inContact's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: inContact, Inc. (SAAS)

inContact, Inc. (NASDAQ:SAAS)

Q4 2013 Results Earnings Conference Call

February 13, 2014, 04:30 PM ET

Executives

Gregory Ayers - Executive Vice President and Chief Financial Officer

Paul Jarman - Chief Executive Officer

Analysts

Mark Murphy - Piper Jaffray & Co.

Jeffrey Van Rhee - Craig-Hallum Capital Group

Brian Schwartz - Oppenheimer & Co.

Michael Latimore - Northland Capital Markets

Mark W. Schappel - The Benchmark Company

Operator

Good day, everyone and welcome to the today's program. At this time all lines are in a listen-only mode. However later in the program you will have the opportunity to register to ask a question. Today's conference may be recorded. And now it is my pleasure to turn the call over to Greg Ayers. Please go ahead, sir.

Gregory Ayers

Thank you and good afternoon. This is Greg Ayers, CFO of inContact. Welcome to our fourth quarter and 2013 year-end conference call.

I will begin the call with some prepared remarks and I will then turn the call over to CEO, Paul Jarman to review our fourth quarter and full year 2013 results and provide an update on important Q4 company developments. Finally I will provide additional detail on our financial results for the quarter and for the year before opening it up for Q&A.

For access to our news release and other information about inContact please visit our website at www.incontact.com. The purpose of today's call is to provide you with information regarding our fourth quarter 2013 results.

Some of our discussion and responses to your questions may contain forward-looking statements which are subject to risk, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions provided to be incorrect actual company results could differ materially from these forward-looking statements. These risks, uncertainties and assumptions as well as other information on potential risk factors that could affect our financial results are included in our filings with the SEC, including our most recent report on Form 10-Q, particularly under the heading risk factors.

During the call we may offer incremental metrics to provide additional insight into our business or quarterly results. Please be advised this detail may be one time and may or may not be provided in the future. And now, I will turn the call over to Paul Jarman.

Paul Jarman

Thanks Greg. I am pleased to announced the conclusion of a break-out year for inContact as we continued to solidify our leadership position in this rapidly growing cloud contact center market. For Q4 and for all of 2013 we reached new record benchmarks across our business including sales pipeline, bookings, implementations and revenue. inContact is leading the market with cloud contact center industry's highest cloud software revenue.

In Q4 we achieved record bookings which represents 40% year-over-year growth in estimated contract value. We closed 85 contracts including 61 new logo customers and 24 expansion deals. For the full year 2013 total contracts came to 296 with 211 new customers and 85 expansions. In 2013 software revenue grew 26% year-over-year, combined software and software-related network connectivity revenues grew 25%.

The combined revenue of software and software-related network connectivity is important because offering integrated network connectivity with the software is a big competitive advantage, something only we provide. Second the connectivity gives us additional revenue per customer and additional stickiness and lastly those revenues come in with good net margin.

The total software and software related network connectivity revenues came in at $32.4 million for Q4 and a record $118 million for the full year 2013. In addition, adjusted EBITDA for the quarter was $1.3 million. For the year 2013, adjusted EBITDA was $7.3 million.

In 2013 there were four drivers of significant transformation across our business that enabled us to achieve these outstanding results. The first driver is increasing cloud adoption in key verticals where we had a strong and growing presence. The second driver is enterprises moving to the cloud and our ability to win and retain these larger customers.

The third is our aggressive innovation cadence, increasing our competitive edge and differentiation. And the fourth is our strong ability to execute in sales, marketing and distribution channels. The first driver of inContact growth comes from our successes in several major verticals, including government, healthcare, financial services and travel and hospitality. In Q4, we announced a new deal with one of the top five most popular states in that country. That major State agency is moving from an aging premise solution to the cloud in order to unify operations across three locations with over 300 agents

inContact is a great fit for government because we can help agencies streamline operations, adjust to seasonal demand and reduce cost with the cloud model and we are a proven, secure cloud provider.

In 2013, inContact added 27 government agencies at the state and local levels. All of these agencies are seeking to improve citizen services and are tracking customer satisfaction goals just as actively as their counterparts in the business world. The great news about vertical is that these companies talk to each other and this will further accelerate our momentum in those industries.

The second growth driver for inContact is our increasing appeal to large enterprise organizations. Of the peer cloud providers we have the most enterprise implementations in the cloud and the largest number of cloud agencies. We are pleased to have 36 total Fortune 500 customers now on our roster. this is up 50% from just two years ago.

