ServiceSource International Management Discusses Q4 2013 Results - Earnings Call Transcript

ServiceSource International (NASDAQ:SREV)

Q4 2013 Earnings Call

February 06, 2014 4:30 pm ET

Executives

Anne Bawden

Michael A. Smerklo - Chairman of the Board, Chief Executive Officer and Member of the Service Executive Industry Board

Ashley Fieglein Johnson - Chief Financial Officer

Analysts

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Edward Maguire - CLSA Limited, Research Division

Matthew J. Coss - Piper Jaffray Companies, Research Division

Peter Lowry - JMP Securities LLC, Research Division

Scott R. Berg - Northland Capital Markets, Research Division

Patrick D. Walravens - JMP Securities LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to ServiceSource International Fourth Quarter and 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ms. Anne Bawden, Manager of Investor Relations. Madame, you may begin.

Anne Bawden

Thank you for joining us. Before we begin, I'd like to remind you that during the course of this webcast and call, we may make projections or forward-looking statements that reflect our views as of today, and are based upon the information currently available to us. This information will likely change over time. By discussing our current perception of our market and the future performance of the company and our solutions with you today, we are not undertaking an obligation to provide future updates. We caution you that such statements are just projections, and actual events and results may materially differ from what we discuss. Please refer to documents we have filed with the SEC. These documents contain and identify important factors that could cause actual results to materially differ from those contained in our projections and forward-looking statements.

During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliation between GAAP and non-GAAP measures, which can be found in today's earnings release posted on the Investor Relations portion of the ServiceSource website.

And with that, I'll turn the call over to Mike.

Michael A. Smerklo

Thank you, Anne, and welcome to our Q4 and 2013 earnings call. Today on the call, we're trying a new format via webcast to give you a more visual picture of our business. Post the call, these slides will be posted on our Investor Relations site.

On today's call, I'll highlight key financial and customer details from our fourth quarter and full year results, and give you my thoughts on the year; provide insights into the evolution of our business, the market, and how we capitalize on several key trends; also, explain how our acquisition of Scout Analytics fits within our broader strategy; and close with a forward look to our growth pillars for 2014.

Let me start with a brief review of Q4 and full year 2013 highlights. Total revenue in our fourth quarter was $77.2 million, resulting in 15% growth over the same period last year. For the full year 2013, we grew revenue by 12% to over $272 million. Our adjusted EBITDA was $8.6 million in Q4, in line with our guidance range of $7 million to $10 million. For the full year, EBITDA was $17.7 million, also in line with our guidance. We exceeded our guidance on free cash flow, and we ended the year with over $275 million on our balance sheet. Ashley will go into further details on our fourth quarter and full year 2013 financial results later in the call.

In terms of new ACV signings in the quarter, we saw a mix of expansion deals and new logos. We signed important expansions with 3 Fortune 50 customers and we added 2 new SaaS logos to our business. Other highlights from our fourth quarter include the announcement of new relationships with Accenture and Aria, and we hit a very important milestone of bringing 15 customers live on Renew. We had a major presence at Dreamforce, where we unveiled a new user interface for Renew, and we hosted many of you at our Investor Day that same week. These accomplishments are before we factor in the Scout acquisition, which closed in mid-January.

Looking back, 2013 was a pivotal year and we faced several challenges coming into the year. We have successfully repositioned our business from managed services, powered by cloud technologies, to a cloud service provider, differentiated by our managed services. We unbundled our complete solution, and this has been a big change for our company and our sales team. Changing the business model and our approach to go-to-market takes time and investment. We knew this journey would be difficult and bumpy, but it will be worth it. This change gives us a stronger and more sustainable growth trajectory, opens new opportunities for our business and more choice for our customers.

We made our 5 key initiatives, on which I gave updates through the year. We made progress in many areas and we still have work ahead, particularly in aligning our sales execution and product packaging through our unbundled strategy.

