Callidus Software Inc's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Callidus Software, (CALD)

Callidus Software Inc (NASDAQ:CALD)

Q3 2013 Earnings Conference Call

October 30, 2013 / 4:30 p.m. E.T.

Executives

Bob Corey – CFO

Leslie Stretch – President & CEO

Analysts

Chad Bennett – Craig Hallum

Eric Martinuzzi – Lake Street Capital

Scott Berg – Northland Capital Markets

Brian Schwartz – Oppenheimer

Kevin Liu – B. Riley, Inc.

Operator

Welcome to the Q3 2013 CallidusCloud earnings conference call. My name is Jasmine. I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today, Bob Corey, CFO. Please proceed.

Bob Corey

Thank you very much, Jasmine, and welcome to CallidusCloud's third quarter 2013 financial results conference call. A more complete disclosure of our results can be found in our press release issued about a half an hour ago, as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial tables or details, please see the Investor Relations section of our website.

With me on the call today is Leslie Stretch, President and CEO of CallidusCloud. The primary purpose of today's call is to discuss our third quarter 2013 results. However, some of the information discussed during this call including any financial outlook we provide may constitute forward-looking statements within the meaning of the US Federal Securities laws. These statements are subject to risk, uncertainties and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook.

Forward-looking statements involve risk, uncertainties and assumptions. If any of the risk or uncertainties developed or any of the assumptions prove incorrect actual results could differ materially from those expressed or implied by the forward-looking statements we make today. These risks and additional risks are also described in detail in our reports that we file from time to time with the Securities and Exchange Commission, including our most recent 10-K and 10-Q filings, which I encourage you to read.

With that said, I will now turn the call over to Leslie.

Leslie Stretch

Thank you, Bob. Good afternoon, everyone, and thank you for your interest in CallidusCloud. Today, I'm going to talk about four key topic. Firstly, a quick review of our Q3 performance. Secondly, I will update on our innovative roadmap and important recognition that we received in the quarter. Thirdly, I will talk about our outlook for Q4 and the remainder of fiscal 2013. And fourthly, I'll provide some preliminary color on fiscal 2014.

Far from being a quiet summer quarter, Q3 2013 was an extremely busy time. Our SaaS billings grew 34%, exceeding our expectations. We achieved all-time record revenues, all-time record recurring revenues and all-time record SaaS bookings. We added 135 net new subscription customers in the quarter. We exceeded our profit goals. We exceeded our cash and EBITDA goals and again, added cash to the balance sheet. We generated $5.2 million of cash from operations. Based on our second half momentum, we are increasing our guidance versus the Street for Q4 and for the full year 2013. We are increasing our preliminary guidance, revenue guidance, for 2014. Bob will provide more color during his commentary.

Let me provide a roundup of highlights for the selling cloud, marketing cloud and learning cloud, as well as an update on our alliances and channel progress for Q3. Beginning with the selling cloud. Our commissions business simply rocked and rolled in Q3. Our flagship product had its biggest SaaS bookings quarter ever. We executed four seven-figure contracts, two multi-year agreements with our new billings in the SaaS business as annual billings and two license deals in the on-premises businesses over seven-figures. We took the pick of major commissions deals, taking on all comers in the small, medium and large markets.

New commissions customers included the world's largest insurance organization for commissions, Starwood Vacation Ownership for commissions, PwC Global, the tax and advisory services provider for commissions. Dolby Laboratories for commissions. Dick's Sporting Goods for commissions and WorkFlow. Cablevision, one of the largest communication companies in Mexico for commissions. Notable new configure price quote customers included PointClickCare, a healthcare software provider for CPQ. Actian, a leader in big data analytics for CPQ and Litmos Mobile Learning. JM Family an existing commissions customer in the automotive industry for CPQ.

Careerbuilder, an online jobsite buying CPQ. Smoothwall, an internet security provider in the UK buying CPQ and Garmin in Brazil for CPQ. Blue Cross/Blue Shield of Florida an existing on-premise commissions customers converted to the cloud and added five additional solutions including Sales Performance Manager, Enablement, Litmos Mobile Learning and MySalesGame. Also, Telephonica, the UK's second largest mobile network operator and an existing commissions customer added WorkFlow. All of the selling cloud SaaS modules showed continued strength.

Marketing cloud. We were as busy as ever in the marketing cloud. [3] a leading provider of LED lighting products, already an existing commissions customer added Enablement. Tech Mahindra, an IT services provider and Vollrath, a leading manufacturer, automated intelligence and enterprise content management provider and the YMCA, all signed up for our marketing automation solution. As well as signing new customers, several of our largest customers increased their usage of the solution set.

Learning cloud. Again, Litmos, our mobile learning platform performed well. New signings included First Command Financial Services, an existing commissions customer. Okta, a cloud-based identity management provider, Geisinger Health, Scribble Life, a social media engagement provider, Biodex, a medical solutions provider, PT Health, one of the fastest growing healthcare companies in Canada.

