifting decisions, postponing decisions. But in our enterprise customer base and in the enterprise prospects we see a fairly, what feels like a fairly normal environment and we continue to contract good business there. Sales force are very active. Pipeline is quite exciting as is the partner pipeline. That’s a sort of feel I have appear to be at the end of April, first month of Q2.

Mark Murphy - Piper Jaffray

Okay. And then, my other question was, I just want to make sure I heard the numbers right. Is the net cumulative ACV on this quarter of 1.4 million, am I thinking about that the right way?

Leslie Stretch

Yes.

Ron Fior

Yes.

Mark Murphy - Piper Jaffray

Okay, so it’s up sequentially.

Leslie Stretch

Yes.

Mark Murphy - Piper Jaffray

Any high level, any feel or how that is going to trend here through the rest of the year? Would you think that Q1 is kind of seasonal low point or do you think that – do you think because the spending environment is different that that might not be the cases here?

Leslie Stretch

I don’t know. I think the way we look at it is, that we hope to just continue to increase the net cumulative of the ACV and even if we did annually lets say, flat bookings versus last year, we will grow our revenues very significantly, the recurring revenue line items. All I would say is, there are some significant annual -- contract value opportunities are there for us in a couple different sectors, which I feel quite excited about. I think it's -- that's the way it is really at the moment.

And I think the interesting thing is the enterprise cross trend, we are seeing customers, large customers in traditional industries being prepared to commit to technical, a bit extremely on-demand service software as services itself. And also to recurring business services which sit alongside that. So that's what we are going after and we have got quite a focus and quite a separate new focus on enterprise class business there.

And with the new products though we just had our first quarter of striking oil with the new products and here we kind of brought them out live really for the first time in Q1 Callidus Plan Communicator, TrueMBO and TrueQuota. And we were pleased to sign in very short order three deals for all three products. It's very short campaigns.

Now, I haven't got anything in the -- in our outlook for the new products, and I have said the repeatedly because it was always unpredictable. But I can tell you that the whole company is really excited. When you build new products and bring them to market and contract with customers and also implement them rapidly, it's very, very exciting for the business.

And I think the other thing that is really got us jazzed is the Monaco release that we announced yesterday. We had some phenomenal reaction from customers, and our Customer Advisory Board in California next week who will see the thing really thoroughly, but we had some great reactions from customers and great analyst reaction as well. I think we really hit the mark with that new release and I am looking forward to see the impact on our customers and prospects.

But I am very, very excited about the new volume products but also the enterprise need for our solution is proving to be really very sticky and although as Ron mentioned, we had a couple of small customers who inevitably fell victim to the economy growing the net cumulative ACV is critical. And retaining some really marquee customers and also adding a little bit of additional ACV has been very satisfying and my customer engagement have it on the road pretty well constantly.

My customer engagement is not only very satisfying that they see the value. One of the large telco customers, just recently told me this is the number one strategic application in the business and I believe it, as I know how critical it is. And with people just -- you can’t just switch this application off, you can’t switch off paying your channel when you are sales people is very mission critical, its not a discretionary at all. And the more time I spend in the business with customers, the more that comes home to me.

So, that’s a kind of sense of where we are.

Mark Murphy - Piper Jaffray

Okay, it sounds like there is a lot of excitement about some of the products that you see in the pipeline. I am curious what the implications are there on your services utilization. Can you take us through what the utilization rates are looking right now and how you think that’s going to be trending?

I heard the commentary that you think there will pressure there moving forward, but I am wondering that the services revenues has been hanging on to this range of about 10.5 to 11.5 million for about four quarters in a row and I am just wondering if you think its going to trend below that level?

Leslie Stretch

I think there is a couple of time related issues here. We just brought a whole bunch of customers live. I think we mentioned that 16 or so customers live. And so inevitably you see a tail-off and project related revenues. But we are just about to announce publicly some additional services, that’s been our ambitious to bringing to market for sometime and they are being demanded by customers, specifically in the plan, design area. In fact we’ve just signed our first small contract in that area. And that’s a very exciting opportunity for us. Also we built in our training business to manage as a growth business, instead just part of the traditional services business. So there are number of areas where there are opportunities to add revenue and grow.