One of our top achievements in 2013 is winning and deploying our largest enterprise deal ever in the cloud. For the full year we added eight new accounts that will yield over $500,000 of annual software revenue once they are fully deployed on our system. In response to growing demand we have optimized our implementation process and scaled our capacity to turnout new customers on the inContact platform. We grew turnouts by 40% year-over-year and even faster in Q4.

I am happy to report that all five of the large customers won in Q2 and Q3 are now deployed and are already driving revenue in the first quarter of 2014. Our proven implementation methodology sets us apart. We are ready to scale and turnout even more business in the cloud.

Innovation is the third growth driver for inContact and 2013 was a landmark year for new product introductions that set us apart from both cloud and premise competitors. inContact delivered at least two major releases every year, unlike most premise software vendor who lock customers into an 18 months cycle of waiting for new features.

Some competitors are starting to offer first generation cloud products or entering the market with a patch work of cloud acquisitions. But to be clear about this landscape inContact is the only provider that has a purpose built 100% multi-tenant cloud solution that has been tuned and improved every year since 2003. Even among cloud competitors inContact has an aggressive cadence of innovation which we plan to continue with significant cloud upgrades to our customers at least every six months.

In the first quarter of 2013 inContact introduced the Cloud Universal Queue to answer the complex challenge of managing multiple channels in the contact center. Adding additional service channels beyond voice such as email, chat, mobile and social is a huge driver for cloud adoption. In fact in an annual Benchmark survey the EMG Consulting reported that a majority of organizations are planning to add one or two channels to their service organization during the next 18 months and if they are going to add a channel it is likely in the 80% range that they will plan to use cloud-based technology. The majority of our new customers have cited this multichannel support as a key requirement for selecting inContact.

In 2013 we made a strategic decision to intensify our focus and offering in our Workforce Optimization Portfolio, WFO which includes the full set of tools to understand and improve performance in the contact center. In the fourth quarter we added award winning speech analytics and an operations performance dashboard to the suite. The combination of cloud contacts and our infrastructure and workforce optimization is a major advantage for us. No other peer cloud provider is offering both the level of functionality and the integration between the core software and the WFO.

In the fourth quarter we closed two major deals because of that full solution. One example is a leading entertainment company. The customer will be getting a full multi-channel contact system to support over 250 agents. Plus they will have sophisticated WFO tools to capture performance and customer experience data.

In the Fall release we announced a game changing new offering that will completely displace all dialer software being sold by other cloud and premise competitors. The new Personal Connection outbound solution is a major leap forward in dialing software, backed by [inaudible] Personal Connection totally eliminates the initial pause that is caused by traditional predictive dialers. This is breakthrough news because it transforms the way companies can engage their customers.

Because of this Personal Connection has been recognized with Product of the Year award in 2014 from Customer Magazine. We've heard excellent feedback from our customers who are already using the product and are getting dramatic results. And we are already winning deals against entrenched outbound competitors. Innovation was a big story in 2013 as we leap-frogged both premise and cloud competitors. We plan to stretch that leap even further in 2014.

The fourth major factor in our success is our increasing ability to execute our go-to-market strategy across marketing, sales and channels. Our demand generation efforts are running at full speed bringing in a significant number of leads every quarter. Our customers are a big part of our marketing programs. In 2014 we had 70 customers speaking on our behalf at events, both live and virtual and in video on our website as-well-as in the media. This year has been a record setting and rewarding for our sales teams.

We know have 43 quota carrying sales people as-well-as an additional 15 representatives who are actively supporting sales through our channel partners. We've been hiring more experienced enterprise class associates in the field. Our team is tuned up, trained and exceeding their targets quarter-after-quarter. I am pleased with our progress expanding and diversifying our distribution channel which is helping us grow market share. inContact has the broadest distribution channel of any other peer contact center competitor.

We now have over 45 active partners including both reseller and referral partners. We have a strong fourth quarter with Verizon and with Unify we had our best quarter-to-date in our partnerships. In Q4, 53% of bookings came through all of our partners. We will continue to expand our channel with both new resellers and implementation partners. We have started to certify selective third parties to deploy the inContact platform by adding channel capacity, both to resell and to implement our cloud contact center software. We are well positioned to grow. This ability to expand our distribution channel sets us ahead of the competition. We will diversify and leverage all of our sales channels to their fullest advantage in 2014 and beyond.