Let me update you on our progress in alliances and channels. Our partner ecosystem continues to flourish. During the quarter, we executed 60 resale deals, more than four times the number of resale deals in Q3 last year, including our largest ever multi-year commissions deal with annual billings. We also signed over a dozen new partners in the quarter, primarily focused on the marketing and learning cloud solutions.

Industry recognition in the quarter. In September, Gartner published the first ever Magic Quadrant for sales performance management. The report is a comprehensive evaluation of vendors that offer solutions to transform the way companies hire, train, coach and motivate their sales reps and channel partners. I'm delighted with our leadership position in this report that cites CallidusCloud as the Company with the best vision and ability to execute in today's market. Also in the quarter, we were honored with no less than 20 awards at the International Business Awards and the American Business Awards. All aspects of our Company were recognized, including our teams and our products.

I was particularly pleased with our goal for the most innovative tech company of the year, a strong reflection on our revolutionary products and our customer-driven approach to development. We sponsored key industry events including the WorldatWorks, spotlight on sales compensation in Chicago, BoxWorks in San Francisco, the AppDirect Partner Summit in San Francisco and the Blue sales compensation and channel performance conference in Florida. These events continue to be excellent demand generation opportunities for CallidusCloud.

Let me update you on our product roadmap. At our sellout C3 conference in May, we announced our intention to revolutionize the critical territory and quota management process with a brand new solution. I'm looking forward to its release at Dreamforce in November. We have already seen demand from both existing customers and new customers. I believe this will be an exciting new opportunity for us in 2014.

At our C3 EMEA conference in October, we gave the packed audience a preview of Thunderbridge, our big sales data visualization solution. Big data is an explosive market, as businesses are struggling to make sense of the vast quantities of information they possess. This is especially true for sales and marketing data. I believe that this powerful dataset should be unlocked with easy to understand visualizations and will uncover hidden trends and patterns. I believe this will fuel far richer decision-making helping companies to transform their revenue results.

Now let me turn to say a few words about the Q4 outlook. Our business momentum continues across the board. I expect another strong SaaS bookings performance. Our second half revenue is showing more strength than we indicated last quarter. Bob will provide a detailed revenue expense outlook for Q4 and the full year. As mentioned, we held our EMEA C3 event in October. We will also be platinum sponsors at this year's Dreamforce in November. As one of only 16 platinum sponsors out of a total of more than 350 sponsors, we expect our expanded presence this year to yield high returns.

Now let me say a few words about our 2014 preliminary view. 2014 will be our fourth growth year since making the transition to SaaS. There are several catalysts, which I believe will provide continued momentum in 2014. One, we have increased our sales force this year and will do so again prudently in Q4. Catalyst 2, we now have more experience managing channel partnerships in the SaaS world and have a leverage model emerging with more than 25 resale partners. Catalyst 3, we are seeing increased usage of our solutions fueled by sales expansion in our customer base, both in America and EMEA. Catalyst 4, we see increased cross-sell activity and more customers embracing multiple-modules, as I pointed out at the begging of my remarks. Catalyst 5, our expanded sales effectiveness vision is strongly validated by the leading systems integrators and industry analysts.

Furthermore, recent M&A activity in the CPQ space underlines strength of our vision and our view that customers want more from sales force automation and sales effectiveness than simple point solutions. We believe customers want their business processes and automation tools to mirror the real life mission of lead to money. So based on our analysis of these and other factors, I believe we're set up for sustained SaaS revenue growth in 2014 and beyond. As this stage, our preliminary guidance for 2014 is a total organic revenue of $125 million to $130 million. We are targeting organic SaaS revenue growth of over 25%. Bob will provide more color in his remarks.

Finally for me, I would like to close, my prepared remarks by personally thanking all of our staff around the world for their continued commitment to our mission to provide cloud solutions that drive customer success.

Now let me hand over to Bob for the detailed financial reports.

Bob Corey

Thanks, Leslie. Good afternoon, everyone. Before I begin my detailed comments on Q3, I want to thank each and every employee for their hard work that has contributed to our success in Q3. We would like to remind everyone that I will be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP financial information is provided in our press release, which is available on our website. Additionally, in conjunction with the release of our earnings report, we have posted on our website at CallidusCloud.com under the investor relations tab additional charge that trend identified performance metrics that we believe aid in understanding and evaluating our performance over time. All the non-revenue financial figures I will discuss are non-GAAP. Revenues, of course, are GAAP numbers.

During our third quarter, I am very pleased to report that we continue to build on the momentum established over the last few quarters. Despite the headwind we faced from the previously disclosed large customer loss, that took full effect in our second quarter this year, we are able to report SaaS billings growth of 34% for the quarter. SaaS revenue increased by 26%.

Importantly, the current quarter billings growth did not include any multi-year billings deals. Total revenue increased to a smidge under $31 million an increase of 28% year-over-year. Net of a one-time benefit to professional services revenue in the quarter, total revenue increased 24%. Additionally, SaaS deferred revenue on the balance sheet increased 48% from the prior year. During the quarter, we signed over 135 net new subscription customers and days sales outstanding improved to 67 days from 85 days in Q2.

Okay. Let's move to some specific results for Q3.

