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E2open, Inc. (NASDAQ:EOPN)

F1Q 2014 Results Earnings Call

July 11, 2013 5:00 PM ET

Executives

Greg Kleiner - Investor Relations

Mark Woodward - President and CEO

Peter Maloney - Chief Financial Officer

Analysts

Kash Rangan - BofA Merrill Lynch

Bhavan Suri - William Blair

Shannon Heim - Pacific Crest Securities

Richard Davis - Canaccord Genuity

Michael Huang - Needham & Company

Mark Schappel - Benchmark

Operator

Greetings. And welcome to the E2open First Quarter of Fiscal Year 2014 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Greg Kleiner from Investor Relations. Thank you, Mr. Kleiner. You may begin.

Greg Kleiner

Thank you. Good afternoon and welcome E2open’s first quarter fiscal year end 2014 earnings conference call. Joining me today to discuss our first quarter results are Mark Woodward, E2open’s President and CEO; and Peter Maloney, E2open’s Chief Financial Officer.

Our commentary today will include non-GAAP financial measures, reconciliations between GAAP and our non-GAAP metrics for our reported results can be found in our earnings press release.

Non-GAAP financial measures exclude the impact of stock-based compensation, non-cash income taxes and certain accelerated revenue recognized in connection with the contract amendment.

At times in our prepared comment or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results, please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future on these metrics.

The primary purpose of today’s call is to provide you with information regarding our first quarter fiscal year end 2014 performance, in addition to our financial outlook for our second quarter and full fiscal year 2014.

Some of our discussion or responses to your questions may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions, discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission, should any of these risks or uncertainties materialize or should our assumptions as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual company results could differ materially from these forward-looking statements.

I encourage you to visit our Investor Relations website at investor.e2open.com to access our fourth quarter press release, periodic SEC reports, a webcast replay of today’s call or to learn more about E2open.

Finally, before I turn the call over to Mark, please be advised that during today's discussion, we may reference certain unreleased services or features not yet currently available. We cannot guarantee the future timing or availability of these services or features and not to recommend the clients who purchase our services make their decisions based upon services and features that are currently available.

With that, let me turn the call over to Mark.

Mark Woodward

Thanks, Greg, and welcome to everyone joining us on the call today. I’m happy to report that E2open continue to execute well in our first fiscal quarter with revenue and earnings coming in ahead of our guidance.

The growth in our subscription business remained strong, the transition in our service organization is progressing well and our overall business momentum is robust. Our cloud-based collaborative execution platform continues to resonate with our customers and drive our success in the field.

For the quarter, we reported total non-GAAP revenue of $16.1 million, which was above our guidance. Our total revenue growth of 4% was impacted by our previously discussed strategy accelerating the shift, our professional services business to our partners, along with the product improvements we made to help speed implementation. The combination of which led to a decline in our services revenue.

What’s most important from our view is the momentum of our subscription and support revenue which grew 26% year-over-year and 6%, sequentially. Before I go into the customer highlights of the quarter, I want to start with an update on the changes underway in our professional services business.

First of all, in terms of existing relationship, as I mentioned last quarter, our partner just transformed by taking over portion of our professional services activity primarily in the area of onboarding our customers trading partners. They all -- they are ramping very well and we are quite pleased with their efforts over the last few quarters.

Secondly, we put the infrastructure employee for E2open to ramp new implementation partners and set this effort in motion. We hired the necessary personal to run our partner enablement activities and created the required collateral and training materials. Our first session of training class is complete and more are already scheduled.

Finally, we have executed agreement with one mid-size implementation partner and we’ve received the final approval to proceed with an engagement agreement with the large system integrator. We are in the final stage of contract negotiation with this integrator which we expect to finalize during the current quarter.

Overall, the execution of our partnering model with system integrators moving along well and on track with our expectations. Furthermore, the strength we saw in our business this past quarter further enforce our decision to accelerate our move forward with these transition.

We continue to execute our land expense strategy well in the first quarter. We added four new blue-chip customers. We had a particularly strong quarter with respect to expanding existing customer relationships.

New logos for the quarter included Logitech and Dow AgroSciences. We also had numerous sub sells in the quarter including deals with Intel, BrightStar, L'Oreal Paris and Cisco.