The project business tends to be lumpy. It tends to follow large contracts signing, large on-demand signings. The unknown for us is really around the new products and the implementation of the requirement there.

And there is another dimension, which is that we really have a channel neutral to channel positive stance with regard to partners and we're seeing more partner actions there, which we’re really pleased with. It’s very important to have first is more -- as it is important to us to have two things. Good margin in consulting, implementation services revenue and secondly to have partners there who a can make money from implementing Callidus but who can do it properly and satisfy customers.

So in the last couple of quarters we put a lot of efforts into partner enablement and we're seeing an increase as a result in partner involvement in our contracts.

Operator

Your next question or comment comes from the line of Michael Nemeroff of Wedbush. Please proceed.

Michael Nemeroff - Wedbush

Hi, guys, thanks very much for taking my question. Are you guys converting any of the existing licensed customers on-demand? If so, if you have any metrics that we could track on that that would be helpful

And then also for Ron I just wanted to know either there was cash usage from operation this quarter. Are you planning on running the business to be cash flow from operations positive for the full year.

Ronald Fior

That is definitely our goal. Obviously this first quarter and the obviously the first quarter is generally a tougher quarter and from cash point of view because you have the big finish at the end of Q4. But our goal is definitely to that. It's a challenge right now for this quarter.

Michael Nemeroff - Wedbush

Sure.

Leslie Stretch

On the conversion question, I think it's very good question, it's hard to trend anything because we put quite a bit of focus on new business and new services and new products. But we did do a few conversions, we mentioned a couple in that, I think we mentioned Lexis-Nexis as nice a new conversion for us.

And I think it's an interesting opportunity now, so I see every customer, a prospective customer, as someone who is potential customer for recurring services or software as a services. So we actually are beginning to see a take up in a small way with on-premises customers of some recurring business services on plan design…

Michael Nemeroff - Wedbush

So they are using both products -- both the on-demand as well as the on-premise solutions.

Leslie Stretch

Yes, it's two dimensional. One is they are using some recurring business services and we have just gone live or just got live in one customer who is a traditional on-premises customer and they matched up one of the new on-demand products and are using effectively with existing environments.

So every customer, this is a new development -- I think every customer is prospective customer for on-demand SaaS and also of recurring services.

That's real focus for us, the other thing is that we really do believe very firmly in the current environment. We have gone through a lot of situations where people simply have no budget. They start a conversation with, we have no budget. We really believe that we can provide a more effective solution whether it’s converting our implementation or converting something else. We can provide a more cost effective solution at a discounted level to the way they say for that solution themselves if you follow.

So, I think we expect to see -- I expect to see some significant conversions this year. But I still also expect to see in particular industries and geographies good on-premises business.

Michael Nemeroff - Wedbush

Okay, and then just lastly if you could take about the competitive landscape I know that you had a competitor who exactly at that purchase center. I was just wondering if anything has changed since that announcement for better or for worse for you guys or them, for that matter?

Leslie Stretch

I think our perspective on that is, that market space on its own is really quite unattractive if that’s all what you do, which is why weren’t out looking to buy companies at that level. And so, we really have that view and I think in the current economy that’s and particularly amplified to be honest. So, they don’t have the customer base that we have or the breadth of offering that we have.

We do actually know through our field coverage organization just about every opportunity that is going.

Michael Nemeroff - Wedbush

Right.

Leslie Stretch

Some of the opportunities we have to make a judgment that we don’t want to do [house making] business. We are not in the lost leader mode, particularly in the current economy, that’s not a good move.

Michael Nemeroff - Wedbush

It doesn’t help my cash when it happens.

Leslie Stretch

So, we really get reengaged where we think we can, if the customer really values the solution and I find that end of the market customer churn, isn’t [huge], I let them value the solution quite in the same way that we want to be in that end of the market, make no mistake about it but not to the expense of our enterprise customers.

Part of our strategy is to bring new volume products there, not just to try and create -- trying to shoehorn in a small simple, cheap version of what we have. If indeed that market doesn’t quite value the solution then – our goal is to grow that net cumulative ACV and to minimize attrition. In that market attrition is a characteristic that I think is being amplified at the moment.

