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Rally Software Development Corp. (NYSE:RALY)

F3Q 2014 Results Conference Call

December 5, 2013 5:00 PM ET

Executives

Jim Lejeal - Chief Financial Officer

Tim Miller - Chief Executive Officer

Analysts

Mark Murphy - Piper Jaffray & Company

Nandan Amladi - Deutsche Bank

Michael Huang - Needham & Company

Bhavan Suri - William Blair & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rally Software Third Quarter Fiscal Year 2014 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

This conference is being recorded today, December 5, 2013. I would now like to turn the conference over to Mr. Jim Lejeal, CFO of Rally Software. Please go ahead.

Jim Lejeal

Thank you, Operator. Good afternoon. And thank you everyone for your interest in Rally Software. Before we begin, please be aware we will be discussing our business outlook and we will be making other forward-looking statements regarding our current expectations of future events and the future financial performance of the company.

These forward-looking statements are based upon information available to us as of today’s date and are subject to risks and uncertainties. We encourage you to review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations. We assume no duty or obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

In addition, we will reference non-GAAP financial measures in this call. The company reports non-GAAP results in addition to and not as a substitute for or superior to financial measures calculated in accordance with GAAP.

Unless otherwise noted, our discussion will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as earnings per share. The primary difference between GAAP and non-GAAP financial information is non-cash stock-based compensation and amortization of acquired intangible assets. Please refer to the reconciliation of our financial information on a GAAP basis to that on a non-GAAP basis included in the press release published on our website.

With that, I will turn the call over to Tim Miller, our CEO.

Tim Miller

Thanks, Jim, and welcome everybody. Thank you for joining us today. We are pleased to announce all time record subscription revenues for the third quarter. Subscription and support revenue for the quarter grew 30% year-over-year to $14.9 million. Total revenue for the quarter grew 28% year-over-year to $18.9 million.

We ended the quarter with the total paid seat count of approximately 198,000 seats, which represents a 28% increase over our paid seat count of approximately 155,000 seats at the close of Q3 of last year.

Jim will take you through more numbers later in the call but before that let me highlight some of the key customers this quarter beginning with Rally’s largest initial sale in the history of our business to a multinational financial services corporation.

This customer upped its investment in Rally by purchasing Rally for Good which is a whole solution package combining our product with certain services design for enterprise customers to quickly and easily scale Rally across their organization.

A customer buying our Rally for Good offering is essentially going all in on Agile and Rally and we are very excited to welcome this new customer at this level of commitment with this new offering.

In addition to our initial seat order 1,500 Rally unlimited addition licenses Rally for Good offers this customer access to designated technical account owner, designated support and customized components.

In last quarter’s earnings call you recall -- you may recall that we mentioned a key win in one in one of America’s largest automakers. This quarter this same company accelerated its Rally adoption growing their subscription size by nearly 100%.

We are thrilled to see this rapid adoption and the growing strategic position Rally is in at the center of this large scale Agile transformation working in lockstep with the automaker’s PMO to create a center for excellence for Agile and Rally.

We are honored to be side by side with this customer as they attack their global market. We are excited to see this customer quickly expand on their initial orders and the progress they are making going Agile.

Infoglobo, an online platform hosting Brazilian newspapers is part of a larger organization called Globo, the largest media enterprise in Latin America with $6 billion in revenue and approximately 15,000 employees. Infoglobo began transitioning its development process in Agile in 2011 starting at the team level with in-house project management solution.

As this customer look to continue scaling Agile across its teams there was a need to evaluate more robust solutions. Rally was selected to support portfolio hierarchy to prioritize plans and deliver a single view of what is being completed and what is next for each individual newspaper.

Rally’s portfolio manager functionality keeps Infoglobo organized and well-informed as they continue to accelerate Agile practices across the breath of magazines and news brands. Agile and Rally are means for Infoglobo to keep pace with the competition in the disruptive media space as the variety of serving and consuming news as mobile devices grows.

Mirroring the consistent growth we see an other Fortune 500 customers, a leading U.S. healthcare company grew its subscription of Rally licenses in Q3 by a steady 18%. This customer has been growing organically with Rally over four years and this quarter’s deal is continued proof of that growth keeping pace with the rapid adoption of Agile in all pockets of its large development organization. Interestingly, this customer is in the process of moving the subscription to our staffed environment, a result of their confident in Rally’s ability to deliver solution in this model.

