Intralinks' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.25.14 | About: IntraLinks Holdings, (IL)

Intralinks Holdings, Inc. (NYSE:IL)

Q4 2013 Earnings Conference Call

February 25, 2014 05:00 pm ET


Ron Hovsepian – President & Chief Executive Officer

Derek Irwin – Chief Financial Officer

David Roy – Head of Investor Relations


Jennifer Lowe – Morgan Stanley

Analyst – Stifel Nicolaus

Jeff Van Rhee – Craig Hallum Capital Group

Ross MacMillian – Jefferies & Co.


Good day and welcome to the Intralinks’ Q4 2013 Earnings Conference Call. (Operator instructions.) Please note this event is being recorded. I would now like to turn the conference over to Mr. David Roy, Head of Investor Relations for Intralinks. Mr. Roy, the floor is yours, sir.

David Roy

Thank you, Operator, and good afternoon. Welcome to Intralinks Holdings Quarterly Financial Results Conference Call for the Company’s Q4 ended December 31, 2013. With me today are Ron Hovsepian, Intralinks’ President and Chief Executive Officer; and Derek Irwin, our Chief Financial Officer.

Some of our discussion today will contain forward-looking statements which may include projected financial results including projected future backlog growth, direction, or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities, or other forward-looking topics. These statements are neither promises nor guarantees and are subject to a variety of risks and uncertainties, many of which are beyond our control and any of which could cause our financial results to differ materially from those contemplated in these forward-looking statements.

For a listing of the risks that could cause actual results to differ please see our latest Forms 10(k) and 10(q), and other reports filed with the SEC as well as the factors identified in today’s press release.

A reconciliation to and rationale for any non-GAAP metrics that may be communicated on this earnings call may be found in the press release and accompanying financial tables that we issued in connection with this earnings call.

The information contained in our quarterly earnings release and our comments and remarks of the representatives of Intralinks Holdings, Inc. made during this conference call are integrally related and as such are intended to be disseminated and understood together. Intralinks undertakes no obligation to update or revise this information except as required by the federal securities laws.

Today’s call is available via telephone and webcast. A telephone replay will be available at the conclusion of this call through March 4th, and a webcast will be available on our Investor Relations website. For access to the press release, supplemental financial information or the webcast replay please consult the investor relations section of our website.

Following some prepared remarks we will take your questions. With that, let me turn the call over to Ron.

Ron Hovsepian

Thank you, Dave, and thanks to all of you for joining us today to review Intralinks’ Q4 and full-year 2013 performance. On today’s call I’ll review our performance against our key objectives for 2013, then I will summarize the performance of our business in Q4 and the full year and will provide you with our perspective on our outlook and direction for 2014. Then Derek will follow with the financial details, provide his comments on the quarter and year and discuss guidance for 2014.

Looking back over the year we entered 2013 with a clear strategic focus and we accomplished several critical goals including: return to being a growth company by first building momentum in our core M&A business, which represents our most significant near-term revenue opportunity and was the key contributor to our total revenue growth of 8%; launched and validated our Intralinks VIA offerings which we identified for the beyond-the-firewall collaboration market as a key long-term growth driver – we achieved this by winning key anchor customer references; established our infrastructure and back office operations to position the company to scale properly as we accelerate revenue growth.

While we still have more work to do we believe the positive strategic progress we made in 2013 has put the company on a clear path toward achieving our long-term revenue growth targets of 15% to 20%.

Turning to our financial results, we generated record revenue of $62.6 million for Q4 and a record $234.5 million for the full year. This was $3.6 million above the top end of our guidance for Q4 with M&A once again the main driver of our better-than-expected performance.

In Q4 our M&A business continued the strong performance we delivered all year, with Q4 revenue growth of 19% compared to the same period last year. Our Q4 M&A deal count was once again up year-over-year. Our M&A revenue in Q4 also benefited from larger deal sizes generally and strong international demand in particular.

We are clearly benefiting from the investments we have made in our M&A business as well as from strong sales execution. Our continuing goal is to grow our M&A revenue at a rate that is equal to or greater than the overall market.

Our 2013 initiatives for our M&A business were first to continue to improve our midmarket bank coverage and penetration; second, develop underrepresented geographies; third, broaden the value proposition we have for the deal community. We delivered positive results against each of these initiatives in 2013, and when coupled with our strong brand awareness in this market and the return of larger M&A deals later in the year drove 21% year-over-year growth.

Our recently launched DealNexus platform which is an integrated deal sourcing forum for the M&A community created additional broadening of our value proposition to the deal community. DealNexus supports our M&A and corporate development business by expanding our reach into the pre-due diligence part of the deal lifecycle.

All-in-all we are very pleased with our M&A business and the strong value proposition we bring to customers in that space. We are the market share leader, have great brand awareness, and are executing strongly. After market share gains based on deal counts in both 2011 and 2012 we gained another five points of hare in 2013 and anticipate future share gains going forward.

Enterprise revenue was up 1% year-over-year in Q4 and 1% for the full year, in line with our expectations. We made positive strides in repositioning our enterprise business during 2013 both in terms of our current enterprise offerings as well as the delivery of our third release of Intralinks VIA at the end of the year. This latest release included Intralinks VIA Enterprise which gives our customers enhanced capabilities to manage and control how they collaborate.

Two examples of customer wins from Q4 include HSBC and British-American Tobacco. For many years, HSBC has been a customer of our core platform and our various market offerings. On this occasion HSBC’s Global Sourcing Team had a requirement for secure document exchange as part of their RFP procurement process. Their existing system was reaching end of life and they were looking for an easy to use product that their buyers could use to securely manage the bidding and procurement process.