Operator

Your next question or comment from the line of Kevin Liu of B. Riley & Company. Please proceed.

Kevin Liu - B. Riley & Company

Just looking at the guidance for Q2, I was wondering if you could speak to pipeline on the perpetual side and relatively to where you were entering last quarter. And then also just wanted to double-check and make sure that for the most part it sounds like a lot of the decline quarter-over-quarter is coming from the professional services side. So, what happens to that gross margin as you see slightly lower levels of implementation?

Leslie Stretch

Yes, I think, that’s a very good question. Our goal in professional services is to maintain and improve the margin. So if we don’t see work for our people its not healthy for them or for us to retain the cost and to keep them sitting around. So we don’t see that. We’ll take actions and we intend to preserve and grow the margins.

But as I said, there also are – there’s quite a lot of partner activity out there, which is very healthy for us. We should support while still having a strong implementation capability of our own.

With regards to the license business, we’re becoming less and less dependent on the license business, but we still see almost unprompted demand in certain market segment, vertical market segment and in certain geographies where the software as service mission hasn't quite made the same progress, so Latin America, parts of Europe and even glimmers of demand in Asia Pacific for the traditional on -premises product.

But we are just becoming less and less dependent on that and our guidance reflects that.

Ron Fior

I mean our focus is on the on-demand that is where our focus is but as you said we still have a fair number of on-premises deal that keep popping up and we are going to continue do handle their needs.

Kevin Liu - B. Riley & Company

Got it and then in terms of some of the customers that you lost on the on-demand side, were these just customers that completely went out of business or were some of the reduction in ACV may be the result of some of your customers just cutting out some of the payees

Leslie Stretch

Yes, I think it's a mixture of those things and it wasn't too many actually. But it was a mixture of those things and I think it was like couple of small customers, but to be honest when people who are making and shipping anything from bananas to automobiles are going down in double-digit percentages year-over-year, we seem to keep finding the ability to grow the net cumulative ACV. So it was I think we managed it reasonably well and I think we just intend to continue growing that cumulative ACV.

Operator

Your next question or comment comes from the line of Chad Bennett of Northland Securities. Please proceed.

Dan Rise - Northland Securities

Good afternoon guys this [Dan Rise] pinch-hitting for Chad Bennett today.

Leslie Stretch

Hi Dan.

Dan Rise - Northland Securities

So just a question on -- how much of the subscription and support revenue was maintenance versus on-demand during the quarter?

Ron Fior

I will give you that answer in a second. Here maintenance was roughly $5.2 million.

Dan Rise - Northland Securities

Okay.

Ron Fior

On-demand was the balance.

Dan Rise - Northland Securities

Right, okay, thank you. And subscription and support gross margin obviously ticked down sequentially and how should we be thinking about those gross margins on a go forward basis in the segment?

Ron Fior

Yes, I mean I think we stated at in the script here is that, we are really expecting them to kind of to be relatively stable at this point in time for the next quarter because we have been investing. We had a number of -- as we said a record of go-lives this last quarter. We actually I can see the forecast for this quarter and there is a whole slew of them also going live this quarter.

So, I think there is a big investment in making sure that these guys go-live in a proper manner, implementations tend to go crazy right near the very end.

So I think there is that and then if you remember last year we did invest near the very -- in the later part of the year, we did invest in additional infrastructure, which we have not used up by stretch of imagination and obviously as we can crank up the volume a little bit more here that’s going to drop to the bottom line.

Dan Rise - Northland Securities

Okay, and the license revenue how should we think about that in the run rate basis going forward?

Ron Fior

I think that in looking at the estimates that are out there. I mean we are out pretty much around a number that’s probably in the ball park. And historically when we said this last quarter, we said we have been running anywhere from two and a half to three or four and sometimes even as much as 5 million, but probably more like anyways between the two to 4 million of on premises business and over the last almost year and half, I think if I go back far enough. And that’s still seems to be out there. Some quarter its going to be at the lower end, some quarter is going to be at the high end.