Across the board 2013 was a transformational year for inContact because of our execution and revenue growth. We are leading in the market because we have 10 years of experience and we are focused 100% in the cloud. We have a mature service model with proven implementation and high touch after care services. Among peer cloud competitors we have a unique business model and the most complete solution that includes carrier-grade connectivity, cloud infrastructure plus workforce optimization software. No other provider matches our aggressive pace of innovation.

Going into the New Year we have a strong engine with high performing sales teams and a rapidly expanding distribution channel. In 2014 we believe there is a combination of forces driving the market upwards. Number one, customer experience is now a strategic priority and number two companies are increasingly moving to the cloud for customer service.

The first market trigger has been predicted by Gartner who said that in 2014 customer service is re-emerging as the core business strategy to create a winning customer experience. Because of this the customer experience is now a top priority for executives.

The second market trigger driving growth for inContact is the increasing adoption of cloud by a majority of companies across all verticals. 90% of the contact center seats in the U.S. are still operating on legacy premise software, old expensive rigid systems that can't keep up with the demands of today's customers. The majority of the contact center market opportunity is ahead of us and we are stepping up to capture it.

I would like to now turn to our 2014 plans. We intent to take full advantage of this multi-billion dollar multi-year growth opportunity by continuing to innovate and invest in the following ways; to increase the breadth and diversity of our distribution channel; to add quota bearing sales associates and to expand R&D into multi-channel offering and in outbound technologies.

Looking forward to strong momentum in the cloud contact center industry in 2014, we anticipate our software revenue to grow to between $85 million and $87 million for the full year. That represent 23% to 26% growth. This also represent at least a 30% growth rate when you exclude the unified minimum purchase commitment revenue. Software and software related network connectivity revenue will increase to between $143 million and $146 million for 2014. We also expect consolidated revenue to come in between $154 million and $157 million for the year.

Gross margins will be somewhat impacted in 2014 as a result of certain investments in professional and customer service and the step down in unified minimum purchase commitment revenue. We have begun to invest aggressively in 2014 to set us up for competitive advantage and sustainable growth over the next three years. As such, we expect to increase our investment in R&D to 13% and maintain our investment in sales and marketing at 29%.

inContact has generated positive EBITDA four out of the five past years. We expect to continue that trend in 2014. But given the investment strategy detailed above we will be positive but more closer to breakeven. Given the market opportunity and the valuations in the sector, we believe this is the prudent way to enhance shareholders value.

Now more than ever companies are focusing on customer experience and the cloud offers the scalable, flexible and affordable technology to companies who are ready to upgrade their outdated systems. With those two facts 2014 should be the best year yet in the cloud contact center industry. We plan to continue our leadership and strong execution in another exciting year for inContact stakeholders and shareholders.

Now I'd like to turn the call over to Greg to provide additional details on our Q4 and full year financial results.

Gregory Ayers

Thank you, Paul. First I want to recapitalization the definitions of two operating segments software and network connectivity, formerly telecom. I will then cover our Q4 and full year operating segment and consolidated results as well as other financial highlights.

Our first segment is the software segment which includes all monthly recurring revenue related to our delivery of software applications associated certain professional services and set-up fees as well as minimum purchase commitment revenue.

For Q4, 2013 I am pleased to report that our software segment revenue increased to $19.4 million which represents a 24% increase over the $15.6 million recorded in Q4, 2012. This increase was the result of the following three key drivers of our software revenue, customer retention, utilization rates and new accounts.

The first driver of quarterly software revenue growth is existing customer retention. Our software revenue retention for the quarter remained very strong and was consistent with previous quarters at a rate above 92%.

The second driver of quarterly software revenue growth is the variable utilization of software services by existing customers. This metric fluctuated due to the seasonality, customer service activities and macroeconomic conditions as well as the revenue generated from the sale of additional services to existing customers. The measurement of this revenue growth is similar in concept to the retail industry’s use of the same-store sales metric. In other words it excludes attrition and new customer revenues.

With these existing customers we experienced 6.4% sequential increase during the quarter. This measure was in-line with the historical uptick for the December quarter.