Through Q, I’m sorry, though Q1 is traditionally our smallest bookings quarter of the year, the pace of business combined with our strong pipelines of opportunities had provided us with the confidence to increase our guidance for new and upsell bookings, as well as for subscription support revenue for the full fiscal year 2014.

So let me talk about the few of the deals in the quarter. Dow AgroSciences, this is particularly interesting, the great example of the network effect inherent in our business. In fiscal Q3 of last year we signed Land O’Lakes a new customer. The Dow relationship was greatly influence as a result of this deal as they are one of Land O’Lakes’ largest suppliers.

Like leave our customers, Dow runs a complex global supply chain with long lead-time materials in a mix of in-house and outsourced manufacturing. They need to be able to manage seasonality and demand volatility as well as the ability to meet increased demand in a constraint supply environment.

They currently use a collection of highly manual processes to communicate both demand levels and change items to suppliers with no systematic means of collaboration. In practice, this means there is no easy way for suppliers to respond to demand changes or for [down drill] our process in responses they received.

Because of these highly manual processes, Dow spends a majority of its time gathering data and firefighting with a very little amount of time spend on analysis and strategic activities. Dow Agro is implementing E2open’s collaborative execution platform to give them real-time visibility to the stats of orders and shipments within their network of contract manufacturers and suppliers.

They plan to take advantage of our real-time business network that will provide them with proactive exceptional alerts to potential issues with the problem impacts identified along with the library of commonly used resolutions available that quickly resolve these problems. E2open platform enables systematic collaboration with a single source of demand and available supply, making it easier for company’s like Dow Agro to operate in a lean fashion and service more customers, lower material costs and reducing the need for costly expediting materials.

Additionally, Dow Agro will be able to utilize reports, dashboards and score cards based off of real-time data to monitor and manage supply chain performance, a dramatic improvement in their previous manual processes thereby significantly improving the productivity of everyone in the supply-chain organization.

In addition, to be a great example of our network effect in action, this custom win also highlights a few other key themes E2open, including expanding business outside of our core tech telecom verticals and setting the foundation with another blue-chip brand, Dow, in this case to expand within other divisions over time.

Last quarter, I talked about a key win we have with Intel, which was led by our new analytics offering. I mentioned that we were deploying to enterprise, platform and services division which was being used as a test item for future deploy within number of other divisions of Intel.

I’m happy to announce that our successful pilot was able to prove the value of our platform very rapidly and as a result in Q1, we closed one of the largest and fastest upsells we’ve ever done. We are now deploying our collaborative execution platform with our unique integrated real-time dashboard in analytics, the three divisions within Intel and we believe there is further opportunity to expand this relationship overtime.

Our experience with L'Oreal, the world’s leading cosmetic and beauty company, is another example of our success within one part of an organization leading to additional business in another division. Our initial implementation cover their operations in North America but in the past quarter, we signed an expansion that puts in place the framework to cover our global rollout. The first phase of this agreement resulted in commitment to expand our flipping throughout the EMEA region and run through their headquarters in Paris.

As part of our relationship, L'Oreal partnered with E2open to develop a strategic solution to enable L'Oreal to work collaboratively with their trading partners to make intelligent timely decisions based on the most accurate information available. A program has improved both service levels and cycle response times and provided the company global inventory visibility, a harmonized data exchange and an exception management framework.

The resulting solution has resulted in a significant reduction in manual processes and has enabled L'Oreal to implement an integrated strategy accompanying both supply chain planning and execution. As a result of the success of our partnership with L'Oreal, they were selected as a winner of the 2013 manufacturing 100 leadership award. The ML100 Award honor companies and individuals that are shaping the future of global manufacturing.

On the product front, we launched our E2 Rapid Resolutions demand-supply workbench offering in the past quarter. The products we had to our recent efforts to expand our portfolio of analytics offerings, in particular, E2 Rapid Resolutions leverages the power of our underlying platform along with the predictive analytics embedded in our E2 process management solution to measure the impact of the potential disruptions and provide detailed what if alternatives.

The product was designed based on specific feedback from number of customers and we look forward to bring it into our overall customer base as we build on the strength of our analytics offering.

During the past quarter, we’re also pleased to once again participate in the Gartner Supply Chain conference, a meeting of the top executives and experts in the field.

