Mattersight Corporation (NASDAQ:MATR)
Q4 2013 Earnings Conference Call
February 12, 2014 5:00 PM ET
Kelly Conway - President and CEO
Mark Iserloth - VP and CFO
Richard Dresden - EVP, Sales
George Sutton - Craig Hallum
Matthew Paul - Sidoti
Good afternoon. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattersight Q4 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].
Thank you very much and I will now like to turn the call over to Kelly Conway, President and CEO. You may begin your conference.
Thank you very much and welcome. Thank you for joining us for our Q4 2013 earnings webinar. Joining me today on the earnings webinar is Mark Iserloth, our CFO. Also with us is our newly appointed Executive Vice President of Sales, Richard Dresden.
Before we start the call, I'd have Mark read the Safe Harbor language. Mark?
Thanks Kelly. During today's call, we will be making both historical and forward-looking statements in order to help you better understand our business. These forward-looking statements include references to our plans, intentions, expectations, beliefs, strategies and objectives. Any forward-looking statements speak only as of today's date. In addition, these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied by the forward-looking statements. The risks and uncertainties associated with our business are highlighted in our filings with the SEC, including our Annual Report filed on Form 10-K for the year ended December 31, 2012; our quarterly reports on Form 10-Q, as well as our press release issued earlier today. Mattersight Corporation undertakes no obligation to publicly update or revise any forward-looking statements in this call.
Also, please be advised that this call is being recorded and is copyrighted by Mattersight Corporation. Kelly?
Thanks Mark. I'd like to start with a summary, and we are very pleased with the performance we had in Q4. We had very strong financial performance, significantly ahead of our guidance, and also our internal projections and our many metrics -- in fact, numerous metrics of revenues and gross margins and operating income, record levels for Mattersight. We are very pleased by that. We also continue to be buoyed by the strong growth and interest in our Routing Behavioral pairing application. In the fourth quarter, we also strengthened our balance sheet, as you will see.
We added Richard Dresden, who just started this week as a highly regarded sales executive, is our EVP of sales. Richard will address the call a little bit later. Obviously, we were disappointed with the outcome with GDIT. That was not the outcome that we expected, but frankly, we view that the momentum in the other parts of the business is strong, and over the next several quarters, we will go through that; and towards that end, our near term focus is on growing and converting our pilot pipeline, which increasingly is focused on routing.
Having summarized that, I want to now turn the call over to Mark, to talk about some of the metrics and highlights of Q4.
Thanks Kelly. Couple of metrics to highlight the success, we felt, we had in Q4. On a bookings metrics, we booked $2 million of incremental ACV. We had five deals north of approximately $200,000, so we had a pretty good diversity of deals, and they were skewed towards our existing clients with our existing offering. As most folks know, our Predictive Routing is mostly reflected in our pipeline and growth, as well as the pilots, and not yet in our bookings numbers. Revenues, we recognized a record $9.2 million in revenue, that's up 7% sequentially overall, and 11% sequentially in subscription. I will talk about that a little bit more in a moment.
On our P&L, we achieved a record $800,000 of positive adjusted EBITDA, and record gross margins of 75%; up 800 basis points sequentially from Q3, which is reflective of our increased efficiency and focus on both delivery and then on our routing offering.
On the balance sheet, it’s the strongest position we have had since I joined about a year and a half ago. We raised $6 million via a very well subscribed pipe. We paid up all the debt, and ended the quarter with $13.4 million in cash. In our pilots, we closed a record 25 new pilots, including a record 22 new predictive routing pilots; and our ending pilot base grew 64% sequentially, to a record of 54.
As you can see on this table on the next slide, I like the trajectory of the business from Q2 to the end of the year. In every line, revenues, subscription revenues, gross margin and on our metric for bottom line adjusted EBITDA, we showed improvement period-to-period. You can see also the delta that changed from 2013 and 2012, that although the top line didn't grow significantly because of the impact of the Q1 deal which we talked about at the time, but underneath, it was already impressive. Our gross margin went from 61% to 69%, and our adjusted EBITDA went from a loss of 7.1 to a loss of 800,000, reflective of a pretty strong cost containment effort on part of management, as well as increased efficiency in delivering.
Our bookings, again I compare -- I show the quarterly splits and then compare 2013 and 2012. I will focus primarily on the year-over-year. For incremental ACV bookings, it nearly doubled from 6.5 to 11.9, and again, that doesn't really reflect the potential of our PBR offering yet.