Dan Rise - Northland Securities

Okay. And I think you might have touched on this before, but what's kind of the focus of the business on a go forward basis from the on-demand or I guess, from a license mix perspective?

Ron Fior

I think there is going to point very soon hopefully, and this actually relates back to Michael Nemeroff comment on cash that, we have enough annual contract value, so that we really don’t have to rely on any license value, any license revenue. And when I say we have enough that means that we can be profitable without the license.

When we get to that stage I mean, we're going to seriously consider and we’ve been actually testing it out, going to more of a subscription-based term license kind of idea for the license side of this business for the on-premises side, because as I already said, there are some certain verticals that just seem to be pretty well stuck on the idea that they’re going go do an on-premises.

So our longer term point is to get to that stage where, one we have a recurring revenue stream that is already enough to make us profitable and drive that profit down there and being a software company if you’re profitable you’re going to generate cash when they kind of follow from each other. So that is our goal longer term here. Its obviously we love to grown faster in this first quarter and last quarter, but we definitely see the light and its going to happen sooner than later.

Operator

Your next question or comment comes from the line of John Zaro of Bourgeon Capital. Please proceed.

John Zaro - Bourgeon Capital

Hi, guys. Most of my questions have been answered. I just have sort of a couple clean up stuff. The three new deals you talked about with the new products, those all happened in the second quarter as opposed to the first quarter that you just reported?

Leslie Stretch

No, they happened -- we released them in the middle of the first quarter and we just…

John Zaro - Bourgeon Capital

Okay. That were the deals that were announced before, not new ones?

Leslie Stretch

We didn't announce, we announced one of those. We didn't announce all three products been sold.

John Zaro - Bourgeon Capital

Okay and then on the exactly -- you talked about exactly.

Leslie Stretch

I didn't but – I never Zaro.

John Zaro - Bourgeon Capital

But there is a question about exactly. You guys have been going down though, a little bit down market. Is that right?.

Leslie Stretch

No, We have been invited into competitive situations because there is -- there appears to be a lot of churn there, quite significant churn and we have been invited into few of those situations.

John Zaro - Bourgeon Capital

Okay.

Ron Fior

When you are not profitable John we just go now, we can't do it. We are not going to do it.

John Zaro - Bourgeon Capital

Okay and then [Indian] -- the services for you guys for going offshore.

Leslie Stretch

No.

John Zaro - Bourgeon Capital

Can you sort of just talk a little bit about how that's gone?

Ron Fior

That's been primarily the R&D side.

John Zaro - Bourgeon Capital

Right.

Leslie Stretch

And don’t think there has been any adds in this last quarter. But we continue to use them and it's a very cost efficient way of doing it.

Ron Fior

Now the people that we are going let go, we will let go have already been gone and they went through last quarter.

John Zaro - Bourgeon Capital

That's in services?

Ron Fior

Yes. So the people in the last quarter there was services that were -- again we Leslie made the comment earlier that we are going to manage the headcount and utilization in services to meet the need.

If the service revenues are going to go down, they will adjusted and they will continue on. It's not kind of -- it's an ongoing thing and when we add revenues, we are going to add more people back in but probably through using contractors and probably through using third parties.

John Zaro - Bourgeon Capital

Okay. And then with the cash going down little bit and I am sort of drawing up on what have said throughout --- what you were saying throughout the call, which is basically whether its to get business accomplished or to the record go-lives for the last quarter end, for this current quarter. Its using the cash to do what you have to do to get things out the door and get it done like you are planning?

Leslie Stretch

Not really, I mean the cash is really a function of in this last quarter, I mean if you think about it we spend $0.75 million on the buy back.

John Zaro - Bourgeon Capital

Right.

Leslie Stretch

You take that out of the factor then you really have a much smaller change in the actual cash balance.

John Zaro - Bourgeon Capital

And then as it adds on, it didn’t pay which is for…

Ron Fior

Well, where we had the timing…

John Zaro - Bourgeon Capital

Right.