Unless I mention otherwise, the percentage increases or decreases are compared to the same period of the prior year. So looking at the recurring business. Total recurring revenue for the quarter was $21.1 million, a 20% increase resulting from the 26% growth in our SaaS revenue, which totaled $17.1 million, compared to $13.6 million for the same period last year. Overages during the quarter were approximately 8% of SaaS revenue and were slightly up from the prior quarter. The overage as a result of our customers' expanding use and reliance on our cloud solutions.

We anticipate that we'll continue to have negotiated over ages in future peers. Our SaaS revenue growth rate when adjusted for the lost revenue from our previously disclosed lost customer, would have been in excess of 43%. The actual dollar of lost revenue in Q3 from this former customer was about $1.7 million. I only mention these adjusted rates to clarify the momentum we're seeing in our business.

Making its revenue of $4 million was higher than expected and was consistent with the prior-year period. We do not anticipate a decline in making this revenue over the next several quarters. As previously disclosed, we were able to close two seven-figure SaaS contracts within the quarter. As Leslie previously commented on, one of these deals represented a conversion from on-premise to multiple cloud solutions.

During the quarter, the mix of contracts with annual versus quarterly payment terms remain consistent at approximately 77% being annual terms. Lastly, our customer retention rate continued to be 90% plus. Non-GAAP recurring gross margin during the quarter was 69%. This is up 4 percentage points from the 65% reported in Q3 and improved from 68% reported in Q2 of this year. We continue to target recurring revenue gross margins in excess of 70% as we exit this year of 2013.

Let's turn to our services and other business. Services and other revenue including licenses for the quarter were $9.6 million, an increase of $3.2 million from the prior year and a $3.2 million increase from Q2 of this year. During the quarter, the professional services group and the finance organization reviewed all outstanding service projects that were included in deferred revenue. As a result of the review, we recorded a benefit or increase of approximately $800,000 to professional services revenue.

Normalized professional services revenue when adjusted for the $800,000 benefit, was up slightly from Q2 at $5.3 million and should trend slightly up over the coming quarters. Separately, we were able to close two seven-figure on-premise license deals within the quarter valued at about $2.9 million. Total license revenue for the quarter was $3.4 million representing a significant increase. One of the deals in the United States was in the Phoenix services vertical and the other was an international deal in the telecommunication vertical. We do anticipate closing on-premise license contracts in future quarters based upon customer needs.

Non-GAAP services and other gross margins 56% increased – sorry, increased significantly from 29% in the prior quarter and significantly improved by 27 margin – or percentage points from 29% reported in Q2. The significant increase in services and other revenue and other revenue gross margin is primarily attributable for the increase in license revenue, and the benefit of the increased professional services revenue resulting from the project review. The normalized gross margin for professional services in the quarter was about 24%, primarily based on higher billable utilization in our professional services organization. We anticipate that gross margins on professional services to trend around the 20% margin level in upcoming quarters.

Shifting to the overall gross margin. Our overall non-GAAP gross margin for Q3 was 64%. We expect our overall non-GAAP gross margin will continue to improve during the year, reflecting the targeted improvements in our recurring revenue and professional services gross margins. The overall non-GAAP gross margin when adjusted for the revenue benefit recorded to professional services revenue was 63.8%. Operating expenses, our non-GAAP operating expenses, were $16.2 million, an increase of 60% in the prior-year quarter. This exceeded the high side of our guidance of $13.6 million to $14.6 million for the quarter primarily due to higher than planned commissions, bad debt expense and a bonus accrual.

Sales and marketing expenses were $8 million, 26% of revenue in Q3. An increase of $900,000 from Q3 last year, percentage of revenue was 30%. The increase from last year primarily reflects additional costs associated with increased commissions. Increased commissions were attributable to a significantly higher license revenue, the effective accelerators in the commission plans, and increased partner commissions. Research and development expense was $3.8 million for the quarter an increase of 8% over Q3 of last year and represented 12% of Q3 revenue consistent with the prior year. The increase reflects investment we have made and will continue to make in our product team as we endeavor to enhance our solution set.

G&A expense was $4.4 million at 14% of revenue in the third quarter. An increase of about $1 million from last year's quarter. The increase is primarily driven by bad debt expense, which was unfavorable, by around $400,000, due to our detailed review of past-due balances. Planned costs related to severance and recruiting in the accounting and finance organization of about $300,000, along with planned increase of legal expense of about $200,000 associated with protecting our IP and the general corporate bonus accrual. Non-GAAP operating income for the quarter was positive $3.7 million, compared to an operating loss of $600,000 last year, and operating income of $400,000 in Q2 of this year.

Our operating income for Q3 benefitted significantly from two seven-figure license contracts closed within the quarter for about $2.9 million. We continue to anticipate positive non-GAAP operating income in Q4. The adjusted EBITDA for the quarter was $4.8 million representing substantial improvement for the same period in the prior year. Our adjusted EBITDA for the prior-year quarter was essentially $187,000 presented on the same basis as this year. Non-GAAP EPS, our non-GAAP net income for the quarter was $3.3 million or $0.07 per fully dilutive share compared to the prior year quarterly loss of $900,000 or a $0.03 loss per share. This is higher than our expectations for the quarter EPS and resulted primary from the two seven-figure license contracts we closed within the quarter. Non-GAAP income loss per share is calculated based on 48 million and 35 million, or 36 million of basic weighted average shares outstanding respectively.