The third and final driver of our Q4 software revenue growth is revenue from new contracts that are not yet included in the same-store sales metric. We closed 85 new contracts in the fourth quarter, 61 new customers and 24 up-sells to existing accounts where we expanded our footprint in agency, new locations or additional software application offerings. We estimate the expected future value of these contracts will be approximately 40% higher than the total estimated annual contract value of our Q4, 2012 bookings. Q4 represents the largest bookings quarter in the company’s history.

I would like to take a moment to remind you how inContact calculates bookings. Bookings are an estimate of the annual contract value of new software sales. It does not reflect the full value of a multi-year contract nor does it include estimated network connectivity revenue. We believe that this conservative approach to the bookings calculation is an accurate reflection of the true software revenue run rate that will be added to the business.

For the full year 2013 our software segment revenues increased 26% to a total of $68.9 million, our full year CAGR for software revenues stands at 26%, a strong showing within the SaaS sector.

In Q4, 2013, software segment gross margin was 58% on a GAAP basis and 71% with non-cash charges added back, compared to Q4 2012’s 60.5% and 72%, respectively. This slight decrease in GAAP gross margin is principally attributable to an increase in the percentage of professional services revenue and cost of professional services as well as an increase in royalty bearing software services revenue. Q4's $11.3 million of software segment gross profit represents a new company record.

Our second segment is the network connectivity segment, which includes all connectivity services, provided to both our legacy customers, as well as to our software segment customers. Network connectivity segment revenue for Q4 2013 was $15.7 million, a 4% increase over the $15.1 million in Q4, 2012. Approximately 83% of the network connectivity segment revenue is now generated by our software segment customers. With the exception of accounts sold by network connectivity based partners such as Verizon we typically provide such network connectivity services to customers using our software.

For the full year 2013 network connectivity revenues grew 10% to a total of $61 million. The Q4 network connectivity segment gross margin increased to a record 36%, up from 33.4% in Q4 2012. This increase in gross margin is principally attributable to continued leverage from our network connectivity equipment investments. Q4's 24.4% network connectivity segment operating margin is 180 basis points higher than Q4, 2012.

Our consolidated results for Q4 are as follows: Consolidated revenue increased to $35 million, a $4.4 million increase or 14.4% from Q4, 2012's $30.7 million. This revenue increase was driven by the growth in our software segment and software-related network connectivity. Including the software and software-related network connectivity business over 92% of our consolidated revenue is derived from SaaS contract billings and for Q4, totaled $32.4 million. For all of 2013 consolidated revenue totaled a $130 million, an 18% increase over 2012’s $110 million.

Consolidated gross margin was 48% in the fourth quarter, compared to 47.2% for the same period in 2012. This increase in gross margin is attributable to improvement in the network connectivity segment through leveraging fixed cost and an increase in the level of minimum purchase commitment revenue.

Adding back non-cash charges consolidated gross margin percentage on a non-GAAP basis was 56% for the fourth quarter compared to 54% for the same period in 2012. Operating expenses were $20.2 million, up $5 million for Q4 2012's $15.2 million. Approximately 50% of increase came from higher levels of investment in software segment sales and marketing.

As Paul mentioned previously the investment in sales and marketing has paid-off over the past 14 quarters as we continue to achieve year-over-year strong bookings. GAAP net loss for the quarter was $3.6 million or $0.06 per share, as compared to a net loss of $874,000 or $0.02 per share for Q4, 2012. The increase in the net loss is primarily attributable to the increase investments in sales and marketing and research and development.

Adjusted EBITDA, which is a non-GAAP measure is an important metric of our operating results due to the significant amount of depreciation and amortization resulting primarily from previous acquisitions of software products, customer base fees and network technology as well as the amortization of capitalized software development cost and stock-based comp.

Q4, 2013 adjusted EBITDA was $1.3 million versus $2.3 million during the same period in 2012. Adjusted EBITDA for the full year was $7.3 million almost double the $4 million level which we had estimated at the beginning of the year. This past quarter marks the eight sequential quarter that we generated positive adjusted EBITDA. As of year-end we had $49.1 million in cash and had access to an additional $16 million under our line of credit and term note facility.

In summary we are pleased with the company's continued successful and look forward to continuing our strong momentum through 2014. Paul and I will now turn the call over to the operator for Q&A.

Question-And-Answer Session

Operator

(Operator Instructions). And we will go first to Mark Murphy with Piper Jaffray. Your line is open. Please go ahead.

Mark Murphy - Piper Jaffray & Co.