We are proud of our accomplishments in 2013, especially in the reengineering of our business model and selling subscription. In just the past few months, we rebuilt our product UI and some bigger market partnerships and enhanced the managing cloud services our sales people can sell. This puts us in a strong position going into 2014.

Now I'd like to transition from looking back to looking forward and give investors some perspective on the evolving market and our company's positioning.

The recurring revenue economy is emerging because of the intersection of big and important trends. These include: the move to the cloud; the birth of the Internet of Things; the need of all companies, traditional or subscription, to sell into the installed customer base; and the rise of the recurring revenue business model. All of these trends require the company to focus maniacally on maximizing customer lifetime value. This is where ServiceSource excels, and our recent acquisition has only strengthened our position.

To remind investors, 2 weeks ago, we closed the acquisition of Scout Analytics, the leading SaaS vendor of predictive analytics applications. Scout focuses on recurring revenue management for subscription businesses. With this acquisition, we doubled our total addressable market to more than $600 billion and added more than 50 new customer engagements and $3.5 billion in recurring revenue under management. As a result, ServiceSource now has $14.5 billion in recurring revenue under management based on 200 customer engagements.

The Scout acquisition also increases our total addressable market. Traditionally, ServiceSource would help technology companies grow their renewals and recurring revenue businesses, and we're able to serve customers with simple or highly complex data in business environments. But as we just discussed, there's a radical change in business models underway. New companies are being born, and traditional hardware, software, service and investor companies are having to rethink the way they deliver their products and services to customers. In the past, in the last few years, SaaS customers have grown to 20% of our revenues and, with the acquisition of Scout, we can offer greater value and a more comprehensive portfolio of software and managed services to companies in this important and growing sector.

Our customers face a variety of business challenges. Traditional businesses suffer from inefficient renewal and channel management and limited customer visibility, often resulting in low renewal rates. Subscription businesses have limited visibility into their application usage. As a result, can have low adoption and customer satisfaction, often resulting in high churn rate. As more companies move to hybrid business models, with both traditional and subscription elements, they face several problems: a higher cost of sale, the need to identify cross-sell opportunities, incomplete information on the customer and increased business complexity.

ServiceSource already supports a number of companies at the forefront of this shift, such as Adobe, Microsoft and EMC. We do risk leveraging the most comprehensive portfolio of offerings to help businesses grow and thrive in the recurring revenue economy. In addition to our suite of applications, we also provide professional services and managed services to help our customers succeed. Last quarter, we began to kick off critical relationships with Accenture and Aria, and we continue to invest in our Recurring Revenue Alliance. In addition, Scout partners closely with Zuora and they're building a relationship with Marketo, all of which helps us address customer problems end to end.

As we look ahead to 2014, we are focused on the growth pillars we outlined to you during our November Analyst Day. Our future growth is based on providing the industry's best cloud applications for driving recurring revenue. And we have a blue chip customer base to sell into, as well as a rapidly growing market opportunity. Gathering data from multiple sources and helping our customers harness the power of that data to drive their business, will continue to be a primary competitive advantage and an area of investment. Our leadership position in managed services allows us to provide a complete solution for customers and is a strong market differentiator. Extending our go-to-market reach remains a priority, and our partnerships and ecosystems will augment our sales and marketing teams. And of course, none of this would be possible without the continued dedication and execution of our most important asset, our people.

In closing, our business model is evolving and we're in a strong position to cash our share as the market evolves and drive higher margins through cloud applications. With the acquisition of Scout, we've grown our business in the past 3 years from under $180 million in ACV to over $312 million in ACV. We've also diversified our business, from 100% managed service to a mix including recurring subscription revenue that now accounts for more than 10% of our ACV. And we've delivered a compounded annual growth rate of 21% over this period. We're excited about the opportunities ahead and confident in our ability to help the world's largest and most successful companies grow and retain their recurring revenue streams.

And with that, I'll turn it over to Ashley to walk us through our Q4 results and guidance for 2014.

Ashley Fieglein Johnson

Thanks, Mike. Let me begin by providing some of the highlights from our fourth quarter and full year 2013.