The balance sheet and cash flow. We had another record quarter for cash collections, which increased cash investments to $34.1 million at quarter ends. This is an increase of $6.9 million from the prior quarter reflecting our continuing improvements in days sales outstanding and early billings in the quarter that we were able to collect. Cash flow from operations for the quarter was $5.2 million positive. Days sales outstanding improved from 85 days in the prior quarter to 67 days in Q3. If you adjust DSOs for the $2.3 million growth in deferred revenue in the quarter, also referred to as net DSOs, net DSOs improved from 71 days to 59 days over the same period.

Total deferred revenue including both short and long-term, increased by $2.2 million to a record $49.6 million. SaaS deferred revenue was $37.1 million, an increase of $3 million sequentially, with the balance relating to maintenance and services. Reflecting the momentum in our on-demand business, the SaaS deferred revenue balance has increased 48% year-over-year. As a result of hiring the previously announced additional sales personnel headcount – sorry, as a result of hiring the previously announced additional sales personnel our headcount has increased from 564 in Q2 2013 to a total headcount at September 30 excluding contractors of 590 employees. We will continue to prudently add sales capacity in North America and EMEA and in SaaS operations and professional services to support the growth in our customer base. As a result, we anticipate our headcount to increase during the fourth quarter.

Before I move on to guidance, I'd like to comment on a subsequent event to our third quarter. On October 28, we filed an 8-K announcing that we had negotiated an early conversion of $9.6 million of our convertible notes. We are always evaluating ways to strengthen our balance sheet and negotiated a market-based premium to incent the note holder to convert into our common stock. Under the negotiated agreement, the note holder converted approximately $9.6 million of bonds into 1.2 million shares of our common stock at the conversion rate stated in the existing agreement. The net value of the negotiated premium was positive as compared to the remaining interest payments (inaudible) maturity. We believe this early conversion provided certainty to the conversion and represented prudent use of available cash. Okay.

Turning to guidance. I'd like to move on to the forward-looking financial outlook. I want to remind you of the Safe Harbor language provided at the beginning of the call. For Q4, we're anticipating total revenue to be between $28 million and $29 million, representing an increase of approximately 11% to 15%, compared to fourth quarter of 2012. Additionally, we anticipate that SaaS revenue growth for Q4 will continue to be approximately 25% over Q4 of the prior year. Non-GAAP operating income for Q4 is expected to be between $1.6 million and $2.2 million. The non-GAAP expense is projected to include costs associated with being a platinum sponsor at Dreamforce conference next month in San Francisco, and the costs associated with additional headcount in sales and professional services. We are guiding non-GAAP fully diluted EPS of $0.03 to $0.04 per share. Lastly, we are projecting the cash flow for the upcoming quarter remaining slightly positive.

Turning to our guidance for the full year 2013 and 2014. We are increasing our earlier total revenue guidance of $108.5 million to $109.5 million and are projecting our full-year revenue to be between $110.2 million and $111.2 million. This represents double-digit revenue growth for total revenue. Our prior guidance for non-GAAP operating income was $3.5 million to $4.5 million for the year. As a result of the strong non-GAAP operating income in Q3, we're increasing our non-GAAP operating income range to $5 million to $5.6 million for the year.

We are guiding non-GAAP fully diluted earnings per share of $0.06 to $0.07. We anticipate to continue generating positive cash from operations and positive cash flow for the full year. Following up on the preliminary 2014 guidance of revenue of $125 million to $130 million. SaaS revenue growth of over 25% discussed earlier by Leslie. We anticipate issuing our complete guidance on 2014 in conjunction with our Q4 2013 earnings release in February. I would now like to open the Q&A session. Operator, would you please prompt for questions.

Question-and-Answer Session

Operator

(Operator’s Instructions) And your first question comes from the line of Chad Bennett from Craig-Hallum, please proceed.

Chad Bennett – Craig Hallum

Good afternoon, guys.

Bob Corey

Hi, Chad.

Chad Bennett – Craig Hallum

Nice job once again on the quarter. First of all, I guess a point of clarification on the preliminary guidance for next year. At least in the release that I'm looking at overall revenue guidance, $125 million to $126 million. So is it really $125 million to $130 million?

Bob Corey

It is $125 million to $130 million, that's correct. You're referring to what? The press release.

Chad Bennett – Craig Hallum

Yes.

Bob Corey

Okay. We'll have to correct that because it’s $125 million to $130 million. Sorry about that.

Chad Bennett – Craig Hallum

No big deal. I like the number you said on the call. So…

Bob Corey.

Thank you, Chad, so do we.

Chad Bennett – Craig Hallum

That’s – and so not to kind of delve into too much next year, but how should we think about considering, you know, the huge license number this quarter? Going into the next several quarters, should we still think about the license revenue rate being kind of $0.5 million to maybe $1 million a quarter? Or has the pipeline proven to be, you know, better than that from, you know, looking out the next several quarters?