Our routing pilot at the end of the year, we had some trials in 2012, that was three, went up to 44 in 2013. Our total pilot base nearly tripled. Our converted pilots nearly doubled. Our ending pilots tripled, and our follow-on ACV nearly tripled; and again as you can see, in the quarterly splits, between Q2, Q3 and Q4, a nice trajectory in most of the numbers on the table.
As we introduced our book of business a couple of quarters ago, let me update you where that stands. It reflects, you see $2 million in ACV bookings, which was down from Q3, but up from last year's Q4, and then no surprise given the impact of GDIT, our book of business fell approximately $2 million from 9.3 to 7.32.
The table on the lower right, shows how that's made up, and shows the starting book of business at 9.3. Incremental ACV on a quarterly basis of $500,000 and then the deployment and consulting runoff as well as the adjustment to subscription of $825,000 and $1.6 million. Of the $1.6 million of subscription, $1.5 million of that is reflective of GDIT. The balance is some ins and outs, some seats changing with existing clients, but the vast majority is the GDIT impact. And the same thing is true for deployment and consulting runoff. Of the $825,000 there, $460,000 of that is the impacted GDIT. The remaining $360,000 is a combination of a couple of stage [ph] pilots that rolled off, as well as some short term consulting gigs that ended, and is fairly consistent with the past few quarters of delta in the deployment consulting run-off category.
We talked about the pilot follow-on ACV, which continues to be encouraging. There are two items that I will comment on, on this page. One, which is fairly obvious, and that is the growth from Q1 of this year to Q4 of this year is nearly triple where it was. So that is obviously an encouraging metric, reflective of the success of the PBR offering in the market.
The one that is not so obvious is that, we had 54 pilots underneath that. So the average ACV of that pilot is approximately $520,000. What's interesting is, that our PBR offering is actually bringing that number up. If you are thinking about the conversation we have had in the past, we thought we'd skew a bit more towards mid-market, and we are seeing that the appeal of it is pretty broadly based, so we are seeing some larger customers, and there are potential customers in there as well.
With that, let me turn over to Kelly, who's talking about the impact analysis.
Yes. So I want to give you some additional, double clip data underneath the high level of what we see in the routing. So what we see on slide 9, is the trend of our impacts analyses. We hit more impact analyses in Q2. We signed 13 in Q3 and 18 in Q4, and we are on track to beat that number, we believe in Q1. So we are seeing that number going in the right direction.
The next, really, question you get here is, what's the disposition of those impact analysis. And so, what we see is, as of year end, that the 49 that we have done, either formally or informally, we have done a number of them informally as well. And if you look at the top two pie slices, 18 clients made a decision after seeing the impact analysis. 15 of those have converted appliances. So that's the next step in our process. So we are very encouraged by that 80% conversion rate of those 18. You also see 31 are in disposition. Those need to move more quickly. We think that will be a major focus of Richard Dresden moving forward.
In general, we have gotten very positive affirmations and indications that most of these clients need to move forward. Our issue from a sales execution standpoint, is that needs to go faster.
Just kind of the net takeaway that we have in this pie chart is, was that most of the people that have decided, and 80% of the people that have decided that go ahead and put it in your technology, and that other slice is, we need to execute faster to move these pilots through our pipeline, which again, Richard will address.
And that leads to kind of the next piece of the waterfall of the pilot process, the PBR process, is how many appliances -- we have a process, so those are actual appliances that are being installed, or that are up and running. And you can see, that's up into the right as well. In Q2, we had two. In Q3 we had seven, and in Q4 we had 12, and again that number will increase again, pretty substantially in Q1.
So those are all the right trends. What I would say is, its too early for us to declare absolute victory, but we are really-really encouraged by the trends that we are seeing, putting things in the pipeline that we [indiscernible] and then the number of appliances that are getting installed. So that's a bit of a double flick on what's underneath the numbers.
We talked about the need to accelerate our sales processes and towards that end, I am very pleased to introduce Richard Dresden, and I will turn the call over to him in a second, but let me introduce Richard.
In the last half of the year, we did an extensive executive search, and we are very pleased to find Richard and have Richard join us as our new EVP of sales. A little bit about his background; he ran a financial services vertical at Savvis, which was over $300 million in annual run rate revenues. It had a team of over 50 sales professionals. At Savvis, he sold, oversaw the sales of complex solutions, including several of the largest transactions in the company's history. He also not only had a track record as a great sales manager, but before that, a very successful individual contributor.
At a personal level, Richard has the characteristics we wanted. He has got a keen intellect, he is analytical. He has got great team values, and is very-very motivated to win. In addition, as you will see -- as we will discuss his kind of excellent education a little bit. Pedigree with an undergraduate degree in economics and MBA from the University of Michigan and some additional advanced course work in engineering.