For the fourth quarter 2013, we delivered $77.2 million in revenue, up 15% from the $67.3 million delivered in Q4 of 2012. This was in line with our guidance of $75.5 million to $79.5 million for the quarter. For the full year 2013, we delivered $272.5 million of revenue, up 12% year-over-year and also in line with our guidance of $271 million to $275 million.

For the full year and the fourth quarter, our cloud and data services business represented approximately 6% of our revenue, while managed services represented approximately 94%. As we continue to shift our business to a subscription model with our technology platform, both organically and through acquisition, we expect cloud and data services to represent an increasing percentage of our revenue. Beginning in 2014, we will break out revenue and gross margins for each of these business lines in our quarterly results and guidance.

We continue to invest in our operating expenses to build out and grow our technology subscription business. These investments have included growth in our professional services teams, hiring engineers and product management in R&D to develop and expand our product footprint and sustaining our investments in sales and marketing to reposition the company and enhance our market presence.

Our non-GAAP gross margin declined on a year-over-year basis, both in Q4 and overall in 2013, due to the increased expenditures for professional services and our SaaS operations cost, as well as the reclassification of some of these expenses from R&D to cost of revenue, as we move from the products being in development to having deployed customers on Renew.

Our full year adjusted EBITDA of $17.7 million was in line with our guidance of $16 million to $19 million, and reflects the investments I've highlighted and increasing our market visibility and bringing our customers live on Renew OnDemand. Similarly, our non-GAAP net income on a full year basis was $5.2 million, or $0.06 per diluted share, also in line with the guidance.

Moving to the balance sheet. Accounts receivable were up $9.2 million sequentially, to $73.1 million on higher revenue in the fourth quarter 2013. Overall, the quality of our receivables portfolio remains healthy, and our cash collection, thus far, in the quarter have been strong. DSOs in the fourth quarter were 85 days, improved from 86 days in the third quarter, and in line with the guidance we provided for DSOs in the mid-80s. Deferred revenues were $6.3 million, inclusive of both short- and long-term deferred revenue and approximately 2x our deferred revenue balance at the end of 2012.

Cash flows from operations were $912,000 for the fourth quarter and $15.7 million for the full year, up from $10.6 million in 2012. Capital expenditures were $2.1 million for the fourth quarter and approximately $5.2 million for the full year. Free cash flow in the quarter was negative $800,000 and positive $11 million for the full year, after allowing for the effect of exchange rate changes on cash. A significant improvement from negative free cash flow of $10 million in 2012. Finally, we ended the year with total cash and cash equivalents of $275.1 million.

As Mike discussed, 2013 was a year of learning, with both the unbundling of our products and the realignment of the business. As I turn to guidance, I will provide you with a more detailed view of our business by segment, applying some of the same levers we have discussed historically and noting how they are changing as our business model evolves.

Turning first to managed services. Managed services is the foundation of our business and has been a profitable growing business for us over the last decade. We generate profit and strong customer reference ability from this business, which supports our investments and our technology and builds and expands our who's who customer base.

The 4 key levers for managed services remain consistent. First, the timing and quantity of new ACV added throughout the year influenced our revenue growth in the year. We're starting the year with estimated managed services ACV of $281 million. We expect modest growth in managed services as our business focus shifts to our SaaS subscription businesses. We expect new business for managed services in 2014 to be weighted to H2. But should we see more of the ACV signed in H1, this will provide upside to our revenue forecast.

Second, we assume ramp times of new ACV will be consistent with historical average of 2 to 3 quarters for the managed services business. On new business ramps, managed services faces gross margin compression, as we incur cost before our revenue reaches its full potential.

Third, quarterly seasonality that we experienced in our managed services business further exacerbates this gross margin compression in Q1 and often in Q3, as well, as these are typically the lightest seasonal quarters for revenue. And finally, as Rick mentioned in the past, the important lever for growth is our ACV retention rate. In 2013, we returned to our historical ACV retention rate, averaging around 90%. We are targeting the same or better in 2014.