Leslie Stretch

Okay. So couple of comments. The overall – obviously over all business is bigger, so, you know, licenses a soup-big proportion. We had some upside opportunity head to head with IBM and two big situations in Q3, and we took them. And, you know, there are similar situations like that actually in front of u but our guidance is really conditioned around the recurring revenue and the consulting business, because licenses inherently unpredictable. So we don't really guide that. We still just think about $0.5 million to $1 million. But there is upside to that? Yes but I wouldn't get excited about it. There is a long way to go. So think about as $0.5 million to $1 million.

Chad Bennett – Craig Hallum

Yes. Okay. Okay. So anything above that would just be gravy.

Leslie Stretch

Yes.

Chad Bennett – Craig Hallum

Okay. And should we think about – so kind of going down the line there, how – where do you think you can drive recurring gross margins to? I know you obviously show great progress this quarter. You're still focusing on exiting the year at 70, which looks, you know, pretty achievable at this point. As we get into next year, is the – I know the longer term target now I think is the mid-70's, is that how we should be thinking?

Leslie Stretch

Yes, I'll let Bob comment in a second. You know, I think that when I look at the best-in-class SaaS company, I looked at ultimate yesterday, they were mid-70's or 73%, 74%. Best in class is 75%-plus, which is where we should be. I would like to get to 75% next year. I think in Q1 when we talk about the full year, performance for 2013, we'll give you more specifics on that, but I would be disappointed with less than 75% next year.

Chad Bennett – Craig Hallum

Okay.

Bob Corey

Chad, it's Bob. So in our long-term financial model, in our projection we say 70% plus for that non-GAAP gross margin percentage. I agree with Leslie completely. As we continue to consolidate the data center relationships resulting from our acquisitions, and leverage those consolidated locations, we anticipate we will be 75%, right? And then we'll go up from there.

Chad Bennett – Craig Hallum

Okay. And where did sales count end in the quarter at, sales headcount?

Bob Corey

What we have is – what we've done is we targeted, we added 15 quota caring sales reps in the quarter, right?

Chad Bennett – Craig Hallum

Yes.

Bob Corey

We're going to be adding more in Q4, and so the way we're trying to size it externally is, we said before we want to have about 65 quota caring assigned reps, and originally we're thinking maybe we have probably maybe turned around 60 with calling low performers. What we decided to do in Q4, we're upping our target to about 70 and for culling, we think we're going to be 65 quota reps going forward in Q4.

Leslie Stretch

So – and it’s worth deciding those with alliance group as well, and also there’s an increase in sales engineer experience, sales engineer headcount as well that goes along with that.

Chad Bennett – Craig Hallum

Okay. And where did you remind me again – I can look back – what did you come into this year with, Leslie, do you remember?

Leslie Stretch

I think I'll have to reach back for that one.

Chad Bennett – Craig Hallum

No big deal. I would be kind of remembering what I didn't know, so I wouldn't comment.

Leslie Stretch

I'll have to get back to you on that one, but it's – anyway, as Bob said, we want to end around 65 to 70, taking into account any attrition that takes place at the end of the year.

Chad Bennett – Craig Hallum

Yes, makes sense.

Bob Corey

I would say, Chad, our billings growth and success we're seeing and momentum we're seeing, we believe in the ramp in the headcount we saw a year ago, right?

Chad Bennett – Craig Hallum

Yes.

Bob Corey

And a move in…

Chad Bennett – Craig Hallum

No, I hear – yes, absolutely.

Bob Corey

Okay.

Chad Bennett – Craig Hallum

And you need to keep that up. So speaking to attrition, was there any notable attrition in the quarter?

Leslie Stretch

The customers?

Chad Bennett – Craig Hallum

Yes. The customer dollars, whatever you want to – however you want to – I know it was over 90%, but..

Bob Corey

Yes. Okay. So, you know, our stated posture is over 90% performance there. I would tell you there were no significant departures in the quarter.

Chad Bennett – Craig Hallum

Okay. And should we think about – when you talk about 25 – last question for me – 25% SaaS revenue growth next year, obviously this year, or next year, I should say, in the March quarter, you'll still kind of have that Pfizer third quarter that you're kind of comping against so to speak. So the real SaaS revenue growth is probably better than that. So if you want to look at it that way.

Leslie Stretch

Well, I think – yes. Yes, go on.

Chad Bennett – Craig Hallum

Yes. So should we think about – and I know these are tough to forecast – should we think about billings growth still being kind of at a greater rate than SaaS revenue growth next year? And I know it’s tough to forecast, but should we think about that still being a touch higher?

Leslie Stretch

I think so. Yes, because, you know, you got the time lag and the follow-on from the bookings of revenue and so on.

Bob Corey

And Pfizer has a definite impact because the SaaS revenue growth is – the slope of that line blunted because of the Pfizer departure, right?

Chad Bennett – Craig Hallum

Got you.

Bob Corey

So, you can run the numbers, if you normalize the SaaS and revenue billing numbers you can see what the relationships there.