In the near term, Richard is going to be focused on continuing to build our pipeline and moving into late Q1 and Q2 to really beginning to harvest that. Honing our vertical bit of market strategy for large accounts, and really emphasizing the growth of our partner channel, as a great way to leverage our offering faster in the marketplace.
Richard, would you like to say a few words, and then of course, you're open to take any questions at the end?
Thanks a lot Kelly. Hello everyone, Richard Dresden here. I am very excited to be part of the team. I think Mattersight is a fantastic company in a growing space with a really unique value proposition. And that, combined with the management team and the market position, really attracted me to join the firm.
So in the near term, as Kelly said, primarily focused on three plays or three processes. First and foremost, closing up the funnel. We have a great funnel, mostly PBR of course, but a terrific funnel, with a lot of very positive responses from our clients and prospects; and going through that funnel with qualification, prioritization, focus and process and injecting good amount of sales discipline to convert that, is my number one focus and a [indiscernible] number one focus going forward.
Secondly, as Kelly mentioned, the finding before [ph] the market model, that will be within certain verticals, where our use case is best fit. How we can best accelerate our value proposition within certain aspects of the vertical, as well as, really igniting the channel. With the PBR solution specifically, as I was going through the recruiting process, and my channel [ph] checks, that we are very positive on how the solution will be accepted in a channel strategy, and that's a real key aspect for us to drive growth.
And thirdly, implement sales operation aspects. Just to hone our forecasting and our account planning, and really prioritize our resources and recruit a world class sales team.
With that Kelly, I turn this to [indiscernible].
Great Richard. It’s a delight that you are here. Richard has been here for three days, and we already feel the impact that he is starting to make, very-very encouraged by that.
I am now going to turn the call back over to Mark, to talk about what our key metrics are going forward, and our business outlook and guidance.
Thanks Kelly. So as we think about 2014 and how to communicate, what's going on in that business. There are a handful of things that we continue to focus on. First one, we are still -- the book of business metric is still a good indicator for us going forward. But in addition to that, it is opposed to how we thought about things in the past, rather than give quarterly guidance, we are going to focus on full year guidance.
So this year, we expect the total revenue growth, netting out GDIT from 2013, should be in the 25% to 30% range, and we expect subscription growth to be higher than that. We expect to do north of 100 pilots, which would mean we would average or improve up on what we did in Q4 for each quarter of the year, and we expect our gross margins to continue to climb to approximately 70% for the year.
The one metric that we are still looking for additional data points on, as we have talked about in the past, is the router conversion model. I think as Kelly and Richard both commented on, there is a focus on converting what we have at the lower end of the funnel into ongoing subscriptions, and those data points will start to come in Q1 and more in Q2; and I think at that point, we are going to be able to [indiscernible] this bottom number, to help folks understand our forward-looking projections, a little bit better.
So, how do we think about the full year? Pipeline, as Richard already commented on, for our current products remains solid. There is a continued very strong interest in our routing offering, and that's obviously one of the appeals that we had, before Richard had, when he kicked the tires. So we have a bit of a first things first approach, focusing on Q1 and Q2, primarily conversions and then continued pilot and follow-on ACV growth, again as Richard has commented on.
And so, for the full year, I talked about the net of GDIT revenue growth of 25% to 30% range, which would equate to low to mid-single digit growth on a GAAP basis, including the impact of GDIT in 2013, and then obviously, with the impact of the cancellation, Q1, it will be down from Q4, and then we expect it to reflect -- to look similar to how we did in 2013, where each quarter grows sequentially after that.
Operator, with that, we'd like to now open up the call for questions.
(Operator Instructions). And your first question is from the line of George Sutton with Craig Hallum. Your line is open.
George Sutton - Craig Hallum
Thank you and welcome Richard to the company. I wanted to better understand the sales headcount, as we look into 2014, and then also how you are using quotas, for both the number of pilots and conversion of pilots, to try to influence the ramp that we might see?
Yeah, we currently have about 12 quota carriers, and we are -- Richard coming on board, is finalizing the compensation plans. We are thinking about sales quotas in the range of $2 million to $2.5 million per year for sales, and that's an ACV sales quota. It's how we are thinking about that. We are -- as we look to ramp up our sales team, we are balancing the following question, and that is, how much do we invest in the large enterprise accounts, where there might be a bigger price, but slower sales cycles, versus the medium size companies, particularly with routing, candidly towards, we have seen faster sales cycles -- and as compelling results in our analysis, and faster sales cycles with the, let's say, 500-seat call centers that are doing -- telling every attention [ph].