Yes. Thank you. Congratulations on a very strong finish to the year. Paul, I wanted to clarify a comment that you made. I know you said that many of the large deals from last year are live now and generating revenue. Did you mean to say that they are completely live, in other words that all of the pieces have been deployed or is it each of them has at least begun getting the pieces deployed?

Paul Jarman

So basically where we are at Mark is, we have turned up each of the five companies. There are some divisions and sections that are still being turned up but each five of them the initial implementation is done and we are through additional products or division to some of those still in the process.

Mark Murphy - Piper Jaffray & Co.

If you have to guess then if you took all the seats scenario given -- I remember you are referring to a 5,000 CTO and I know there were many others that were multiple hundreds of seats and may be others around a thousand. What percentage of this do you think are turned up and generating revenue at this point, just on the larger deals?

Paul Jarman

Yes from the five that we're referencing, one or two are completely done and the other three are probably about half way done.

Mark Murphy - Piper Jaffray & Co.

Okay. Good. And then Paul, could you provide some more color on what you built for Salesforce.com and the Force.com platform, what exactly is that technology and how are you partnering with Salesforce?

Paul Jarman

You bet. So, what we have done is we announced last quarter an integration through Force.com with Salesforce where we have embedded our user interface that a customer service rep would normally see from us inside of Salesforce's interface itself, we use their latest APIs, we are very innovative within the UI-UX of the solution and we did at Trueforce.com which meant that there was a rev share opportunity between us and Salesforce.

So it was meaningful for a couple of reasons. Number one is the functionality through the new APIs is significant. Two is that it gave us an opportunity have a tighter relationship with them through the Force.com platform. And three is it allows their sales people to get some quota credit as it's sold.

Mark Murphy - Piper Jaffray & Co.

Okay. Got it. Thank you for sharing the details. My next question is we had the rumblings that you said you are beginning to farm out more of that implementation work to the third parties. And probably you are doing it so you can focus resources more optimally. My assumption is maybe that would allow you to prioritize some of the bigger rollouts with your in-house implementation teams. Is that an accurate way to think about this and in addition if that's correct how beneficial could this to be to your go-live timeliness this year.

Paul Jarman

So first of all last year we taught the different resellers that we have how to implement our solution and really last year and little bit of a year before. And so they have been implementing their own – as you mentioned what we've also done now is we have some additional implementation partners that are implementing the deals for us that did not sell the deal. And that does give us bandwidth and speed.

In some of the larger deals it doesn't necessarily significantly impact the speed of the implementation because it's often the timeframe of the customer that is the longest pole in the tent but it does give us more speed in the mid-market and kind of upper mid-market as those deals come through that we have a wider set of people who can immediately take those.

Mark Murphy - Piper Jaffray & Co.

In those detail what are you referring to when you said mid-market or upper mid-market deal?

Paul Jarman

I usually refer to that as under 100 seats.

Mark Murphy - Piper Jaffray & Co.

Okay.

Paul Jarman

It would be more mid-market deal.

Mark Murphy - Piper Jaffray & Co.

I am sorry I missed the last comment.

Paul Jarman

Yeah. So mid-market would be pretty much 100 seats or under. Upper mid-market probably more like 1 to 300.

Mark Murphy - Piper Jaffray & Co.

All right. Got it. Okay. And then also I think you gave us the number of – reps I think it was pretty consistent with where you ended Q3. Is there any way you can help us with maybe where you want to get that number by mid-year or by the end of this year.

Paul Jarman

Yeah. So what I mentioned was 43 on the quota side and 15 that are working with the channel. And in general for the year we are looking to expand that by about 25%. And so and we will try to put as many of those as we can earlier in the year than later.

Mark Murphy - Piper Jaffray & Co.

Okay. And then the last question, Greg I wanted to try to ask you. In general how to model of the telecom revenue going forward. Because it appears that on the one hand it is attaching to your direct software bookings and you are starting to catch up on some of the deployments so that would sound pretty beneficial. And then on the other hand you are doing the kind of a shocking amount of channel business. And I think in a lot of cases there is no attached telecom revenue for that piece of it. How exactly -- how should we think about modeling that going forward or how do you think that would balance out?

Gregory Ayers

Yeah, Mark I guess the easiest way to answer that question is the guidance that Paul provided in that our software and software-related will grow between 21% and 23.5%. We've already taken into account that there is a small percentage of the portfolio which continues to trip, there is an expanding adoption of channel partner and different routes to market. But even taking into those two factors we are still looking for the software-related network connectivity and software to grow again between 21% and 23.5%.