With this context, we are guiding for the managed services business as follows. Q1 revenue in the range of $59 million to $61 million, and full year 2014 revenue in the range of $270 million to $274 million, reflecting 5% to 7% growth year-on-year. Q1 non-GAAP gross margins are expected to be in the mid-30s, driven by quarterly seasonality and ramping of new business, with full year gross margins in the high 30s to 40%. Overall profitability for this business funds the investment in our technology subscription business, while providing meaningful leverage in our go-to-market strategy.

Turning to our Cloud and Data Services business. Our SaaS subscription business experienced significant growth in 2013, and with the acquisition of Scout Analytics, now represents more than 10% of our total ACV. We believe the combined solution offers the opportunity for continued growth and market leadership in 2014. In terms of key drivers for this segment of our business, we're entering 2014 would subscription ARR of $31 million and we assume an increasing percentage of new ACV will come from subscription agreements to our technology platform.

As with our managed services business, we expect that new business will be weighted to the second half of the year, and we assume that subscription agreements will be recognized ratably, starting the month after new business is signed. Our subscription gross margin should improve gradually throughout the year as the business scales, but we expect professional services to continue to be a loss-leader to drive successful enterprise deployments and adoption of Renew OnDemand.

Please note that our subscription revenue guidance in 2014 reflects non-GAAP revenue, which does not account for the adjustment of deferred revenue required for GAAP purchase accounting. As we report our quarterly results, we will provide a reconciliation between GAAP and non-GAAP revenue. Based on these key assumptions, we guide our Cloud and Data Services business as follows. Q1 2014 subscription revenue in the range of $7 million to $8 million, up over to 225% from our subscription revenue in Q1 of 2013 and approximately $1 million of professional services revenue. Full year 2014 Subscription revenue in the range of $35 million to $38 million, up approximately 200% from our Subscription revenue in 2013, but approximately $3 million to $4 million of professional services revenue.

Gross margins for our Subscription Revenue in the low 60s for Q1, improving over the course of the year to the high 60s. And as I mentioned, our professional services business remains focused on ensuring the successful deployments and adoption of Renew OnDemand, and is not at this time focused on the profit margins we would expect to achieve at scale.

Summing it all up, for our Consolidated business, we are forecasting total revenue for Q1 of $67 million to $70 million, reflecting a 10% to 15% increase over Q1 2013, and full year revenue guidance of $308 million to $316 million, reflecting 13% to 16% growth from 2013. We will sustain our investments in professional services, sales and marketing and R&D to support the rapid growth in our Subscription business, while we will seek scale in areas like G&A. We are also investing in integrating the acquisition of Scout Analytics, with the goal of accelerating the potential revenue synergies for that acquisition.

As such, we are forecasting non-GAAP gross margins for Q1 in the range of 33% to 35%, and full year gross margins between 38% and 40%. Adjusted EBITDA for Q1 in the range of negative $3 million to negative $6 million, and full year adjusted EBITDA between negative $4 million and positive $4 million. Q1 non-GAAP net loss of negative $0.04 to negative $0.06 per share and full year non-GAAP net loss in the range of negative $0.04 to negative $0.09 per share. This guidance assumes a normalized tax rate of 40% and a fully diluted share count of approximately 82.5 million shares for the first quarter and 84.5 million shares for the full year.

Free cash flow is forecasted to be breakeven to positive $3 million for Q1, and in the range of negative $7 million to $15 million for the full year, reflecting the continued investments in our growth, and the integration of Scout. We expect capital expenditures for the year of approximately $8 million to $10 million.

One final note on our non-GAAP metrics in 2014. In addition to excluding stock-based compensation and amortization, we will also exclude any one-time transaction costs associated with the Scout acquisition. Please see the reconciliation of GAAP to non-GAAP metrics available on the IR portion of our website.