The final key win we will discuss features the top Fortune 500 oil and gas company that highlights our continued success in offering elite Rally professional services and coaching.

This company has previously been running a large project for the past two years with minimal results delivered to the market costing the company million of dollars. A key campaign at the oil and gas company has been seeking away for her team to confidently finish commitment and report on progress to the executive team.

Rally worked with this customer to uplevel their Agile commitment by offering dedicated services designed to increase consistency, increase Agile option and increase discipline. We are excited to partner with this customer as they go Agile and go Rally.

So summarizing our customer activities and despite Q3 being a seasonally soft quarter for us, this quarter we saw some impressive wins and continued good growth at our existing customers. With Jim and I on the road updating you all on our progress, many of you asked about our sales transitions that we affected two quarters ago and I’m pleased to report the following.

Dan Patton, EVP of Sales is setting a course for us to grow our business, consistent with the goals we’ve set, discipline, execution and customer engagement are key themes of his leadership, as he builds on the team we have in place.

We bought in a Regional VP in Singapore as well as the new Regional VP in Australia and we believe this will set a strong stage for our APAC expansion in fiscal ’15. Regarding sales hiring, we are on pace with the hiring plan we communicated to all over time.

I will share though our executive team is designing an operating plan for fiscal ’15 that meaningfully increases our investment and sales headcounts and other areas of the business, which reflects our confidence in our business and the state of the Agile market and our ability to effectively compete in it.

We don’t have the details nail done yet, but you should expect when we report our Q4 performance we’ll give you an outlook for fiscal ’15. We will be sharing details that reflect this increased investment.

With that, I would like to hand it over to Jim to go over our third quarter financial performance in more detail and our outlook for the coming period.

Jim Lejeal

Thanks, Tim. I will start with providing some details on our Q3 FY ’14 performance and offer an outlook for FY ’14 and full year FY ’14, and conclude with some preliminary and conservative thoughts regarding our fiscal year ’15 expectations.

I remind us all that our discussions will be on a non-GAAP basis for all costs, gross margins, operating and net income as well as EPS unless I state otherwise. As Tim outlined, despite Q3’s typical seasonality, a dynamic that we have talked about with you all repeatedly, we posted a really good quarter.

I will start with a review of our key metrics. As we have said, we believe total seats are key indicator of our market penetration, growth and future revenue. We define a paid seat as a seat with the subscription or support contract as of the measurement date.

We ended the quarter with the total paid seat count of 197,806 seats. This seat count represents a 28% year-over-year increase when compared to 154,982 seats under contract at the close of Q3 of last year. The 5,687 seats added in the quarter represent an increase of 3% over the seats under contract at the end of last quarter.

We offer our renewal rate on a quarterly basis to provide insight into our ability to upsell or expand in our existing customer base. We calculate our renewal rate by comparing the number of paid seats of all our existing customers at the beginning of the 12-month period to the number of paid seats for those same customers at the end of such period taking into account non-renewals, upgrades and downgrades.

As of October 31, 2013, our renewal rate among existing customers was 118%. This compares to a renewal rate of 123% for Q3 fiscal year ‘13 last year. Total revenue for the quarter was $18.9 million, which represents a 28% year-over-year increase over the same period last year. Subscription and support revenue for the quarter was $14.9 million, which represents a year-over-year increase of 30%.

In terms of geography, our growth continues to be driven by the U.S. market which accounted for 85% of revenue in the period. Calculated Billings, a non-GAAP measure, which we define as revenue plus the change in deferred revenue closed the quarter at $16.4 million, representing a year-over-year increase of 8%.

As we talked about in all of our earnings call, there is a wider way of factors that influence calculated billings and quarter-to-quarter fluctuations in the calculated billings metrics should not be taken as an indicator of changes in future revenue. One dynamic that can have affect is the occasional occurrence of a customer electing the contract with us for multiple periods and to prepay against the contract as well.