Mark Murphy - Piper Jaffray & Co.

Okay. Got it. And thank you very much.

Paul Jarman

Remember Mark just one thing is that not all of our channel partners require the connectivity revenue to be there as we do provide that for a lot of the channel partners.

Mark Murphy - Piper Jaffray & Co.

Yeah. Understood. Okay. Thank you very much. Congrats again.

Paul Jarman

Thanks.

Operator

And we’ll go next to Jeffrey Van Rhee with Craig-Hallum. Your line is open.

Jeffrey Van Rhee - Craig-Hallum Capital Group

Great, thank you. Very nice quarter guys. Few questions from me. First, Paul could you just expand on the channel side? That’s a really big number as a percent of the bookings. And maybe just expand on what changed there both in this quarter and also in terms of any new relationships and the pipeline for new relationships maybe if you could just start there for me.

Paul Jarman

You bet. So one thing to know Jeff as if you look at our channel about 40% of our channel bookings they are coming from what I call a reseller and about 60% are coming from what I call a referral partner, someone who refers the business and we put it on our paper. And so through the year we have been adding additional referral partners and we have been adding additional resellers and obviously we don't announce every one of those as they come but we have been gaining momentum both in the number of partners and the amount of revenues that’s coming from existing partners.

Jeffrey Van Rhee - Craig-Hallum Capital Group

So as you think forward to the year give us a sense of what you think mix wise in terms of the bookings they are going to come from channel versus say the trio of direct sales.

Paul Jarman

So I think that 53% is probably pretty accurate. Remember that a portion of that is referral partners where our direct sales team is still involved because it’s not our paper but I think in aggregate it’s about 50-50 and then also the other comparison that I gave is probably pretty true as well which is about 40% reseller and about 60% referral.

Jeffrey Van Rhee - Craig-Hallum Capital Group

Okay, all right. And touch on the outbound for me. Obviously you guys did pretty differentiated technology you talked about with significant potential ARPU uplift as that gets adopted, what uptake have seen, what kind of impact has it had and do you expect it to have?

Paul Jarman

First of all from our customers that have used it now and new companies that are using it now we had a favorable response as to that we have eliminated the pause and we have really changed how look at communication to the customer because about 49% of people that receive that call hang it up when they hear the pause. So the algorithms in the pads that we have are working.

The second thing we have seen Jeff is that some of the other cloud competitors have done well in cloud dialing and so we think we can make an impact in that market and it’s $400 million-$500 million market itself. And then thirdly is as we can create additional revenue on top of the resale and in some cases where in the past we did not win an ACD sale because they needed both dialing and ACD, we can now provide both.

So we view it as a key addition to what we are doing in that we didn't just come out with a me-to product but created a lot of innovation there and protected it with patents.

Jeffrey Van Rhee - Craig-Hallum Capital Group

Got it. And last one maybe Greg just back to the software gross margin can you just give us just in terms of this quarter maybe go a little deeper just to understand the puts and takes in terms of the drivers that are moving around right now?

Gregory Ayers

Sure, Jeff. So as a percentage of total software segment revenue we saw an increase in services revenue and professional service fees. Obviously those line items or that business comes at a lower gross margin than you would obviously see on the product. We also saw an increase in the percentage of products that we provide to our customers that have a royalty associated with them. So there was a shift mix with regard to the revenue and then in addition to that we saw a bit of an uptick with regard to the percentage of cost to provide those professional services. As we move into these larger accounts they require workforce with a higher level of skill therefore a higher level cost.

Jeffrey Van Rhee - Craig-Hallum Capital Group

Got it. Okay then last one from me. You sort of put out there over time this 30 to 50 range on the bookings front. Just your thoughts on that range going into the forward year and also any incremental color about the depth and make-up of the pipeline going into the year would be helpful.

Paul Jarman

Yes, so Jeff first all we are excited about the pipeline. We feel we have got good pipeline in our direct teams and our referral partners and in our resell partners, number one. Number two is, I am not going to give any precise bookings guidance for the year. What we do see though is that, as I mentioned, we believe that we can grow the software 30% or faster when you don't consider the Siemens guarantees and obviously we would need bookings to be able to support that kind of growth rate.

Jeffrey Van Rhee - Craig-Hallum Capital Group

Got it. Thank you.