To the extent, that we want to grab land and grow very rapidly. We are cognizant of that balance and that, while the very large banks and telcos are really interesting, they are all -- those sales cycles also are really long, even if -- you show them a good benefit.
So those are kind of some of our initial thoughts. I certainly welcome Richard to add to that, and in all fairness, he has been only here three days, I wanted to take the first crack at that.
I appreciate that, Kelly. The only thing I would add to that, would be around the large enterprise focus. Having the vertical expertise in the organization around telco, tech, financial services, will help us create the really true targeted approach within those large enterprises, to accelerate the sales cycle, versus trying to boil the enterprise ocean, which would just take too long, and consume too much resources relative to the market opportunity we have. So those master [ph] accounts are still a very big of ours, but only in a very defined manner, to make sure we don't over extend our resources, relative to all the other opportunities we have, in small and medium business, with the channel, etcetera, etcetera.
George Sutton - Craig Hallum
Mark, you mentioned, I think the number was $520,000 per average pilot, did I hear that correctly?
You did, George, and that's nothing more than looking at our ACV, our follow-on ACV at just north of $28 million divided by the 54 pilots.
George Sutton - Craig Hallum
Okay. It just sounded like a bigger number than I would have anticipated on a per pilot basis. Are you starting to see some of the larger pilots move forward, is that what we are seeing in that number?
No, actually what I think you are seeing is, the mix that the average size of the PBR pilot is a little big bigger, and we had more of those in the Q4 -- 22 out of the 25 pilots were PBRs, that pulled it up some.
George Sutton - Craig Hallum
Got you. Lastly, just curiosity from Richard's perspective, having just done due diligence calls himself, I am curious what sorts of things did you hear, that made you excited about taking on this opportunity?
That's a great question. I am very-very excited to be here and doing the due diligence. The thing that struck me the most was the, the true business impact of the routing solutions. I mean, performance management is a great baseline, and all of the IT that the company has, and being able to translate that into a business impact, revenue generation, cost saving, MPS optimization, and that's such the language, that my customers deal in, that it translates into a really good business sponsorship to getting things done, and in the sales world and the go-to-market world, having that business sponsorship and directly achieving those results in the analytic space, isn't that common, and being able to cut through that from the channel checks that I did and the [indiscernible] with some of my contacts, was very positive and was a big part, along with the management team and the IT, with me coming on board.
George Sutton - Craig Hallum
Super. Well thanks for the thoughts. Thanks guys.
And your next question is from the line of Jonathan Ho with William Blair and Company. Your line is open.
Hi. Thanks for taking the call. This is John Wideman with Jonathan, he is traveling today. I have a question for Richard's domain. Richard, your work will include not just dealing with new sales activity, but also getting things out of the pilot pipeline, correct?
Yes. In conjunction with operations. But yes, that is a big part of my job.
Okay. I am curious. The things you started talking about, seemed more internal in nature. Is it like processes and what not? Is it your belief that it's more execution and internal, or to what extent might it be external and you kind of pull your customers, convince them to convert and how much is it external and how much is it internal?
Well it's both, but when I say process, I am referring to the sales process. So that's within my domain, but it is directly related to our ability to convert in the lines of right resources, in association with the customer demand. So that voice of the customer, the voice of the sales process, through that conversion and qualification cycle, I believe, and which is why I came on board, for [indiscernible] pretty quickly, extremely important to inject into the process, to drive that conversion faster.
Okay. Thank you. Kelly, question on -- well I guess, Kelly or Richard, but sales capacity, implementation capacity, can you tell me the early question will then revert to hiring or not. I am not sure. Where do you think you stand, as far as over the next few quarters. You have the capacity sales and implementation lines, professional services and what not, to -- for the next few quarters, or do you anticipate continuing to ramp over the next few quarters. Just want to get some comments here, and where you see this going?
I will give you a qualitative answer. I know that you will have discussions with Mark about the expense model. We are maintaining a pretty tight headcount, and kind of the reasons are is, obviously, we lost a fair amount of revenue with GDIT, and we are already mindful of that, as we rebuild our revenues over the next several quarters, to manage our expenses tightly on that. So in general, we are managing headcount pretty tightly.
As it relates to the question, do we have the capacity to execute on everything that we got in front of us now? I think the answer is, it appears that that's correct. We have gotten very efficient at doing numerous parts of the pilot pipeline. The one thing I would tell you is, over the next two or three months, we are going to see a dramatic ramp of actually installing those appliances, at a level that we have never done before. So likely, we are going to run into some new, some unknown-unknowns, that we can't foresee as we sit here, as we start to put in a large number of those appliances. Both the ones that were contracted for, by the end of Q4 and frankly, we are starting to see an acceleration of those converge, I think in Q1.