Relevant for this quarter, in Q3 of last year, we closed a low seven-figure three-year subscription contract with a largest customer who also elected to prepay against the agreement for a very modest discount. The year-over-year growth rate in Calculated Billings for Q3, taking into account this prepay dynamic normalized out this 15%.

The impact, as you know, is multiyear in nature. To normalize for last year’s multiyear prepay deals, we need to adjust Q3 fiscal year ‘13 down by $500,000, and increase Q3 fiscal year ‘14 by approximately $400,000. Given the multiyear effect of this impact, I will remind us all of these dynamics when applicable in future calls.

Gross profit for the quarter was $14.6 million compared to $11.5 million in Q3 of fiscal year ’13, reflecting an increase of $3.1 million or 27%. Total gross margin for the quarter was 77%.

Now, I’ll turn to operating expenses for the quarter. Sales and marketing expense was $10.3 million, representing a year-over-year increase of $3.2 million or 44%. This increase was mainly driven by increased headcount across our sales and marketing organizations, increased commissions due to the increase in bookings, certain severance payments and variables spend in our lead generation activities.

As a percent of revenues, sales and marketing expense was 55% for the quarter compared to 49% for the same period in fiscal year ‘13. Research and development expense was $4.8 million, representing a year-over-year increase of $700,000 or 17%.

This increase was mainly driven by increased headcount as we continue to invest in product development. As a percent of revenue, R&D expense was 25% for the quarter compared to 28% for the same period in fiscal year ‘13.

G&A expense was $3.6 million representing a year-over-year increase of $1 million or 37%. This increase was mainly driven by increased headcount to support our company's growth and certain legal and accounting expenses related to operating as a public company. As a percent of revenue, G&A expense was 19% for the quarter compared to 18% for the same period in fiscal year ‘13.

Net loss for third quarter, fiscal year ‘14 was $4.2 million or a net loss per share of $0.17 per basic and diluted share. We are currently generating a net loss and as such, our basic weighted average shares outstanding for the period was approximately 24.4 million shares and does not include the impact of in the money stock options, restricted stock units and warrant. If we were profitable today, our diluted share count would -- would have been approximately 25.9 million shares when applying the treasury stock method to these equity instruments.

Cash flow from operating activities was negative $8.7 million for the quarter compared to cash flow from operating activities in the prior year's third quarter of positive $1.9 million. You will note this period’s cash flow from operating activities includes $4.2 million in restricted cash, which is a one-time adjustment as a result of the company making a security deposit related to the expansion of our corporate headquarters.

Turning to our balance sheet, as of October 31, 2013, our total cash, cash equivalent and accounts receivable balance and excluding restricted cash was approximately $106.6 million compared to $115.7 million as of July 31, 2013 and $28.7 million as of October 31, 2012. We currently carry no bank debt.

We ended the quarter with account receivable balance of $11.7 million. Total deferred revenue increased $3.8 million year-over-year to close the quarter at $33.7 million compared to Q2 of FY ‘14 total deferred revenues decreased $2.5 million.

For the period, our days sales outstanding was 65 days at October 31, 2013 as compared to 55 days at October 31, 2012. With respect to headcount, we added 12 employees during the quarter for a total company team headcount of 408 employees.

Let’s turn to our outlook for the full year fiscal 2014 and the fourth quarter. For the fourth quarter fiscal year ‘14, we currently expect revenues between $19.2 million and $19.4 million representing year-over-year growth between 24% and 25% over Q4 FY ‘13 revenue of $15.5.

For the fourth quarter of fiscal year ‘14, we currently expect a non-GAAP net loss per basic and diluted share between negative $0.26 and negative $0.24 with weighted average shares outstanding of approximately 24.5 million shares.

For the full year -- fiscal year 2014, we currently expect total revenues in the range of $73 million to $74 million, representing year-over-year growth between 29% and 30% over fiscal year 2013 revenue of $56.8 million. For the full year fiscal year 2014, we currently expect a non-GAAP net loss per basic and diluted share between negative $0.89 per share and negative $0.85 per share with weighted average shares outstanding of approximately 19.8 million shares.

Regarding fiscal year 2015, while we are in the early stages of our annual operating plan process and looking forward to providing you the appropriate details on this plan during our Q4 earnings call in March 2014. We are comfortable at this time, providing a following estimated initial baseline total revenue growth rate of approximately 26% for our full year fiscal year 2015.