One of the main things of the conference was the evolution going from the old push model of supply-chain to a world where the leading companies integrate demand, supply and products into a collaborative network that allows companies to better respond to changes in real-time, in particular, advanced capabilities in end-to-end supply chain segmentation, analytics, multi-tier supply chain visibility and supply network optimization were those highlighted.

Another important trend that Gartner is witnessing at leading companies across a variety of industries is that supply chain efforts are evolving from an exercise and driving efficiencies in cost cutting to more strategic level being viewed now the growth enabler was visibility at the CEO level.

As we’ve discussed in the past and have successfully demonstrated for our customers, we share their vision of a more connected world and in many ways E2open is a key enabler in helping customers realize the business benefits of this vision.

In addition, every year at this conference, Gartner publishes a list of the top 25 supply chains in the world, recognizing companies for their leading edge efforts in the field. In 2013 top 25 list, we are proud to say that four of the top five and six of the top 10 are E2open customers.

In summary, the company performed well once again in the quarter and we remain excited about the opportunity in front of us. The accelerated transition of our professional services business is on track and will drive our future success. The strong momentum of our business has contributed to the guidance that Peter will outline shortly.

With that, let me turn over to Peter for more details on the financials.

Peter Maloney

Thanks Mark. Before reviewing our P&L for the first fiscal quarter, please note that the description of our results excludes the effects of the RIM contract amendment that took place during the second quarter of fiscal 2013. This is similar to our presentation at recent quarters and is due to the fact that this was a non-recurring item and not reflective of our ongoing operating performance.

As mentioned earlier, total non-GAAP revenue for the quarter was $16.1 million, an increase of 4% compared to $15.5 million for Q1 of fiscal 2013. This was driven by continued strong results from our subscriptions and support business, offset by the impact from the professional services transition currently underway.

Subscriptions and support revenue was $12.4 million, an increase of 26% compared to $9.8 million from Q1 of fiscal 2013 and up 6% sequentially from $11.7 million for Q4. This result was above our guidance and was driven by our continued business momentum.

Professional services revenue was $3.7 million. This was at the high-end of our guidance. That would represent a decrease of 34% compared to $5.7 million for Q1 of fiscal 2013 and down 42% sequentially from $6.4 million for Q4.

The decline in our professional services business was driven by the accelerated shift in our go-to market model that we discussed last quarter, along with the impact from the product improvements aimed at speeding implementations. We will continue to ramp our partnering efforts over the remainder of this fiscal year and we are pleased that this process is on track with our plans.

Non-GAAP gross margin for the quarter was 61% compared to 64% for Q1 of last year and 67% for Q4. The decline was driven largely by the previously mentioned transition in our professional services business. A portion of our services capacity was offline this quarter, working on partner enablement activities, which drove our professional services gross margin below breakeven.

Though there may be variability from quarter to quarter, we continue to target overall long-term gross margins in the 77% to 80% range as our revenue mix improves and our professional services gross margin normalizes. Our profitability metrics for the quarter all came in above our guidance as well. Our non-GAAP operating loss was $4.1 million for the quarter compared to an operating loss of $1.8 million for Q1 of the prior year and a loss of $1.4 million for last quarter.

Non-GAAP EPS was a loss of $0.15 per share, that was in our guidance range of a loss of $0.22 to $0.18. This compared to a loss of $0.08 per share for Q1 of last year and a loss of $0.06 per share for Q4.

Adjusted EBITDA for the quarter was a loss of $3.6 million better than our guidance of a loss of $5.5 million to $4.5 million. This compared to an adjusted EBITDA loss of $1.4 million for Q1 of last year and a loss of $1 million last quarter.

Both cash flow from operations and free cash flow for the quarter were negative $3.3 million and we ended the quarter with $44 million of cash and investments. Our total deferred revenue balance at the end of the quarter stood at $37.1 million. Overall, I would remind everyone that the change in deferred revenue was not a good predictor of our future revenue growth or our bookings in any given period.

The amount that is visible on our balance sheet is determined by the timing and mix of bookings and billings that can be impacted by customer contractual terms, services delivery timing and the size and length of contracts. We do provide additional transparency in to our business by providing new and upsell bookings guidance on an annual basis.

Now let me turn to guidance. We will continue to guide to both subscriptions and support and professional services revenue throughout fiscal 2014 as we complete the transition of our go-to-market model though this will not be something that we plan on continuing to break out beyond this fiscal year.