So we think we have the resource. So the overall philosophy, is to manage the expenses tightly over the next few quarters, as we rebuild our revenues from the loss of GDIT. We believe we have the right resources, although people are flat out and busy, with the caveat, as we put in a bunch of these appliances, we could run into some unknown-unknowns that we may have to add some staff for.
Okay. Great. Thank you. Some help in understanding, I am not sure if I am missing something. The one chart you showed, impacting [indiscernible] outcome trends, whereas the denominator of the pie graph is at 49, it looks like its slide 6?
Yes it does.
Has the value of 49, and I see that's -- that doesn't equal the number of pilots at the end of the quarter. is that -- I thought it would be the 54, the number 54. What are --
That's a different dimension. The 49 is all of the impact analyses to-date, and 54 pilots are the ones that are active as of the end of the quarter.
Okay. So you don't necessarily -- so they are not going to equal, because you don't do an impact analysis on each one, is that it?
That's correct. Some of theme either get cancelled or converted, so that number is dynamic. But really, the two points again John, I take from that chart is, people are persuaded by the data. Particularly, you get into sales and retention. Applications, the returns are extremely compelling, and I would say, probably about 70% of the -- 70% to 80% of the service analysis we do, are compelling as well. And when we say compelling, we believe that's in an excess of a 3x return for our client, that they install our technology.
So that's number one, and we will harp [ph] by that. The second that, which is -- points out an execution challenge, is the fact that they are moving too slowly through the process of presenting them the data, and in most cases, getting their strong affirmation, and then moving them to the next step of the process, getting an appliance in. That's really Richard's job one.
So again, I take from that start, both a positive and it highlights a challenge we have in sales execution.
Got it. Okay. That makes sense. Thank you for clarifying that. Right now, I don't think I have any other questions. Thank you.
(Operator Instructions). Your next question is from the line of Matthew Paul with Sidoti. Your line is open
Matthew Paul - Sidoti
Hi guys. Good afternoon. Thanks for taking my questions. Just a couple of general questions here. Mark, I was wondering if you could hone in on the margin expansion you saw in the quarter, and your confidence to keep it above, I guess, what that 70% estimate is for the year?
Sure. In Q4, we had -- we did a little bit better on the revenue side, than I expected, and that dropped pretty much straight through gross profit and the bottom line. We got a little bit more leverage out of the teams, and things wrapped up and things -- it’s a bit of a revenue bump that laid on top of that.
Underneath that, we have done, some of the operational changes made over the course of the year, which is reflected in our expense base. Its reflected both in our cost of sales, as well as in the other lines in the income statement; and you are sort of seeing with the revenue moving up, the fact we don't have to change our expenses too much, we are getting a lot of leverage out of it. So it's again to the point where, as we have talked about in the past, trend in the $9 million, $10 million range, and start seeing a lot more drop through the income statement, all the way to the bottom.
The reason for the, I think the conservative estimate of 70% for next year is, we do expect that the impact of GDIT will bring that down a little bit, and then we should be back to continue to growing. Does that make sense?
Matthew Paul - Sidoti
Yeah. Thank you. Second question was just, in January, when you pre-announced your revenue estimated, you noted that GDIT -- payout that closed during the year, but that there were ongoing conversations. Is it safe to assume -- it sounds like its safe to assume that the deal is no longer, I guess, in discussion?
I think the best way to think about that is -- I have to be careful about what I say and respectful. There are two other parties in this conversation with GDIT and CMS. We are not -- first of all, it didn't go the way that we, or I think, candidly, perhaps GDIT thought it was going to go. So not everybody was on the same page with CMS. I think that's the first point. When everyone will get realigned, is really hard to anticipate. We are not putting any of those revenues back into our plan for this year, and looking to replace them rapidly with routing revenues, and revenues from large accounts like United Healthcare and others, in which we see great expansion opportunities.
Matthew Paul - Sidoti
Understood. Thanks for taking my questions guys.
There are no further questions at this time. I will turn the call back over to our presenters.
Great. Well I thank you for everyone's interest and participation. Again to summarize, we are really pleased with what we got done, in the latter part of last year, and in particular, in Q4. There is, from our perspective, very strong demand for behavioral routing. We are glad that we were able to strengthen our balance sheet and our management teams, as you have had a chance to meet Richard Dresden. Again, those are all really positives, and it's unfortunate that we had the outcome we did with GDIT. We are very focused on growing through that as quickly as we can over the next few quarters. And again, thank you for your support, anticipation, we look forward to talk to you soon. Bye-bye.
Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.
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