Finally, in terms of upcoming conferences we’re attending, expect to see us at the Needham conference in New York in early January. If you are available to meet at these conferences, please let me know.

This concludes my prepared remarks and I’ll turn the call back over to Tim.

Tim Miller

Thanks Jim. At Rally, we believe that teams working collaboratively together will solve the world’s toughest problems by doing great things. So to wrap up, as I’ve done it in all call, I will end with saying thank you to every member of the Rally team. You efforts make our company great. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Mark Murphy with Piper Jaffray & Company. Please go ahead.

Mark Murphy - Piper Jaffray & Company

Yes. Thank you. Jim, wondering how would you characterize the deal pipeline as you’re moving into Q4, just in terms of the -- I guess the well-qualified opportunities that are -- that are toward the bottom of the funnel?

Jim Lejeal

Yeah. Thanks Mark. This is Jim. I did not characterize Q4 as typical strong quarter in terms of the deal activity we see. We, as you know, sell to the enterprise volume customer and Q4 for us is a year-end buying initiative activity on the part of our customers and then year beginning. And at this point in time, we are -- we feel particular -- we feel good.

Mark Murphy - Piper Jaffray & Company

As a follow-up, I did want to ask you about Q3 seasonality, when we look back on it, the current deferred revenue has indeed declined sequentially in Q3, I think four years in a row. And the sequential growth in paid seats has also decelerated in Q3 for four years in a row? That said, I think, when we are looking at the current results, they are a bit more seasonal than we have seen in past year? So just curious to get your commentary on how do you view the seasonality and just fundamentally in terms of growth rates, do you sense any lingering effect from the sales leadership transition which usually or often would have some type of disruption or the perpetual price increase there that occurred in Q2?

Jim Lejeal

Yeah. Thank you for that. First of all, the overwhelming majority of our new contracts with customers are one year in length and we do have multi-year and stub period orders, these are orders that are add on orders that are termed at our existing end date of their existing of the current contracts and these can create noise in our calculated billing. It’s why we talk a lot about why calculated billings may not be the best leading indicator for us. We caution you around using it in this way.

We do offer the normalized billings calculation when we feel like that’s appropriate and we did that certainly here in this call. I will point out that we do that in a very disciplined way. We take every single account and we normalize for all multi-year effects, had I normalized last quarter just this one contract that was a low seven figure deal, the calculations would have been slightly in the better if you will, we would have normalized to a number of 20% not 15%, if I isolated adjusted this one seven-figure deal. But as you know, Mark, we are particularly disciplined when we do these sorts of things and the rigorous calculation calculates to 15%.

If there is one seasonal effect I would call out that I think might be, might characterize the quarter a little differently is we did not see any significant multi-year commitments in the quarter and in some cases those would be large clients making very strong commitments, but at any rate, I think the last part of your question was around the sales leadership and from my prospective, all changes in leadership have an impact and but my view on dense transition is that it is quite effective and as transition, we have lost no significant skill set in -- that was in a capacity of direct report to him in a U.S. and international -- our territory.

There has been some changes made in international and Tim noted in the call the two new hires. But may be I can hand it to Tim for a minute to talk about his prospective on dense our position in the seat.

Tim Miller

Sure. Thanks Jim. I mean just two quick comments, one, we are really upping our discipline and so, perhaps, that has some influence during the seasonality when we do some of these larger transitions, we are much more disciplined, we are much more buy the book and I think we are setting a foundation for how to go to market and how we sale the customers that is extremely scalable.

This process is in place, I think are really terrific. It also remember and just a sort of ducktail on the seasonality question, because Q3 does tend to be a relatively low production quarter for us compared to others, we get that hit twice, we get that hit with new products, new products means all the new customers, but we also getting when we upsell through existing customers upon their renewal of that. So because we have last customers renewing in the quarter, we do not tend to see those big annual upgrade. So as you noted this has being common in our business as long as I can remember.

Mark Murphy - Piper Jaffray & Company

So I appreciate the color. I guess, sort of the normalized billings growth rates that you are providing for Q3, I think either way, they are a bit less than we had hoped for? I understand and the converse is they were a lot more than we had all hoped for in Q2, so perhaps it all kind of evens out in the course of the year? But can you provide any more color on maybe what you experience in terms of close rates towards the end of Q3, was that in line with what’s you are hoping for?