Also as a reminder, due to the RIM contract amendment, please keep in mind that there will be a negative impact to GAAP revenue of approximately $500,000 for the second quarter of fiscal 2014 and a total of approximately $2 million for fiscal 2014 as a whole and this is taken into consideration in the guidance that I will now review.

For the second quarter of fiscal 2014, we expect non-GAAP revenue of $17 million to $17.5 million. We expect subscriptions and support revenue to be between $13.1 million and $13.3 million or growth of 26% to 28%. Professional services revenue is expected to range from $3.9 million to $4.2 million.

Non-GAAP operating loss is expected to be $4.5 to $3.9 million leading to a non-GAAP EPS loss of $0.18 to $0.15 based on the diluted share count of $27.2 million. Adjusted EBITDA is expected to be a loss of $4 million to $3.4 million. For the full fiscal year 2014, we are increasing our new and upsell bookings growth guidance to the upper end of our prior guidance or approximately 30% which would translate roughly to $91.5 million.

We expect non-GAAP revenue of $77.5 million to $79 million. This is an increase at the midpoint from our prior guidance of $77 million to $79 million. We expect subscriptions and support revenue to be between $55.2 million and $55.8 million, or a growth of 28% to $29%, up from our prior guidance of $54.6 million to $55.4 million.

Professional services revenue was expected to be in the range from $22.3 million to $23.2 million, a small decrease from our prior guidance of $22.4 million to $23.6 million. We expect non-GAAP operating loss of $9.5 million to $8.5 million, leading to a non-GAAP EPS loss of $0.36 to $0.33 based on our diluted share count of $27.3 million, unchanged from our prior guidance.

We also expect adjusted EBITDA to be a loss of $7.5 million to $6.5 million unchanged from our prior guidance. Finally, our free cash flow guidance is also unchanged from last quarter and expected to be negative $8 million to $7 million.

So to wrap up, we were pleased with our performance during the quarter. Our business continues to perform well and we are well on our way with our go-to-market transition. Our unique product offering continues to drive our results. We are putting the right pieces in place to ensure our long-term success and we are well positioned to continue gaining share and reinforcing our leadership position in our multibillion dollar market opportunity.

And now, we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Kash Rangan with Merrill Lynch. Please proceed with your question.

Kash Rangan - BofA Merrill Lynch

Hi. Thank you very much, Mark and Peter. Good to see the nice stable results finally after your decision to change the professional services strategy. My question to Peter was on your guidance for professional services.

Are you largely reiterating just a little bit lower, but that the Q2 guidance is a little bit lower than what we had in the model which implies bit of a catch-up in the second half, I just want to understand what the risk to that guidance. I know that you’ve done a nice job lowering the expectations for profitability for the overall business but at this point are we done flushing out the part –the forecast part of professional services or where do we stand with that and I have a follow-up for Mark. Thank you.

Peter Maloney

So Kash, this is really for Q2 that’s right where we expected to be. We had not provided guidance for professional services revenue for Q2 before. As we talked about in our Q4 call, we’re going through an accelerated transition of our strategy and during the first couple of quarters, there is a lot of training and enablement processes that are going on.

And then in the second half of the year, we put some of our people back on line to go and deploy as well as the help from the partners that we are enabling now. So it is exactly what we had anticipated and we are still comfortable with that 10% to 20% annual gross margin for PFs that we had talked about at the end of Q4.

Kash Rangan - BofA Merrill Lynch

And from this point, going forward, Peter, would you expect professional services to grow in line with subscription revenues looking out, whatever the growth rate of this subscription is, you have not given us guidance, but philosophically, should the professional services grow in line or slower than subscription?

Peter Maloney

In the long run, it is definitely going to grow slower now on a quarter-to-quarter basis as you know, it’s a little bit more lumpy than the subscription business. So really, we are looking at it is just to enable more subscription growth and that's how we are running the business.

Kash Rangan - BofA Merrill Lynch

Got it. Mark, on the business side, just wondering if you can give us a feel for what are the newest applications that you are seeing the most rapid uptick, maybe give us a perspective on the number of application modules that your customers have currently installed and where do you see the number of apps per customer going forward? Thank you.