Ron Fior

Our cash receivable increased which in and itself isn’t necessarily bad but it is something that we have not planned, for we had anticipated there would be some reduction in that number which should generate cash. Because we anticipated in particular one big payment and they came in last week. But in addition to that as we do more differed revenue as we get sign up more of these net ACV deals then what you end up doing is you start to build a receiver amount and so as we get that cash in, it starts to generate cash.

John Zaro - Bourgeon Capital

Right.

Ron Fior

So, we had a loss I mean that’s the facts and also if we can reduce the loss as I said in the previous -- to this previous gentlemen is that, we get ourselves to profitability -- it’s a the software company, we will generate a lot of cash. And we are continuing to…

John Zaro - Bourgeon Capital

That would be good.

Ron Fior

I mean, it would. I mean working so much…

John Zaro - Bourgeon Capital

As you know.

Ron Fior

Yes, we are continuing to watch our operating costs, I mean you can see our guidance is again projecting even lower operating cost than we have last quarter and which were lower than the prior quarter. And we have said we are really, really watching these things carefully. So…

John Zaro - Bourgeon Capital

And the suspension of the stock buy back is more just being conservative than…

Ron Fior

I mean, we’ve bought back 8.8 million or thereabouts and…

John Zaro - Bourgeon Capital

Right.

Ron Fior

We just think that’s enough right now. We would like to look for other opportunities that we might be able to use our cash.

John Zaro - Bourgeon Capital

Okay. That’s its from me.

Operator

Your next question or comment comes from the line of Gregg Speicher of Moss Creek. Please proceed.

Gregg Speicher - Moss Creek

Hey guys. I just wanted to clarify the question on the cost of subscription and support. Were you saying you made some one-time investments or is that sort of new permanent dollar, absolutely dollar level?

Ron Fior

No, its – so there’s two things. We did make some investments back in Q3, Q4 in infrastructure which were built in and obviously they stay, they are pretty flat and obviously to the extent you generate more revenues on top of that that drops margin, right. So, that’s one piece.

The other piece is actually a more variable and that is that as we had people going live and we had a lot of them going live, the level of activity, not only technical activity but also people-wise activity increases pretty exponentially near the go-live dates. So there is fair bit of additional cost that went into there. And that’s why I said in the previous answer that I can see actually a number of go-lives going very aggressively this quarter, again another a huge number, which will obviously involve a significant amount of people and technical costs. And that’s why I said, I'm not ready to say that the percentages is going to go up this quarter but definitely longer terms it will go up.

Gregg Speicher - Moss Creek

Okay, okay.

Ron Fior

It will go up. Its just not right away.

Gregg Speicher - Moss Creek

Do you care to share the number of on-demand payees currently

Leslie Stretch

Well, we are focusing on the net ACV and cumulative net ACV is the leading indicator and the reason for that as when you put the new products in the mix, they are fairly low dollar per payee products, very quick to implement and quite profitable.

And so it's hard to then get this metrics of per payee, it hasn't -- which is -- where people -- where you want to go, ACV, payee account or payee, its pretty much stable. But the new products are beginning to show a different, they fit a different profile, so it's a mix now. You just don't have this one uniform per payee price book.

I am happy that we grew the subscriber account pretty nicely and that was reflected in the ACV.

Gregg Speicher - Moss Creek

Okay, fair enough. And let say have little fun here. Hypothetically, if the economy starts recovering, do you see more pent-up demand for on-demand or this unprompted license business you are talking about? What is the sales guys telling you?

Leslie Stretch

I think that fact that, we added ACV, we added license, we added customers, different geographies, in what is a hellish market environment. And the fact that we also retained customers who had very challenging times of their own as you know one or two of them particular who renewed and paid, it just brings us great confidence, that this is a core strategic solution.

And when we look at the elements that we were building around it, it's a core strategic solution and we just have enough time and bandwidth and coverage then we are going to be in a very exciting place, I am not sort of wait -- we are not waiting for the economy to pick up, so we just have to keep getting the coverage out there and also working with our partners, who I think have done some very encouraging things in the past few months.

Ron Fior

I mean I could postulate on that if the economy does in fact pick up then we might actually see some shortening of the buying cycle, which is obviously pretty elongated over this last six months or so. I mean customers continue to push it out, push it out even though they may have budget. So that might actually be a very nice thing. But I haven't seen it today.