And the part of this question do you have any preliminary thoughts for Q4 in terms of, I think people right or wrong they are going to be horn in on the sequential growth rates for paid seats and differed revenue. At this point would you expect them to strengthen and maybe gravitate back towards historical normal here in the Q4 that we have -- that we are into now?

Tim Miller

From a competitive standpoint, I can share that our win rates has been almost exactly identical what we have seen in the past with perhaps a slight improvement. So from a marketplace and from who we were selling to and how we are selling, we see very little change.

And one other thing that I have shared in the past is our competitive win rate with IBM and I am pleased to share that year-to-date we have won 95% of the dollars in our direct competition with IBM. So I do not see if they change that again, this is a seasonally low quarter for us.

Jim Lejeal

Yeah. And as we look at Q4, our view is that it should be in the range of the trailing four month average growth rate that we typically post in the way we have always presented the business. These are growth rates in the range of the topline number, our growth rate that we posted this Q3, 30% year-over-year growth rate in subscription and total revenue growth rates accordingly. So speaking to our view on how we think about billings. Q3 is a seasonally tough quarter for us.

Mark Murphy - Piper Jaffray & Company

Yeah. If I may just continue on a bit here. Jim, the FY ‘15 revenue guidance I just -- I wasn’t sure if I heard you correctly, did you say 22% or did you say 26% growth?

Jim Lejeal

No. I absolutely said 26% market, I would characterize that as the outcome of a carefully thought presentation at this point in time. We are currently in the process of creating our fiscal year operating plan and will mail that down with our board as we move towards the beginning the year but no I said two six, 26%.

Mark Murphy - Piper Jaffray & Company

Okay. So I guess I want to clarify then Jim there I think consensus is closer to 22% or 23%. And I guess my question would be, given that this is in early timeframe to try to guide preliminarily on the out year, you are not -- you are not through Q4 yet. You had the recent change in sales leadership, what exactly is it that is causing you to surprisingly guide a bit above on next year?

Jim Lejeal

My perspective is we are -- we remain the market leader in our very large greenfield market and we are the best of breed whole solution that the enterprise customer will run to when they are transforming the organization in an agile way. The multinational bank institutions that deal that Tim talked about this 1,500 seat initial deal.

Tim and I had the pleasure to talk with the account team just recently about that particular sale. And this is a customer that combined not only the 1,500 seat purchase license in our limited edition but also purchased our Rally for good packaging which is a whole services solution that we offer to customers that are literally moving their entire enterprise to Agile.

And this is -- often you will hear Tim describe this as the unmatchable offer. No one in the market place competes with us when we present this way and that -- the discussion we had with the account team as we decomposed the deal and listened to the initiatives that this particular customer is undertaking with our solution and the reason for them purchasing Rally for good.

There was nothing but positive signs in the part of this very large seat potential customer, There were two seat potentials associated with this account. It was initially in the -- at least in the near-term timeframe for the divisions we have sold to with the 1,500 seats. The seat capacity, the seat potential there is about 5,000 seats but then as we explored further the ability to sell beyond that just these two groups we sold to, I think the seat potential is characterized in the 15,000 seat range.

So we feel very strong about our market place and our position and we know it is the right thing to invest against the opportunity. Hence the confidence in the -- that these statistics the initial framing of FY ‘15.

Mark Murphy - Piper Jaffray & Company

Okay. Great and one final one, if I may, just in terms of the filtering, Tim I heard your earlier comment on the call. I think what you are trying to say -- I think you are referring to the target of trying to get 245 to 260 sales heads by the end of this fiscal year. Could you just confirm is that -- do those numbers still apply, that’s what you are referencing and maybe what do you think at this point is going to determine whether you come in closer to the low end or closer to the high end of that range?

Tim Miller

Thanks. This is Tim. You are absolutely correct with the range, we are re-affirming that we are confident in our abilities to meet those goals. Without going into details of the quarter, we are extremely confident. So we are not increasing our guidance there but we have a recruiting machine and I can share with you we have a small truckload of people just through yesterday as an example on the sales organization, we are getting some really very talent.