Operator

And we will go next to Brian Schwartz with Oppenheimer. Your line is open.

Brian Schwartz - Oppenheimer & Co.

Hi. I too want to add my congratulations on strong bookings and new deals this quarter.

Paul Jarman

Thank you.

Brian Schwartz - Oppenheimer & Co.

A few questions here for you guys. Maybe following up on the last quarter may be kind of looking out in terms of growth rate. For Paul and may be this is for Greg, so the ACV booking front, they look great it certainly was a big step up this year in growth. For 2014, the software guidance is assuming that the overall rate it's going to impacted by the Siemens comparison. So it's not really truly reflecting the strong ACV growth rate. So what I wanted to ask you guys is how you are thinking about the intermediate growth rate for the software business?

Does it get back above the 30% like it did before and what type of scenarios would have to happen for that to occur and I don't want you guys to get too far ahead of yourself, but just kind of interested in how you are thinking about the process when you look at the intermediate planning for the software business?

Paul Jarman

And Brian when you used the word intermediate, you mean multi-year or you need multi-quarter?

Brian Schwartz - Oppenheimer & Co.

No, I am looking multi-year. I am looking beyond -- we have a tough comparison here in 2014 because of the Siemens. So I am looking more multi-year, looking '15, '16 and beyond.

Paul Jarman

Yes. So first of all Brian, we think the market is going to grow at a pace that we could have organic or I will use non-Siemens guaranteed growth in the 30s. And so that shift this year pushes it down a little bit as you see the Siemens guarantees go away. It's still would be lower a little bit in first and second quarters of '15 as they compare year-over-year to the guarantees and then by third quarter of 2015 you have no more compares in there. So, we want to keep moving the company at that 30 plus range and just work through those compares as we go.

Brian Schwartz - Oppenheimer & Co.

Thanks Paul. That's a great target to draw out there. A couple of question on the landscape out there. First on the win rates in the quarter, I wondering if they picked up here with the strong deal metric and the bookings that you are reporting and if there any changes out there in who you are beating more frequently in the market?

Paul Jarman

First of all, one thing that was very good for fourth quarter we were excited about our win rate percentage against the primary competitors. And number two is, traditionally we're usually out there taking business from legacy premise competitors. Those people would be the Avaya, Genesis, the Cisco and those are where most of the premise revenue sits today. And then on occasion we will be fighting against some cloud competitor or hybrid competitor to take that away from the premise companies.

Brian Schwartz - Oppenheimer & Co.

Great. And then last question just kind of on the pipeline. I appreciate all the real good commentary we have done so far. Just kind of wondering about those big out elephants in your pipeline, the new Fortune 500 opportunities. If I look at the new ads that you added, the Fortune 500 customers, it's certainly in the ballpark here in 2013 with the previous couple of years. I'm wondering if you could comment how your pipeline looks. I know in this fiscal year for those very big deals compared to entering prior years?

Paul Jarman

So Brian, I would just say that, well I take two things. First of all we have some nice opportunities that's out there in the pipeline for just some significant deals and I'd also say that we love that kind of 100 to 500 seat range because they are quicker to close, they are quicker to turn up and get to revenue. And so though we have some nice opportunities in the systems for bigger wins we are going to keep our sales team also working really hard to hit that sweet spot.

Brian Schwartz - Oppenheimer & Co.

Thank you Paul and then last on from me. On the competitive landscape there’s certainly been some noise here with one of the cloud competitors out there, they did a recent IPO, another one is talking about raising money this year. So I am wondering in terms of the replacement opportunity and the replacement cycle Paul if you think that anything is starting to change, maybe picking up the pace of the replacement cycle as we potentially get more market awareness of contact-as-a-service solutions in the market. Thanks.

Paul Jarman

Yeah so I think in general you know this market is going to move from more of an adoption model to more of a competition model, and then at some point it will move into who are the winners. We’re still just exiting in my mind the adoption model because you only have literally 10% cloud adoption in the contact center market. So I think certainly as in most markets you are going to see two or three different players start to gain the traction versus others as we have already seen. And I think what’s interesting today though in our market is the larger premise players have not seem to be those that have responded quickly to the opportunity. It’s been more of the pure play or smaller players that are really gaining the momentum right now.

Brian Schwartz - Oppenheimer & Co.