To wrap it up, we are moving to a new phase in our business evolution, with greater than 10% of our revenue generated from a rapidly growing technology subscription business. We continue to invest in all areas of our business where we see opportunities for market capture and growth, while shifting our business model to one with greater long-term leverage and scalability.

With that, I'd like to open up the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jennifer Lowe from Morgan Stanley.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

I wanted to ask a little bit about some of the changes in the sales organization, does that happen towards the end of the year? Mike, in your prepared comments, you talked about how some of these new -- the new Renew OnDemand offering requires a different go to market. But can you talk a little bit more just about some of the changes that you've made in leadership and what sort of the aspirations there are for this year?

Michael A. Smerklo

Yes, sure, Jen. We've been really excited. I think what we're looking for -- we just came back from last week, we had all of our customer-facing teams together for a couple days off-site. A tremendous amount of energy. I think with the new leadership, Tom Bonos, reporting into Jay and having a consolidated view of both new ACV acquisition and ARR acquisition as well as customer, is going to serve us well. I think the synergy is already playing out. We felt that -- it looks like we're off to a good start, a strong January. And really, I think, the focus for us is to leverage the investment we've made over the last couple of years on the Sale side and put more tools in the bag of our sales folks. We have continued with the unbundling approach. But now with having Scout in the bag, so to speak, as well as partnerships on the Product side with the likes of Aria and go to market with Accenture, we believe that plus a more close alignment with the unbundling to the value proposition, it's going to serve us well. So we're off to a strong start in 2014, and I think there is a higher level of energy than there was just a few months ago.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Okay. And then just one more for me. I think on the Q3 call you talked about mid-teens to maybe even high teens ACV growth for the year. And on the Scout Analytics call, I think there was a reference to ACV growth being a little bit slower than that. Can you just talk through the ACV dynamics in Q4 and what might have caused that to under-pace a little bit?

Michael A. Smerklo

Yes, sure. So when we look at the year and the 13% growth, which was all organic, it ended up being -- we expected more of a back-end-loaded year. It was -- the second half was about the same or a little bit less, but pretty good compared to the first half, it just didn't get to the back-end weighted that we thought. I think our learnings are, one, it's still going to be -- there was a big transition last year and our solution is going to be lumpy. One of the neat adds about Scout is it does give us a lower ASP to sell and a little bit easier foot in the door, so we think that's going to broaden the solution. I mean, we're also happy that we saw 200%-plus growth increase in subscription. But netting it out, we looked at the second half of last year and it was okay, but we expected it to be great. We're taking those learnings, putting them forward into this year and, as I said, they will be reflected in the session that we had last week and kicking off this year.

Operator

And our next question comes from Ed Maguire from CL.

Edward Maguire - CLSA Limited, Research Division

I was wondering if you could discuss the investment plans this year? Actually, your guidance assumes that there is -- it really reflects this change in the model. And it's -- I'm interested to get a bit of color in terms of how much of the impact to gross margin is from the broader shift toward software-as-a-service? How much of it is from the Scout Analytics acquisition? And how much of some of the new business that you guys are going to be booking may end up showing up as -- in the deferred revenue line, and whether that might become a new way to measure the business?

Ashley Fieglein Johnson

Sure, Scott. So in terms of gross margin, the biggest compressing effect that we see -- sorry, I was looking at a different list, sorry. In terms of the gross margin impact, the primary factor is the fact that we are continuing the investment in professional services. And really, focusing on adoption with Aria customers, to make sure the early -- we mentioned 15 customers live on the platform -- that it's not just get them up and move on to the next customer, but really make sure that they're adopting and using the product as it's intended, and that they're achieving the ROIs that we set out. So that is something that we expect. As the business scales, it will be less of a factor, but it's something we're certainly anticipating in 2014. And then on the managed services side of the house, it's a combination of the seasonality that you see in Q1, as well as new business ramping, obviously, always has the compressing impact on gross margin. So those are the primary factors around gross margin. And then overall for the business, we are investing, as you mentioned, in Scout, and then in driving sales and sales synergies for that business, as well as continuing to invest in R&D for both of the platforms.