So I am very excited. I pay a lot of attention to our recruiting and I couldn’t be more pleased with the activity that they go in line especially in the last quarter.

Mark Murphy - Piper Jaffray & Company

Okay. Great. Thank you very much for taking my questions.

Jim Lejeal

Thanks Mark. Thank you very much.

Operator

Our next question comes from the line of Nandan Amladi with Deutsche Bank. Please go ahead.

Nandan Amladi - Deutsche Bank

Hi. Good afternoon and thanks for taking my question. So you made referenced to a couple of very large deals that you signed in the quarter, presumably none of them have gotten live yet or maybe they are at value added for early stages. So how much of that is factored into your 26% revenue growth, early guidance for next year. What does that contemplate in terms of existing customer growth as well as new customer adds?

Jim Lejeal

Hi, Nandan. It’s Jim. Thank you for asking that question. I will tell you that the 1,500 seat deployment to this particular customer is in fact provision and in fact those customers are meaningfully engaged with our services team that is surrounding them as they -- with respect to delivering this at this full service compliment. This services and product packaging that we call Rally for good.

It absolutely is part of our future forecasting and we model the foundation of that particular customer into next year and the automotive example that Tim gave you which is the add on order to the landing of that particular automotive customer that we talked about in the Q2 call. That again is absolutely part of our forecasting forward as we know the -- we know the footprint we have. We have the confidence of this satisfaction of the customer.

And then we have the active engagement of our sales people and services professional before full Rally team, if you will, all of the insights that come from that with regard to interacting with the customers to them model the timing of when we think these customers may add on to their particular foundation of seats.

So, so, it is the dynamic of our land and expand business. They are two sides of the coin of our land and expand, right. We grow slow with our customers of late; we are growing faster that’s clear. But we expand once we land with customers and that adds to a flywheel that we enjoy through in future periods. So absolutely, it gives us confidence with regards to the -- at least what I would characterize as a conservative outlook for FY ‘15.

Nandan Amladi - Deutsche Bank

Okay. Well a little more specifically then, for as we look into next year, what portion of the business is suggesting customers buying versus new customers?

Jim Lejeal

Yeah, now we don’t break out that sort of mix, it hasn’t been something that we update or communicate, we -- I think as you know adopted a progressive release of key metrics throughout our public life. We’ve been -- we try to remain disciplined on what we communicate on a quarterly basis.

That being said we have -- we remain committed to kind of review of what we release on an annual basis. And we know that we will offer you additional metrics at the end of year and will take that under consideration to provide that kind of mix at year end to give you all insight into building a models.

Tim Miller

Yeah. Let me just jump in and maybe give you a little more color there. We absolutely have good estimates on how much we consult to our existing customers. And I think it’s fair to say, depending on what type of period you are looking at, the majority of our sales actually go to our existing customers because we do come in relatively small initial sale and they continue to sell in a quarterly or every two quarters and then get some lumpy sales a year or two in.

Many of these large transactions that we’re talking about now are projects that one started in 2009, and now we’re at 4,000 seats and there’s ability to sell an additional 5000 seats. So, we picked folks up in the Agile adoption phase often times a year, two years, three years, after a particular group has turned into this very dynamic trend we’re seeing towards Agile and then incrementally grow throughout the year.

So, new business to existing customers is quite strong. New business to new customers is a difficult measure to really think about our business, because there is so much up-selling that’s going on. Q4, we did -- last year a thousand transactions, so understand that it is very transactional at the large.

Nandan Amladi - Deutsche Bank

Thank you.

Operator

Thank you. Our next question is from the line of Michael Huang with Needham & Company. Please go ahead.

Michael Huang - Needham & Company

Thanks. Just wondered if I could kind of drill into a few things, so when you think about kind of the number of transactions that you did in Q3, kind of both on the upsell and on the new customer front, how does that come in kind of relative to the Q2 and kind of relative to your expectations? I mean, you don’t fear, was wondering if you could just provide some color on that without providing specifics surrounding the number?