Thank you. If I can just squeeze one in for Greg here, just wanted to ask where the business is today on the productivity curve with the sales force expansion on the direct side? If I look at the metrics here it looks like the sales force has grown almost 35% over the last two years so I am wondering where we are in terms of the productivity curve for those new sales hires that we can look for productivity gain as a potential growth catalyst for the business here in ’14. Thanks.

Gregory Ayers

Sure, so with the 43 quota carrying headcount that we ended Q4 ’13 that was actually up 59% from the prior year. And we have seen folks come on board and do very well their first quarter, their second quarter. So I think we have already experienced an uptick in the productivity with regard to the quality of new sales reps that Bill has been able to pull together in the company.

For financial modeling standpoint we factor in about a six month lag but I think that’s relatively conservative. So I think we’re seeing a positive trend line with regard to earlier productivity from the new hires.

Brian Schwartz - Oppenheimer & Co.

Thanks again for taking my questions today and congrats again on a good quarter.

Paul Jarman

Thank you.

Operator

And we’ll go next to Michael Latimore with Northland Capital. Your line is open.

Michael Latimore - Northland Capital Markets

Hey guys. Can you give what the average selling price change was either sequentially or year-over-year?

Gregory Ayers

Sure. So year-over-year was up 11% in average deal size.

Michael Latimore - Northland Capital Markets

Thanks. Then what do you think in terms of CapEx for this year?

Gregory Ayers

So we would probably be looking to spend approximately $4 million to $5 million with regard to replacement of network infrastructure and expansion.

Michael Latimore - Northland Capital Markets

Then how about software CapEx?

Gregory Ayers

So software CapEx is probably going to be around $10 million.

Michael Latimore - Northland Capital Markets

Okay, and then I know you had landed a larger, I think it was wire distributor. I guess any bookings from that and how are your recruitment to wire distributor going?

Paul Jarman

So Mike we got a group of people or a team that’s in that area. First of all we've seen nice traction with the first one and second of all we have a team that’s working with large firm, more than just Avaya but we are seeing that in general they are interested in how do I get into the cloud market. So I don't want to say more than that and it’s an area of opportunity for us this year.

Michael Latimore - Northland Capital Markets

Got it guys. And then how about just back on the deployment timelines? Do you have some sort of average deployment timeframe for deployments to occur and has that changed much over the last year or so?

Paul Jarman

You know I think that if you look at that kind of mid-market or upper mid-market I referred to before that’s kind of two to four months range and a little bit based on connectivity, company speed and then you have some outliers who are bigger companies that could be because of their processes or multi software pieces coming in together. So in general it’s going to flow through from two to four and then you are going to have couple outliers in the bigger deals.

Michael Latimore - Northland Capital Markets

And just last what was the professional services revenue in the quarter?

Gregory Ayers

So PS was $1.8 million.

Michael Latimore - Northland Capital Markets

Great, thanks a lot. Have a great year.

Gregory Ayers

Thanks.

Paul Jarman

Thanks Mike.

Operator

And we’ll go next to Mark Schappel with Benchmark. Your line is open.

Mark W. Schappel - The Benchmark Company

Hi, good evening. Thanks for taking my question here. Greg what was the percentage of software revenue from ACD sales this quarter?

Gregory Ayers

That was 78%.

Mark W. Schappel - The Benchmark Company

78, okay. And then Greg could you just remind us what the quarterly unified take-or pay arrangements are for the rest of the year?

Gregory Ayers

So it’s 1.75 million in Q1 and Q2 of ’14 and a net 500,000 in Q3.

Mark W. Schappel - The Benchmark Company

What was Q2 again?

Gregory Ayers

Q2 was 1.75.

Mark W. Schappel - The Benchmark Company

1.75, thanks. And I believe there were 8 customers this year that you added that are paying about 500,000 per year. What’s the total number Greg?

Gregory Ayers

So Mark just clarifying that so the eight that we signed we anticipate them to generate $500,000 in annual revenue. They are not producing that yet but of those that are we still have 13 customers that are 500,000 or more on an annual basis software only.

Mark W. Schappel - The Benchmark Company

Great, thank you. That’s all from me.

Operator

Thank you. And that is all the time we have for questions today. I would like to turn the conference back over to Mr. Jarman.

Paul Jarman

Well thank you for your time and your support and we look forward to an exciting and great 2014. And again thanks for your time.

Operator

And this does conclude today’s program. We appreciate everyone’s participation. You may disconnect at any time.

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