Edward Maguire - CLSA Limited, Research Division

Okay. And I did have a follow-up, as well, on the industry initiatives, which have not been quite as much front and center over the last year. But as you make this -- the transition towards more software-as-a-service, how does that impact at all the focus that you guys have had historically on high tech and some of the other industries? I know that Scout gives you -- gets you into a completely new vertical and media, but would love to get your updated thinking on that.

Michael A. Smerklo

Yes. I think the great part about adding Scout to the portfolio, and it really does expand what we're -- the markets we're serving. And so we look at it now as having 7 core markets that we're serving over $600 billion of addressable market. It's something we've highlighted. We tried this format for the investors to show the business problems that are unique to traditional business models, unique to subscription, and then those that are -- really when you're in a -- in a hybrid model. Our general belief in what we're seeing, to answer this question specifically, is an increased focus on recurring revenue across all the verticals. As I look at our pipeline activity and our new starts, it's a really interesting mix. And while we continue to see strengthen the core technology, maintenance support business, the new conversations we're having in industrial, in health care, in digital media are really exciting, and then a whole host of conversations with companies that are in the middle of a transition. So we believe that adding information services and media to our core verticals and having additional capability to sell is really strong. Another thing I'd add on, it's really early, but having a partner like Accenture, that is literally in deep with every senior executive in just about every major vertical, is really also triggering some very interesting conversations. So it's been fun to see early days on this evolution, but I think having more to sell and having more people helping you sell is going to prove to be a real strong -- strength for us in 2014.

Operator

And our next question comes from Mark Murphy from Piper Jaffray.

Matthew J. Coss - Piper Jaffray Companies, Research Division

This is Matt Coss on for Mark Murphy. I just had a couple of questions. One, actually a clarification. Did you say that Cloud revenue was 6% of revenue for Q4, or was that all of 2013?

Ashley Fieglein Johnson

It's actually for both, I'm rounding. It's -- for the year, it rounds up to 6%; and for the quarter, it rounds down to 6%. So yes, for both. It's the Cloud and Data Services business together, represents about 6%.

Matthew J. Coss - Piper Jaffray Companies, Research Division

Okay. And then, on the -- the pace of hiring in the Cloud's new business is going to grow much more rapidly than managed services. And it seems to me that when -- clearly your existing reps will be selling both solutions as you mentioned. But it seems to me that hiring future reps probably has to take place and with reps that have successfully sold Cloud in the past. Do you think that when you hire new reps to sell Renew OnDemand that they want new [indiscernible]? Are they really going to have a background in selling managed services, or does that -- can that just be sold by using sales reps? Or I guess, how are you going to steer the hiring in the future since the Renew OnDemand business is growing so much faster?

Michael A. Smerklo

Yes, the interesting part is, Michael, the one thing we found -- the consistent theme is executives and the sales team that can compromise -- or I'm sorry, develop a complex sale, sell a robust business case, and leverage all the attributes we bring to bear. And so I think our pattern -- what we found is by hiring executives, a lot of them came out of enterprise software on the Business Application side, has served us well. Executives that have grown up in the SaaS marketplace and being able to layer on top of Services has also served us well. So that's the general pattern or portfolio of skills that we'll be looking to add. I will say that, one of the areas that you'll see additional investment from us is on the Scout Analytics side. This is, as I mentioned before, is a smaller ASP product. But it's gotten to a decent size with almost no sales investment. So a handful of folks have gotten this business through a pretty healthy clip. I've been amazed at -- as I've gone out and talked to our existing customers, it's almost unbelievable how much interest there is in the ability to do, to provide comprehensive usage analytics and then provide a predictive analytic framework around that. And so you're going to see us also add enterprise-class sales folks to that part of the business, but also some telesales folks, because that is a different sale that can be done for smaller companies over the telephone. So we're going to address heavily in Scout and it will be on both the Enterprise side and more on the SMB category.