Tim Miller

Like I said, the vast majority or the lion share, we would consider -- we consider an upsell, a new sale. We don’t share the number of logos that we closed, but typically what we see is a bit of churn in the low-end, very stable at the high-end. And sort of rotating out very significant customers like some of the ones we mentioned. And often losing some 25, 50, 75 seat types of opportunities go out of business or other kinds of thing. So, that’s stratifications little bit difficult to quantify but that’s something we’ve seen pretty much every quarter.

Michael Huang - Needham & Company

Got you. I mean, so just going into the net asset that was done in the quarter, so I know that you had characterized Q3 as a challenging seasonal Q4. But was wondering how did that number come in relative to kind of internal expectations? I mean, it was down year-on-year, despite the size of the opportunity and the strength of competitive positioning. So, was wondering if you just provide some thoughts kind of around, how that metric looks relative to kind of what you were thinking?

Jim Lejeal

Yeah, Mike, I think, it is right. This is Jim talking. I think, we’ve tried to characterize Q3 as a typical seasonal quarter. You heard Mark Murphy earlier in the call relay the -- how Q3 has always presented this way. I think it’s safe to say that Q3 was a little softer than perhaps we expected, and some of that can be decomposed to say international and some of the productivity that we had hope to experience there.

But as we decomposed it, I see nothing in the business that suggests that something’s afoot or something’s wrong that there was a micro dynamic that we are not aware of. Our market isn’t one that’s absolutely in place. The data center, I would point to you that gives me the foundation upon, which to stand and say that to you is the key customer wins that were new in the quarter and the continuing support from existing customers.

So, what was there was, this Q3 a little softer than some in the past. Yeah, I think it was but when you look at our business and we look at Q4 and we look at Q3 here, we remain as bullish as we always have been. And in fact, I would say given the foundation of the executive team as is composed now, we probably had the highest level of alignment.

The most focused efforts in terms of how we will navigate from our product and road map in future year. And then the discipline that needs to occur as the business grows from its milestone at $50 million to $500 million using some nebulous far off milestone. So that’s my answer.

Michael Huang - Needham & Company

Okay. Last question, I was wondering if you share an update on Flowdock and kind of what you are seeing there and maybe in terms of activity levels, user adoption and maybe update us on how this is being priced?

Jim Lejeal

So, we’re thrilled with that acquisition. From a revenue standpoint, it’s still very low. You may have noticed that we have come to market with new pricing. We expect to make some noise here. Still this calendar year about some new capabilities that we’re very excited about, so stay tuned for that.

I can share that it will be much more integrated with our core solution and we believe that’s going to be a tremendous benefit up to date. Our enterprise sales force has really not been selling that, but we have just started to see that change. So stay tuned for Q4 and we’ll try to give you a more detailed update then.

Tim Miller

Yes. The only thing that I would add there, Mike is I along with two other, Ryan Martens, our Founder, CTO and Jay Littlepage, our VP of Engineering, we were physically in Finland three weeks ago and helping chisel into place how we will grow that asset.

Michael Huang - Needham & Company

Great. Thanks, guys.

Operator

(Operator Instructions) Our next question comes from the line of Bhavan Suri with William Blair & Company. Please go ahead.

Bhavan Suri - William Blair & Company

Hey guys can you here me there okay?

Tim Miller

Yes we can.

Jim Lejeal

Yes.

Bhavan Suri - William Blair & Company

So just -- just a couple of questions, one I think we’re looking at the seat count issue but maybe I was thinking we should look at ASPs and obviously you can move ASPs tremendously in a given quarter but how should we think about ASPs that come up a little bit and that certainly impacted revenue nicely. How should we think about that going forward?

Jim Lejeal

Yes. I mean, Bhavan, we -- I think we would remain consistent with the way we described this in the past that is we’re making a meaningful investment in R&D and clearly there's a good roadmap for that group to run against and deliver featured functions to the marketplace. We’ve advised that you all -- the external party shouldn’t model an increase in ASP nor model a degradation. We feel that's conservatively right.

Bhavan Suri - William Blair & Company

Okay, okay. And then just on the quarter quickly before I get to some of the sales questions. Was there -- when you look at how the deals came in, in the quarter, were there when some of the seats came in online, was there any sort of sense through the quarter on a monthly basis whether some came in earlier or later?