Chad Bennett – Craig Hallum

Yes. Okay. Sounds good. Great to have it good, guys. Thanks.

Bob Corey

All right. Thank you, Chad.

Operator

And your next question comes from the line of Eric Martinuzzi from Lake Street Capital, please proceed.

Eric Martinuzzi – Lake Street Capital

My congratulations, as well. I wanted to follow up on your comment about the consolidation in the CPQ market. Could you talk just, you know, do you think there is going to be – I know it is relatively soon in the deal hasn't closed here – but Oracle buying big machines, pros holdings picking up chameleon, and I know there was a big venture funding for Aptis [ph] in September. But specifically on Oracle and big machines, how have you competed with big machines in the past? Do you think that changes in the future?

Leslie Stretch

Yes, great question. I think that when we – our biggest challenge has been sales coverage as we may have mentioned to you before. When we get to the table, we can beat them. We have more a agile multi-tenant SaaS solution. We allow our clients into a sand box immediately. We just have a much more agile, much better user experience, modern user experience but we need to get to the table. We understand the business needs of customers in the space, the modern business needs of customers and I think we understand that extremely well because we have the broader sales execution context in mind.

So we're relishing it. It is good for us. It will create disruption, deep focus, and that’s great. That’s perfect for us. You know, we've got a contract roadmap as well which we published. So, it’s pretty good.

The other things is – in the SNB space – we announced immediately on the big machines acquisition, a bundle, a compendium of solutions, a very disruptive cost point, very disruptive price point. So that is a great opportunity for us.

Beyond that, it’s just – it’s really a validation of what we’re saying; the customer wants more from the sales execution management solutions that are out there today. So it’s a great opportunity for us.

Eric Martinuzzi – Lake Street Capital

You know, you've talked in the past about the portion of your recurring revenue represented by the sales cloud, I know that's dominated by the incentive compensation management. Have you talked specifically about what CPQ represents as a percent of the recurring?

Leslie Stretch

No, we didn't. We kind of don't. We talk about it as the selling cloud today. It's very fast growth business. It is obviously coming from a smaller base. But it's in terms of transaction count, it is beginning to – it is beginning to become a very significant business for us.

Eric Martinuzzi – Lake Street Capital

Okay. And then lastly just M&A appetite, there was a time when you guys were doing – you were, you know, frequently in the market, has there been any change in the M&A appetite?

Leslie Stretch

Right, so today, the short answer is no, but let me give you some color. Today we're in a position where we're releasing three or four new product cycles. We've got a dozen SaaS products, big flagship products, as you rightly point out in the selling cloud. We have more than enough to make our numbers – make our commitments in our forecast. Never say never, right? But right now, we really got what we need to go forward.

Eric Martinuzzi – Lake Street Capital

Thanks for taking my questions.

Leslie Stretch

Okay.

Operator

And your next question comes from the line of Scott Berg from Northland Capital Markets, please proceed.

Scott Berg – Northland Capital Markets

Hi, Leslie and Bob, congrats on a well executed quarter.

Bob Corey

Thank you. Thanks much.

Scott Berg – Northland Capital Markets

Couple of quick things. First of all, Bob, the conversion of the convertible debt in the 8K [ph] this week. Can you comment on who contacted you to started that conversation? Was it you contacting the bondholder or vice versa?

Bob Corey

Yes. I shouldn't comment on how the negotiation came about but like I said in the prescribed comments, we're looking to improve our balance sheet and we thought that was a fabulous opportunity to strengthen the balance sheet in light of the strength we saw in cash in the third quarter, we thought it was a good use of cash, right? And we're continuing to look opportunistically, if we had a favorable conversation with a bondholder and we could utilize cash, we could do that. Yes. And I guess, you know, as you know, the bonds aren't callable until July of 2014.

Scott Berg – Northland Capital Markets

Sure. Leslie, couple comments on the strength on the commissions business right now. If I look back year-to-date, you have been able to assign some significant multi-million dollar contracts, multi-year SaaS contracts with a couple of large entities, which seems to show a much more momentum in the space, than I think what a lot of the street would have thought exiting last year. Can you comment on what you see relative there and how we should look at the next couple three quarters going forward?

Leslie Stretch

I think, Scott, that it sustains. We see similar opportunities now and in 2014. So it's a strong business. I think there's more enterprise awareness and more formal framework for evaluating solutions now. I think the cloud makes all the difference.

So it's really a strong market opportunity for us. And I think the fact that we have, again, the compendium, the ability to bundle other things, brings great value to customers, and it’s not lost on us that we see customers lining up with CPQ venders, with enablement vendors. They know the same things. The customer wants more; doesn't mean they always buy more than three module at a time or three module at a time but it does have an influence on the selling cycle. And as an influence on their position and their view on commissions, I also expect the Thunderbridge, the big data, the big so analytics solution is going to be a capitalist than the commissions because I think we're going to have –we’re striving to have at least to have the best territory in quota solution. We put that together with the commissions piece, and that just takes the story to different buying influences at the customer end. And also, we just got a track record of more and more success in going live now, and so that's helping us as well. So I feel very strongly about that business and I feel that it is going to go well for us for the foreseeable future and be a big part of the SaaS bookings growth and revenue growth.