Leslie Stretch

Yes, the thing that excites me about just selling into this little bit is the we get our 100 plus million revenue whatever was last year. We got that and we have got this 27 plus of ACV. We got all of our revenue from a very small group of customers. We can expand that significantly and now with our new products and our new reach and the partnerships and it’s been a real work in progress to have more people interested in implementing and making money from Callidus and I think we cost over a [hundred] there in the last quarter or two.

But I am very excited about all those fronts.

Gregg Speicher - Moss Creek

Okay, great, thanks a lot.

Ron Fior

Thanks, Gregg.

Operator

(Operator Instructions). And your next question is coming, comes from the line of Ted Ketterer of TK Associates. Please proceed.

Ted Ketterer - TK Associates

Hi, guys. Could we circle back to the current business conditions and specifically the pipeline. There have been a number of comments from a number of industry analysts who have been concerned about with, and I think that product disappearing pipeline. Can you give some more color or detail in your pipeline as it currently stands versus end of the year and sort of linked quarter?

Leslie Stretch

Yes, just to clarify, industry analyst concerned with disappearing pipeline, you mean generally or is a general…

Ted Ketterer - TK Associates

On Wall Street it is been in print of a certain company say that the pipeline isn’t what it what it was and it’s shrinking, not growing.

Leslie Stretch

Yes. I don’t know, I just did a channel review, I think two days ago, which was very exciting. Maybe you may be remember, end of last quarter we talked about we brought us some professional channel resources, I consider to be the first professional channel resources that we have had and the workload there is massive. The pipeline is fantastic. I am going to remain skeptical in the current economy because going from funnel to closure is a long way and is a lot of hard work.

But I am pretty excited about what I see and that comes from the IMS relationship. We did another deal with CIS down in Latin America in the quarter. Our comPlan Communicator success depends entirely on force.com and sales force and I am really excited about some of the development that we’ll be announcing soon in that regard. And we know there is appetite believe it or not from SAP in Asia Pacific and Latin America, which we’ll report some progress on soon. So, but it’s like…

Ted Ketterer - TK Associates

So its like that.

Leslie Stretch

Thanks a lot. So, I think you got to look at the pipeline, any pipeline with degree of skepticism and make sure that you’re tracking from funnel step by step to close.

Ted Ketterer - TK Associates

And as I remember Leslie you have a very rigorous pipeline analysis procedure.

Leslie Stretch

Incredibly so.

Ron Fior

I mean, its clear, the covered ratio that you need now are significantly greater from my point of view than you would had a year ago for example. And its because of what I said just here, we said in the previous conversation, we’re just talking about the fact that these sales cycles, even tough we’ve seen customers with the budget just say, hey, I'm pushing it off a little bit, I'm going to wait and see.

Ted Ketterer - TK Associates

Okay, And then my question on buying?

Ron Fior

We’re going to buy eventually, it’s just the timing.

Ted Ketterer - TK Associates

And from you guys -the other thing is last quarter you had some accounts receivable/ balance problems with a couple of customers and as I remember at the end of that conference call those issues were unresolved?

Ron Fior

Yes, one of them was actually, one of them was actually Nortel and they were filed for bankruptcy and since then they re-signed up and they paid, they paid very quickly, so and…

Ted Ketterer - TK Associates

And the other one was…

Ron Fior

The other ones are -- I don't hold our hope for them coming back. Let's put it that way. I mean that sort of the way. We are very -- right now, we are all over our account receivable these days and you have to be a little more cautious and you have to make more phone calls. But that's what we are trying to do make sure that we are collecting everything we can.

Ted Ketterer - TK Associates

I know it's a tough time but you sound -- it sound certainly sounds to me like you guys are going in a right direction and working really hard at creating some value here? Thanks for that.

Ron Fior

We believe so. Thanks.

Operator

Gentlemen, you have no further question at this time.

Leslie Stretch

Okay, thanks everyone for joining us in the call today. We look forward to speaking with you again next quarter.

Ron Fior

Thank you.

Operator

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

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Source: Callidus Software Inc. Q1 2009 Earnings Call Transcript
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