Mark Woodward

Sure. I would say we’re seeing a lot of interest from some of the products we have recently announced and you know the E2 Rapid Resolutions are kind of analytics and dashboard functionality. We have seen a lot of interest in that; at this point, I’d call it more pipeline dealing but we are starting to pull in some very nice deals and Intel is a great example of that.

I think we are also just seeing a lot of kind of what I would call a sweet spot which is around things of managing inventory and visibility in the inventory. That’s where I think we have a pretty unique offering and where there is a really easily identifiable business case and where there, everybody is looking to find ways to be more productive around the management of cash with regard to inventory.

In terms of module, I would say our average deals are still kind of what we have been seeing in the past, where it may be edging up a bit where think the average initial deal used to be around three, we call it modules, it’s probably now more like four. But if you look at this quarter as a great example, we had stronger bookings from upselling the installed base than we did from new which was consistent with what we saw last year.

So as the size of our installed base expands, we continue to have a larger kind of field, if you will, to sell into from those installed base customers. And so I’d say what we would call a pretty penetrated customer would be around 12, maybe up to 15 modules with the addition of our analytics and we’ve got a very good strategy for how we manage our customers and sell into a multiyear roadmap and I think that’s going really well.

So I can’t say that we’re going to get to 12, but I think we’re seeing the average number trends up and I am really happy with how well we’re doing in terms of selling into the installed base with what we’ve called our land and expand strategy.

Kash Rangan - BofA Merrill Lynch

Got it. Sounds very good. Thank you very much.

Mark Woodward

Yeah.

Peter Maloney

Thank you.

Operator

Thank you. Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question.

Bhavan Suri - William Blair

Hi guys. Thanks for taking my question. Can you hear me, okay?

Mark Woodward

Sure. Yeah.

Bhavan Suri - William Blair

Yeah. Great. Just a follow up on Kash’s question here. As you look at the customers and the three modules of purchasing going to four and then cross-selling and up-selling them, are they typically buying the inventory management as analytics sort of a follow on sale or are you sort of seeing the analytics being adopted right upfront?

Mark Woodward

Yeah. This is great question. I think what happens is that with our customers we’ll show them let’s say a multiyear as is where they are today and to be where they can be. And sometimes it may be, and Intel is a good example of this is, is well, okay, we really want the analytics stuff but in order to get that we first have to put in place the infrastructure to get the data and the information around their inventory and their supplier commits and all of that to really then make use of the analytics.

So very often we may start with the integration platform, the inventory management information putting in place all of that and then having the analytics on top of that. In some cases they may buy the analytics upfront, in other cases they may start with the inventory and then later in the year or sometime in the future pick up the analytics. So it kind of depends on the customer.

But it’s a great driver for selling more of our products by the analytics being where they want to be but they need to have the integration platform and the other inventory management applications to use those.

Bhavan Suri - William Blair

And so, I mean, I guess, the question I was getting to so, are the sales folks and sort of the account management folks, looking at these analytics tools as almost a lead, a foot in the door sort of, really look what you could do if you had the infrastructure products and sort of, is that the approach you’re using.

Mark Woodward

It depends on the customer, some of them are -- some of them just say listen, I got a very specific problem around visibility with my suppliers and I got to solve that problem; that analytics thing is nice but we’ll look at that later. Others it’s the opposite, it’s the, the absolute eye candy. It’s a thing where they see this. What we could actually run our business on this and the analytics platform is what they want to drive to and that is kind of -- that is the end game for them. It is going to kind of depends on the customer. And we’re still fairly new in this and so I think our experience is limited so far. But so as we go forward, we’ll have more data and we’ll kind of - we’ll share that with you as we get it.

Bhavan Suri - William Blair

Great. And then one quick one for me. As you ramp the SIs, just a little color on sort of what that channel looks like, what the investment you’ve made it looks like and what you think that’s going to expand to, meaning more channel, more sort of SI relationship people? And then are you seeing the SIs start to bring in business to you guys, given that they’ve got fairly strategic relationships in operations, in the supply chain and a broad customer base?

Mark Woodward

So, again, talking about R2B where we would like to be and where we want to be is where we have relationship with multiple systems integrators that are definitely taking our product to market and pulling us…

Bhavan Suri - William Blair

Right.