Scott Berg – Northland Capital Markets

Okay. And then I guess last question for me is on the uptick in partners has been quite strong from what we seen this year and you certainly made some comments on those. You know what are the expectations in terms of maybe sales opportunities or percentage of deals that you would expect partners, maybe over the next 12 to 18 months to potentially sell for you guys, kind of versus where you are today.

Leslie Stretch

So, you know, it is still early days. You know, a year ago I think I gave the comparison in the compared remarks of where we were a year ago with today. And we shot up a lot in terms of a number of partners doing deals, and so on. It’s still early days. I'm broken out in thinking of what is it – I can't give you a consistent trend in terms of percent of revenues or bookings or whatever, but it’s a big part of our business. And, you know, what we're seeing is people who are building businesses based on resell of our solution of creating a need to continue and grow that opportunity. The sales force partnership is also good for us. Accenture partnership has been very good for us as a resell partnership. So, you know, I'm broken out the numbers of what I think of it. But as a capitalist in – catalysts is one of the catalysts that gives us a chance to have leverage, extended sales force out in the market really meaningful for the first time.

Scott Berg – Northland Capital Markets

Great. Thanks for taking my questions. I'll jump into the queue.

Bob Corey

Thanks, Scott.

Leslie Stretch

Thanks.

Operator

And your next question comes from the line of Brian Schwartz from Oppenheimer, please proceed.

Brian Schwartz – Oppenheimer

Yes. Hi, congratulations on the quarter and the great business momentum right now, Leslie and Bob.

Bob Corey

Hey, Brian. Thank you very much.

Leslie Stretch

Thank you. Thanks.

Brian Schwartz – Oppenheimer

Yes. Leslie I have a few questions for you and a couple for Bob. For you, Leslie, in regards following up on the following up on the product suite expansion, are you starting to see examples with horizontal applications are driving business for the core commissions products?

Leslie Stretch

Yes, no doubt. And I think I listed – you know, when we go through our deal list by the way we're just taking an interesting sample in each cloud. And I think I took some there that where you saw existing customers of commissions module adding other things and you saw CPQ customers, learning customers, adding commissions. It just opens up a market for us. And when a customer already has an existing contractual relationship, we can take the commissions solution in there. So we already theoretically, you know, and practically we have a head start. So it is definitely making a difference. You can see it in the bookings momentum, billing growth momentum is one of the factors, yes.

Brian Schwartz – Oppenheimer

Great. And then Bob, just wondering if you could comment in terms offer what you're seeing in pricing or ASP trends out there. And following on that question with Leslie, trying to understand the trend on the new deals and new customers, if you're seeing them increasingly buying more than one product at initial purchase, or do they typically start with one product and then get adoption and then you go in and up-sell them?

Leslie Stretch

I think we're seeing a small increase in people buying more than one module. It’s still not a trend, yet, but we are – we did see that and I kind of went through some of those in the prepared comments. You have people getting – buying two and three modules. I called out one customer that bought five.

Bob Corey

Yes, Brian, on ASPS, we're tracking the ASB uptick across the quarters. And we’re seeing strength across – at that level because large mix and disparity of the sizes in some of the deals in the selling cloud, which is in some of the volume business, or that will be the marketing cloud or the learning cloud, so on and a general ASP doesn't make a lot of sense for us. But what I can comment on is we're seeing strength in the size of the ACB increasing across the quarters.

Brian Schwartz – Oppenheimer

Thank you, Bob, and I wanted to ask you a question. You made an interesting comment about maintenance revenue, you're not expecting a decline here, which is a change, certainly an improvement over the last – many quarters here, so it sounds like that line item is stabilizing, which is made a positive impact for your total growth. I guess the question I have around it is I'm wondering if there are still conversion opportunities still left from some of those legacy customers, opportunities to move them over to the latest technology and up-sell the suite to them?

Bob Corey

Yes, so – yes, to confirm your thought, as we are not anticipating maintenance revenue to decline over the next several quarters. We think that's because of some of the license fee deals we've closed in the last couple of quarters, you know, supporting any customers that might be leaving but back on the question of additional conversions, yes, clients health service provider out of Florida, right, was actually a conversion and that is the company that Leslie said converted from on-prem and they bought five additional modules, right? So, you know, we're going to let the customer make the choice, whether they want it behind their firewall or in a SaaS-based delivery model. And you know at some point we look at all those on-premise customers as potential conversions.

Brian Schwartz – Oppenheimer

Sounds good. And then last question for me, Leslie, you know, when I just kind of summarize what I think the trends out there, and I look at all of the SaaS metrics right now, they‘re really pointing to the same conclusion that your SaaS business is just absolutely taking off. You know it looks like to me the bookings growth here year-to-date of your SaaS business is running at the same growth rate of the fastest growing publicly traded SaaS companies right now that I'm following.