Operator

And our next question comes from Patrick Walravens from JMP Securities.

Peter Lowry - JMP Securities LLC, Research Division

It's Peter Lowry in for Pat. I guess can you talk about any indications of early traction with the Accenture relationship?

Michael A. Smerklo

Yes, what I can say is it's been surprisingly positive. It is a big organization, we've got to get off that ground. And we're looking for an opportunity to get some mutual wins under our belts. But I think the biggest part is this being around recurring revenue and having a blueprint and, especially for large organizations, the transition from a traditional business model to a new business model anchored around recurring revenue is a conversation they're having across the board. And so what we're able to bring to them is, as I said, a blueprint that says how do you bring usage data from Scout, how do you bring an enterprise application for managing recurring revenue. You have Renew OnDemand. Tie that in with some of our partnerships and layer on top our managed services. That's being robust interest from not only the traditional businesses we've been selling into, but we've been pleasantly surprised, early days, around some businesses frankly that wouldn't be necessarily in our camp, where Accenture is having strategic conversations and bringing us into. So I think 2014, it's going to bear a heck of a lot of fruit and there's a lot of energy on both sides going after that.

Peter Lowry - JMP Securities LLC, Research Division

Okay, great. And then just a follow-up. It looked like North America outperformed relative to Europe and Asia. Can you see -- talk just a bit about what you're seeing from a geographic perspective in terms of performance?

Ashley Fieglein Johnson

Yes, I think we've talked about this before, it really depends on where new ACV is landing. North America, saw more of the business this year than the other deals, but we still landed some great wins in the EMEA region. And APJ, we talked about this I think on the Q3 call, the focus of our investment in Japan and launching that center, we just hired our first rep and outside sales rep in that region. We really saw having an on-the-ground presence in Japan the key to seeing that region turn around on growth. So that's something that we look forward to 2014 and '15. We hope to see that region turn around.

Operator

[Operator Instructions] Your next question comes from Scott Berg from Capital Market.

Scott R. Berg - Northland Capital Markets, Research Division

Given the performance of the managed services business in '13, and I apologize if you already answered this, because I jumped in the call a little late. But how should we think about the growth of that business moving forward? Whether it's this year or over the next 5 years? Mike, you've talked about that being maybe a double-digit growth rate in mid-teens and is that something we can attain on the short-term, or is that something more of medium midterm goal to get back to?

Michael A. Smerklo

Well, I think where we are, Scott, is you've seen this strategic shift. It's a changing business model. It's pretty interesting, I think, when you lay out what we have revealed, as we promised, this P&L by business unit. As you see, a Managed Service business that's a good business generating a gross margin in the high 30s. I think the growth this year is going be a little bit truncated just because of the shift we put and the emphasis we put on subscription last year. And if you look at the high end of the guide, you get pretty close to double-digit growth. Our expectation is that it should be -- that's where it should be or higher. So I don't think there's anything major happening in that business where we say, "No, it's turning dramatically in a different direction." But having said that, our emphasis is going to be -- more of our emphasis in investment dollars are going to be on a business that's growing 200% and has margins that are almost double to that of the managed services. So that shift that we've been talking about and now that I have given you more details around is really where our focus is. But I don't think there's anything preventing the Managed Service business from going at those levels. It's really a matter of execution. And actually having a more -- a year of learning on our belt of unbundling, having the competitive dynamics, have that business stand on its own, if you will, last year was the first year we went through it, and I think this year we're much more prepared than we were 12 months ago, and I would say that across the board. So that's how I would vet it out. I don't want to contradict the guidance, but I think there's potential upside there. And it's not a multi-year, it's really a sales execution in 2014.

Scott R. Berg - Northland Capital Markets, Research Division

Great. And then, as you talk about the software, the product, the Renew OnDemand product, the Scout Analytics acquisition, I assume, will give you more opportunity to try to sell that product into the information services and digital media verticals. Do you have to do much to the product to pivot it for those verticals? Or are the changes going to be maybe smaller, cosmetic? Or is that something that's maybe 2 years away, given a larger investment that's required?