Mark Woodward

…into places where we are not. So, but, we believe that something that starts to evolve next year. If that happens this year great, that’s not our expectation. Our expectation initially is getting relationships. Our goal is with two integrators, large system integrators by the end of this year having a fair amount of their staff trained and out there performing work for us. But all of them will tell you, in the conversation they tell me, I should say in conversations with them, which is what they want to do is go out and find business. I mean that is their model.

They want to learn how to deploy our platforms and they see the need for. They didn’t want to go out and as you say, use their relationships and go out and take us into the market. So there is nothing in our plans for that to happen this year. So if it happens faster than expected, that’s great. But I would think, going forward, next year and as we get into the next year, so that’s become a meaningful channel.

I am not ready to tell you it’s going to be 20% or 30% of our business, I just I don't know yet. But it's something that I have certainly seen work successfully at other companies I have been at or other companies that I have -- that I watch where that should, we certainly have the ability or the opportunity for that to become meaningful in the future for sure.

Bhavan Suri - William Blair

Great. And then sort of the investment that you are planning to make in that space too sort of just on a channel perspective?

Mark Woodward

Yeah. So, I mean, if you look at, just at our forecast for this year in terms of our P&L, we’ve got those, if you will, those expenses built in. There certainly is some additional staff that we’re going to maintain going forward, as well as some things we’ll do around marketing development funds and things like that to support each other and take it in the market.

So I can’t tell you how that looks exactly next year other than we think we’re making a significant investment this year that will be repeated next year, so there is a lot of incremental investment, especially the front half of this year. Some of which will stay in the P&L, especially they’re just specific headcount around managing it, but we’ve already hired up all the people that we need to do that and there is kind of this upfront ramp up that we don't expect to see carryon going forward.

Bhavan Suri - William Blair

Great. Great. Thanks. That’s it for me.

Mark Woodward

Okay.

Operator

Thank you. Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Please proceed with your question.

Shannon Heim - Pacific Crest Securities

Hi. This is actually Shannon Heim for Brendan. Thanks for taking my question. I am wondering if you guys can talk a little bit about the competitive landscape and any changes that you might be seeing there.

Mark Woodward

We really haven’t seen any changes this quarter at all. I would expect that as we get more into the analytics, we may start running into some of the companies that do some rapid planning and analytics functionality. But most of these companies are on premise vendors. They are not software as a service, certainly none of our competitors today that do things similar to us having analytics layer to them.

We do continue to, not in all cases but in large SAP SOPs. We usually have to go through the why not SAP thing where at some point, it’s not necessarily the SAP is competitive but the CIO, if we don’t have a relationship they may say, why can’t we do this with SAP and we always come out but I should say always. We typically come out of that looking very well because we just solve a different problem and have different functionality. So, but that’s been like that ever since I have been here. So we’re really buy and large no real change in the competitive landscape over the last six, 12 months.

Shannon Heim - Pacific Crest Securities

Great. Thanks so much.

Operator

Thank you. Our next question comes from the line of Richard Davis with Canaccord. Please proceed with your question.

Richard Davis - Canaccord Genuity

Thanks. Two questions, one kind of strategic, one more tactical. So on the strategic side, Mark, how do you balance, how do you think about, because one of the things that CEO has to do is also in addition to saying, yes, you also have to say no? How do you think about kind of drawing lines in the sand or are there are lines in the sand in terms of how far out in terms of other industries your salesmen go after? In other words, I mean I have seen companies kind of getting troubled by trying to boil the ocean, so how do you think about that focus versus gosh we have a big opportunity?

And then there is follow up, the second question is more tactical is just, when you get done with this transition to pushing the services out there your partners, where does it feel like the gross margins on services will be, because when you went public it was in the mid-40s. It didn’t feel like it will be that level, it is still more like a 30% number or is it all the way back up to the mid 40s?

Mark Woodward

Okay. Sure. Let me start with the vertical focus first. So, I think, that we are, the CIOs are maturing I think rapidly now around, how they view software-as-a-service as truly just another tool in their tool belt. I mean, I started this business in the technology area. I ran a data center in technical services really on insurance. My job and I think the CIOs job is to find technology solutions to business problems kind of whatever that means. And so in the past we’ve sold primarily into the business owner, but more and more are actually been brought in by the CIOs.