So I think you've done a pretty good job on the call of painting the picture of the numerous trends and catalyst that are driving this momentum. I’m wondering if I could put you on the spot 0and kind of ask you to maybe parse the momentum of all of these catalysts. Is it possible to parse between the difference between the macro trends, those could be the cloud computing trend, or sales and marketing effectiveness solutions becoming a higher priority, or pressures on companies to on-board and retain and motivate the good sales people efficiently? Compare those to really the company-specific trends right now having more products to sell and more distribution capacity larger deals and better lead generation. And then lastly just your thoughts on the sustain ability of these SaaS growth rates given what you are seeing in the pipeline. Thanks for taking my questions today.

Leslie Stretch

Okay. Yes. Pleasure. Great questions. So let me just start with my primary view is that our increased investment in sales and marketing is paying off. That’s the key here. I have to also say that we've seen a North America in particular customers increasing their usage. That stands for a number of things certainly down to the fact that in sectors things have improved. People added sales head, and leverage channel sales head. They’ve used more storage, they’ve used more transactions. That’s all good news for them and for us.

And so North America, you know, economically has been a wee bit better than people portray. We saw a similar effect in EMEA. So, actually external versus the primary internal, which is our increase in sales and marketing investment and focus.

I think the third thing is that having these additional sales execution modules takes us into so many more discussions that we can qualify quickly and move on. And I think a discipline in the sales force and sales leadership is stronger for us. You know, we get into situations that are not right for us and they're losing situations, we lose quickly and move on and there’s so much opportunity for us.

But I think, you know, there is a bit more strength out externally, there is also just more experience, more good live experience of people using the solution and being comfortable and confident in the solution, especially the cloud solution. And so that's a key. We still have lots of work to do but that is a key factor for me. So, you know, all those things at work. Cross-sell is a good catalyst for us, but I would highlight just the general investment and sales and marketing across the board.

Brian Schwartz – Oppenheimer

Thanks again for that color and for taking my questions today. Great job again.

Leslie Stretch

And listen, I was just going to say, someone just remind me, your sustain ability question. I think in my prepared remarks I kind of laid out that, you know, we're building the business for sustained SaaS revenue growth 2014 an beyond. I’m confident of that.

Brian Schwartz – Oppenheimer

Terrific. Thanks again for taking my questions and great job on the quarter.

Leslie Stretch

Thank you.

Operator

And your next question comes from the line of Kevin Liu from B. Riley, Inc. Please proceed.

Kevin Liu – B. Riley, Inc.

Hi. Good afternoon, guys. With respect to the new solutions coming up for the sales cloud both the territory and quota management as well as big data, can you talk about how that might impact your pricing? I'm just wondering if it is a significant add-on sale for you?

Leslie Stretch

Yes, early days. We expect to sign some territory and quota customers this quarter. Territory and quota can be purchased discreetly; it doesn't have to be bought as part of the platform. You know, a kind of nominal view as there’s roughly 25% quoting rate, perhaps a little bit more compared to the core platform but it’s very early days.

In terms of the big sales data story, you know, the sky is the limit there. But again we only just released and started to put the product out. So it's very early days. So I don't have any big projection.

I think Suffice to say, the way I'm looking at Q4 in 2014 is based on what we have in the bag to date. If we get significant upside from these products early on, that will be great.

Kevin Liu – B. Riley, Inc.

Got it. And you talked about the upcoming dream force sponsorship and perhaps getting some more – and some better returns out of that channel. Over the course of the year, we’ve heard about CPQ and how sales driven some better price business your way. Is it solely around that product? Or are you seeing traction in other areas of your business?

Leslie Stretch

You know, we did a number of transactions and partnership with sales force in Q3, and it wasn't just CPQ. They were learning transactions, marketing transactions, commissions transactions. So, it’s really across the board here.

Kevin Liu – B. Riley, Inc.

Great. And just in terms of the number of seven-figure deals obviously in some instances you're seeing people take up five or six products. You’ve got four this past quarter. What does that pipeline look like going forward? And are there any concerns on your part about without being able to continue to grow your SaaS billings despite the very difficult comps ahead?

Leslie Stretch

I think that I expect us to increase the multi-module deals, and I think that is one of the catalysts I laid out. And I laid out those five catalysts and that’s what’s behind the growth story for the future here. We're pretty confident that we'll be able to maintain a good clip rate.

Kevin Liu – B. Riley, Inc.

Got it. And, Bob, just with respect to the professional services benefit in the quarter I was curious if there was any sort of associated costs we should consider with that?

Bob Corey

No, it was really a review of all of the projects in deferred revenue, and no significant cost effect at all.

Kevin Liu – B. Riley, Inc.

Okay. Thank you.

Bob Corey

All right. Thank you, Kevin.

Leslie Stretch

Thank you.

Operator

At this time there are no remaining questions. I would turn the call over to Leslie Stretch for any closing remarks.

Leslie Stretch

Well, thank you, everyone, for your interest in CallidusCloud today. We look forward to talking to you on our next call.

Bob Corey

Cheers.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect. You all have a great day.

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Callidus Software (CALD): FQ3 EPS of $0.07 beats by $0.03. Revenue of $30.7M (+28% Y/Y) beats by $2.49M. (PR)