Tim Miller

When we moved through the quarter, we typically sell -- let me throw out a very rough kind of percentages as you move to monthly through the quarter but sales can flow towards us enclosed in the quarter 20% in month one, 30% in month two and the remaining 50% in month three. And I think if you look at our DSOs, you see they -- they show a little high and this in part because two of them, the more significant sales occurred late enough in the quarter that they showed themselves there in the account and the financial statements and therefore present in the calculation that way. So I don’t think that this quarter was any different than the way that -- the way they all typically layout?

Bhavan Suri - William Blair & Company

Okay. And then just again our trending say versus last quarter and year-over-year when you look at the (inaudible) period orders, was there any shift in that or was that also pretty typical? Given the seasonality obviously of Q3?

Jim Lejeal

The quick answer is given the seasonality typical.

Bhavan Suri - William Blair & Company

Okay.

Jim Lejeal

Nothing is on the list.

Bhavan Suri - William Blair & Company

Okay. And then the last one from me, you’ve added a number of sales people, two questions one where you’re typically getting from and then two sort of just some color on the productivity of the group as a whole or how you break that down with tenure and what we might think about how that might look next year?

Tim Miller

Yes, thanks, this is Tim. So we -- we’ve involved where we have been getting our sales reps up overtime. I would tell you historically, it has been from other companies like such as some of the large incumbents that I typically referred to, again [HP, CAs], we still see those folks, even some of the ones who are (inaudible) and those kinds of companies.

But increasingly our message is higher in the organization and more strategic. And so we’re finding a good early success with folks that don’t necessarily have ALM background. When you look at some of our capabilities, especially some of the new ones around analytics and benchmarking, we’re really solving organizational problem for how do I mobilize hundreds, thousands, -- tens of thousands people will get the most productivity out as opposed to providing a point solution or a tool discreet functions.

So as we sell more business value to the engineering teams, we’re confident that we can open aperture and attract others that will perhaps selling another SaaS companies or the tech companies but not necessarily an ALM and absolute seeing that in the pipeline.

Bhavan Suri - William Blair & Company

And then any sense, sort of the any color on the productivity with tenure?

Tim Miller

Yes, I think folks that has been working with us for while continue to see strong demand. And they have -- they built these accounts that last overtime that -- so we’ll continue to grow linearly or some times exponentially overtime that -- that's definitely continued with a couple of territories that I have talked to about in detail.

Some of the newer territories are little bit softer as we come in and they take a little bit more time to reach that critical mask. It depends on a little bit on the size of the organization but there is a point that happens within an organization where it tips and they -- we become the company’s standard and they go all in and that doesn’t mean that the buying (inaudible) the development organization, just means whether the company is standard. We get another growth.

We typically get our limited addition which is a higher price point per user per seat addition. And then we accelerate our growth but that growth can still last for multiple years. So that’s one of the factors and folks that have been managing those accounts, let’s say, two, three, four years which is when we see some of these large account start to tip, really see it accelerate.

Bhavan Suri - William Blair & Company

And then one quick last one, thanks for the color, Tim, was you guys raised the license pricing, but you still had slightly better probably than I was expecting perpetual mix. Have you seen any shift there, have you seen any impact of that increase on the business as the sales guys are out there selling subscription versus perpetual?

Tim Miller

With our existing customers, again the lion share but it has not been a significant factor. There are few anomalous deals where we might move from perpetual to subscription, which we’re happy to accommodate.

Bhavan Suri - William Blair & Company

Okay. Thanks for taking my questions guys. That was helpful.

Jim Lejeal

Thanks Bhavan. Thank you.

Operator

There are no further questions at this time. I’d now like to turn the call back over to management for closing remarks.

Jim Lejeal

This is Jim on behalf of Tim Miller and the whole Rally team. We thank everyone for your time today and we look forward to meeting with you or taking your calls over the week, the coming weeks and we -- if you happen to attend Needham in January, please schedule time with us and please say hello but thank you for your time.

Tim Miller

Thanks everyone.

Operator

Ladies and gentlemen, this concludes Rally Software third quarter fiscal year 2014 earnings conference call. If you like to listen to replay of today’s conference, please dial 1-800-406-7325 or 1-303-590-3030 with the access code of 4650719. We’d like to thank you for your participation. You may now disconnect.

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