So I think the CIO, where we can help them out also is that, they don’t have to deploy resources to the application. We’ll typically need a little bit help and we have to integration the ERP, but it’s really minor and here they can gain, there is great functionality for their business without having to deploy a lot of resources. So I think more and more CIOs are getting kind of keen to that.

In terms of our vertical focus and are we expanding too much, and now we just say this that when we get into new verticals, we typically go places where we find we can apply our standard solution into these other verticals, because on the supply side especially of these customers when you look from the all the way down into the end of their supply base back into the manufacture themselves, that the processes and the way the company is run supply chains are highly similar amongst what you would think is very, very different businesses. Whether like, so things like beauty care and PC manufacturers, why they sound completely different, you’d be surprise how similar the supply chain processes are when you look at outsource manufacturing, the things like in Dow Agro one of the company like the customer we just signed, they have significant issues, which is visibility downstream, multitude down in their supply base. It doesn’t matter if they buy screws or seeds, I mean, it’s really all the same.

So when we look at going into different verticals, we typically just look for sales people that have experience in those verticals that understand the specific [binocular] and the specific use cases and how to explain that in the language they understand. And that’s really about all we need to do.

We haven’t created very much special technology and when we go and find that there is a process that we need to create for particular customer, we just embed that in our standard product, and then the next customer can choose to use it or not. So it’s one of ways we extend our platform and enable ourselves effective in vertical is that we expand if you will a library or business processes that we have that can be use or just disabled or not enabled by our customers.

So I’m pretty comfortable with but expense we’ve done in the verticals that we’ve gone, we don’t have a long list of new ones, we are looking at we do have a couple. But I think we are fine because I don’t think we’re stretching ourselves too far at all.

Peter Maloney

Margin.

Mark Woodward

I’m sorry, another question about PS gross margins. We think we can get a back up into that 30% to 40% range. I think 40% would be the top. But I think 30% to 40% is a range we are comfortable looking at.

Richard Davis - Canaccord Genuity

Yeah. I think that would be realistic. Okay. Cool.

Mark Woodward

Thanks.

Operator

Thank you. Our next question comes from line of Michael Huang with Needham & Company. Please proceed with your question.

Michael Huang - Needham & Company

Yeah. Thanks very much. Just a few question for you. First of all, in terms of the new customers, I think you had mentioned four. Did you actually share the vertical and geographical split across the new customers and when you look and -- when you look at the pipeline, how does that look along the same dimension?

Mark Woodward

Yeah. So, Michael, I’ll give you some color on that. So it was what I would describe as 50% tech, 50% non-tech. So when I gave you example Logitech, obviously, technology customer and Dow Agro which is not. I think three of them were U.S. and one was international. I would say going forward we will expect to see a little more contribution internationally if I combine EMEA and Asia, when I just say internationally.

And I would say that the pipeline, well, really not much as changed, we are, our business balanced out pretty well last year and I expect to see the same this year, based on this quarter, what I assume the pipelines in terms of the verticals we are selling into. I would still say that single largest vertical will probably be broadly we will call it technology but that would be roughly 50% of our customers and non-tech making up the other 50%. Actually last year it was more weighted to non-tech than it was tech, it was like more 60%-40%. So it’s going to be somewhere in that 50%-50%, 60%-40% range, I don’t see that changing.

Michael Huang - Needham & Company

Got you. Okay. Now, in the case of your large kind of upsell to Intel, just the coherents the relationships, very impressive. I was wondering, did that at all impact the annual bookings guide at all, it didn’t seem like it did. So is it far to presume that you guys were expecting this type of upsell kind of going into the quarter or maybe you would have thought it would close a couple quarters out, but both the magnitude and how quickly you close this, was that a surprise to you guys?

Mark Woodward

No. It was actually in our forecast. So it was expected. I would say, the reason around kind of the confidence in firming up our bookings growth guidance for the year is based on really just what we see going forward more than, I mean, certainly bolstered by the fact that we are very -- feel very good about the quarter we just had. But it is also based on what we see in front of us for the rest of the year.

Michael Huang - Needham & Company

Okay. And then just kind of specifically within the PT vertical, so clearly there is still some PT challenges out there. So what you believe is or how would you characterize your exposure here and could you remind us whether or not you have seen any or whether or not you have any significant renewals this year, or maybe you could help us understand whether or not you’ve had some nice activity in this vertical even despite the headlines out there?