Michael A. Smerklo

I don't think of Renew, that it is a major investment. And I think one of the things we're seeing is if this is really -- it starts with the data layer, which is critical and then the applications on top, and then the vignettes, if you will, for the user are largely consistent. Our near-term focus -- and a reminder, we are going to continue to run Scout for the near-term future as -- largely as a standalone business with the one exception of integrating Scout and Renew. Our belief is independent of industry, that tie again between being able to hold usage data, put it into predictive analytics and have the analytics then drive a recurring revenue sale, that's the power of having Scout and Renew linked together. And I think that's going to play across any industry that's focused on recurring revenue. So to net it out, the near-term focus is really on the integration of the products. First, lightweight and then more deep over time. So that's what the focus on for the next, call it, 1 to 2 quarters.

Scott R. Berg - Northland Capital Markets, Research Division

Great. And then last question for me. Ashley, you talked about additional sales and marketing investments in '14, which I think are more than warranted given the opportunity that's there. But any comment on aggregate quotas and how they're going to be increased this year? And I assume that's a combination of just raising quotas on existing headcount and the new headcount additions. But how should we think about them -- those increasing in '14?

Ashley Fieglein Johnson

I don't think when you add a new product into the bag that necessarily you dramatically increase quotas. I think what we do, as we always do, is look at the territories and the opportunity and we make quota assessments by that. So philosophically, the way we assign quotas hasn't really changed. It's -- frankly we're just -- we're giving more tools in the reps' bags to break into these customers and get us into some new customers, that's the new market. So it's not a dramatic change in quota assignment, per se.

Operator

And we have a question from Pat Walravens from JMP.

Patrick D. Walravens - JMP Securities LLC, Research Division

And forgive me if this came up already, I joined in late. Are you going to keep a separate sales force for Scout?

Michael A. Smerklo

What we're planning to do for this year, Pat, is have a little bit of a hybrid model. So we're going to have a separate Scout-only sales team that's focused on the SMB space, as well as information services and media. Essentially, where we didn't have a named rep to an account, that'll be where the Scout focus is. We're going to put investment behind that. As I mentioned earlier in the call, both hiring more Enterprise sales professionals, but also building out some inside sales capabilities, which frankly we know real well. And then, for the rest of the existing sales team, the service our [ph] sales team, if you will, Scout will be put into their bag and so they'll have the ability to bring Scout, Renew OnDemand and the managed services and Professional Services to market.

Patrick D. Walravens - JMP Securities LLC, Research Division

Okay, great. Show us your kickoff and a little late into the year there, how did the prospects look for maintaining the reps that Boucher recruited? I know that was something to think about before. How's that looking?

Michael A. Smerklo

Yes, I think that we've seen, in terms of retention and excitement around this, I think it's probably better than we thought. You always have to be nervous around that time of year. But any turnover we've had has been about what we would've expected or average. I just, as I mentioned earlier, we just had a kickoff last week. I think there was a tremendous amount of energy. I think our teams get how leverageable Scout solution is into both our existing installed base and to new prospects, so a lot of energy around that. And I think there's also pretty much a pretty decent excitement around having, as I said earlier, more to sell and more folks to help them sell it, combined with a re-acceleration this year. And we didn't -- second half of the year wasn't as strong as we want it to be, there's no doubt about that. But we're still talking about a guidance that gets us to re-acceleration and a subscription business that's growing at 200% year-over-year. So I think when you get the team focused on that and also probably most importantly, some really excited customers that love what we do, there is a lot of energy and a lot of excitement to get going in 2014. And the year's been off to a strong start.

Operator

I'm showing no further questions at this time. I'd like to hand the conference back over for any closing remarks.

Michael A. Smerklo

Appreciate everyone's time. We recommend that -- as we mentioned, the presentation will be up on the website and we look forward to seeing you all at upcoming events. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.

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