Mark Woodward

Yeah. So, if you look at, the fact that we have got Lenovo, Dell and HP as customers, all of those companies have non-cancelable multiyear agreements, so there is certainly no near-term exposure for at least the next couple of years. And on the combined basis, those three companies I think are less than 5% of our revenue, or certainly well less than 10% as a -- with those three combined.

So, I don’t feel a lot of exposure, as well as the fact that these are still very large businesses and we are with Dell alone as an example. We manage somewhat like $50 billion in direct materials spends for Dell. So as bad as the business maybe, the benefit of what we provide to them versus what they pay for us is still extremely compelling for them and even if their business continues to deteriorate, I think we still are very important part of their infrastructure going forward.

Michael Huang - Needham & Company

Great. And last question for you. So as Land O'Lakes is that up and running yet and then given the fact that you have just signed out your, could you help us understand what the deployment cycle looks like for Dell relative to kind of how long it takes to get Land O'Lakes up and running?

Mark Woodward

So Land O'Lakes, with all of our customers we deploy we called our business release strategy and so BR1, BR2, et cetera. We have gone live with BR1 on Land O'Lakes. I honestly I am not close to exactly where we are with Dell. I mean we are still early with them, obviously we are -- I would say early in the BR1 if you will. I don't if that's, typically those are two to four months in size. Typically I would expect Dell to be no different. But, yeah, Land O'Lakes is up and running and we are happy and we are working on the next business release already, and I’m sure the Dell will probably, I would assume some time in the next maybe if not this quarter, early next quarter we’ll be in the same -- kind of same cadence with Dell.

Michael Huang - Needham & Company

Great. Thanks so much.

Operator

Thank you. Our next question comes from the line of Mark Schappel with Benchmark. Please proceed with your question.

Mark Schappel - Benchmark

Hi. Good evening and thanks for taking my call. Mark, on the product front, a large part of your R&D strategy has been introducing additional onboarding capabilities to your network products. And I believe some of that functionality was introduced last quarter, I was wondering if you could just give us an update on how the remaining additions to that are progressing?

Mark Woodward

Yeah. If you look at our, we talked about the -- we talked about how to understand the integrated different kinds of work we do. If you look at when we do deployment, there are two major functionaries, one is the network itself, which is connecting the back in the RPs, integrating with our trading part system and just integrating the trading partners onto the network. The other side is an actual application deployment and configuration.

So, on the network side, we have been doing a lot of work around -- things that lot of customers to on board themselves, just generally even we are integrated to it to do the on boarding conservatively faster. We’ve done a lot of work and when you do the translations of information, we call them maps. There are lot of work in creating maps that’s not 100% highly reusable.

So there are lot of specific things we’ve done in that area. We do continue to rollout new versions if you will of this, we call E2 net, on about six to nine week cadence. So we are constantly upgrading it. It’s a live 24 hour network that we don’t have to take down to even upgrade. And so we just spend new functionality into it about every six to nine weeks.

We actually just have this product counsel meeting day before yesterday, which I wasn’t able to attend. I’ll be get brief done it on Monday but there are very specific functionalities we continue to rollout. There is no -- I would say there is no major -- one major big bang thing we have coming up in the future because we spend this out of small incremental functionalities. But the major things that we’ve needed to do around the network to make it self service and to increase the productivity of people doing those implementations, the majority of the functionality is already up and live.

Mark Schappel - Benchmark

Okay. Thank you.

Mark Woodward

Okay. Thank you.

Operator

Thank you. Mr. Woodward, there are no further questions at this time. I would like to turn the floor back over to you for closing remarks.

Mark Woodward

Thanks very much. I’d just like -- thanks everybody for joining our call today. We feel very good about how well the quarter went. We feel good about our guidance for Q2. And I think we are right where we expected to be and right where we want to be.

And I think that’s indicative based on the guidance we’ve given for the year on both our subscription growth and bookings that’s sold to number of you over the last couple of months. I think a good way to evaluate our success from this transition is, kind of, regardless of what happens to our services business that you continue to see growth in our subscription business. I think that points to the health of the company.

Last quarter we gave guidance that was 22% to 24% in terms of subscription growth and we beat that and we’ve now raised guidance for subscription growth going into the second quarter of the year. So I feel good about how that strategy is going and I look forward to communicating more with many of you as we head through the quarter. Thanks very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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