Intralinks’ status as a trusted partner for secure document sharing outside the firewall made us a natural fit for this opportunity, and Intralinks VIA was a good match for their use case. Intralinks VIA provides the Global Sourcing Team with a mechanism by which they can both distribute the initial RFP documentation to multiple vendors and also receive vendor comments and responses, all in a secure, centralized platform providing them with clear visibility and control over the entire process.

The initial HSBC user community is over 500 and is spread globally throughout HSBC’s end markets. Intralinks VIA is making the procurement process easier to manage, more transparent and much more efficient.

Another key Intralinks VIA win was British-America Tobacco, the second-largest tobacco company in the world by sales. BAT’s Marketing Innovation Group needed a simple but secure way to support ad-hoc sharing and collaboration with a large number of manufacturing suppliers and subcontractors around the globe. This group also needed to share various designs and blueprints and then collaborate on the design development and prototyping process.

For BAT, these designs encapsulate much of their valuable company intellectual property and competitive advantage, and it was imperative that BAT retain control over these files. Though some employees had adopted consumer-grade file sharing applications these applications failed to meet BAT’s security, compliance, and governance requirements.

After evaluating several vendors BAT selected Intralinks VIA based on a couple of important factors. First, BAT valued Intralinks VIA’s strong security capabilities and integrated information rights management functionality, because these features enabled BAT to retain control of design files throughout the collaboration process. Second, Intralinks VIA allowed teams to easily create and manage individual work streams for each project or for individual suppliers, feeding the prototype process.

BAT has a goal of accelerating time to market for new manufacturing designs by 50%, representing a significant cost savings. Intralinks VIA will help make this possible.

Now let me remind you of the key milestones for our Enterprise business we laid out for you at the beginning of 2013 as well as our performance against those milestones. They included first delivering three Intralinks VIA platform releases by early 2014. I am pleased to report that we met this goal. Our first release went into general availability in late April, our second in September and our third at the end of 2013, ahead of schedule.

Second, we targeted the announcement of three to five Intralinks VIA anchor customers. I am pleased to name the following publicly-referenceable customers: HSBC, British-American Tobacco, WorldPay, American Express, Kingsley Napley, and Vodafone McLaren Mercedes. I am pleased with the initial offerings and the customer acceptance of Intralinks VIA.

Now let’s turn to our Debt Capital Markets business. Revenue for DCM was about flat year-over-year in Q4. For full year, DCM was down about 5% which was a little better than we anticipated due to higher loan volumes. In 2013 we delivered promised product expansions and enhancements, amendment voting, deal management capabilities and LenderBridge, which is our packaged integration with the Misys Loan IQ accounting platform. We are pleased with these results which helped us to stabilize our DCM business in 2013.

Overall, 2013 was a solid year in which we grew total revenue by 8%. We had a very strong performance in our core M&A business. We also validated that our Intralinks VIA offerings are the right enterprise products for secure beyond-the-firewall collaboration.

Now, turning to our 2014 outlook and long-term direction, we must build on this momentum in order to achieve our long-term sustainable model of 15% to 20% revenue growth. Let me tell you how we are going to get to that long-term model. The DCM market is a well-penetrated market with modest long-term growth prospects. However, this remains a highly profitable and strategically valuable business for us.

In M&A, based on our leading market position, strong brand awareness and continuing expansion of the value proposition we bring to market we expect to grow at mid- to high-single digit growth rates over the long term.

Turning to our Enterprise business, we want to leverage the strong reputation for security and trust we’ve developed with Fortune 1000 companies over a long period of time in the M&A market, and do the same for enterprise as what we have done for the deal market. In Enterprise, our market research indicates there is a fast-growing $2 billion opportunity for secure beyond-the-firewall collaboration. We believe this will continue the growth of our Enterprise business 25% to 30% over time as we capture a portion of this market.

We have completed the first phase of our Enterprise evolution by developing the initial Intralinks VIA offerings and gaining early customer validation. Based on this success we added 27 more covering industry analysts. The next phase of our evolution requires us to further enhance our brand awareness, sales execution, and customer adoption. We expect the positive impact of these efforts to first translate into growth in Enterprise backlog in 2014 and later into Enterprise revenue growth, placing us on our 25% to 30% long-term growth path.

This year, in order to give investors continued visibility into our Enterprise business we will report on the growth rate of our Enterprise backlog quarterly as we believe this is a key leading indicator of how we are driving growth in our Enterprise business.

For 2014 we have established the following milestones that we believe will demonstrate our progress in broadening our brand awareness and growing our sales, which we believe are key to our long-term success in Enterprise: grow our 12-month Enterprise backlog 10% to 15% by the end of 2014 which will be a major step towards achieving our long-term goal of growing the Enterprise business by 25% to 30%; and add two to three named strategic partners who are committed to our platform.

This will be a great tool to measure market acceptance, brand awareness, and potentially customer distribution. As you recall, we presented this two-year milestone last year and we are continuing to work towards this milestone this year.

Even as we’re making ongoing investments to build brand awareness, ramp up our marketing and sales execution efforts, and improve our operational effectiveness, we expect to generate a modest improvement in our EBITDA profitability for 2014. We are quite confident in the scalability of our business model and believe that making these investments will drive us towards our long-term total revenue growth target of 15% to 20%.

To summarize, we are pleased with what we accomplished in 2013. We are growing again. We are very strong in M&A and made great strides in that business in 2013. Enterprise is headed into an exciting phase as we target 10% to 15% year-end backlog growth which will put us on the path to hit our long-term Enterprise revenue growth target. We stabilized our DCM business and overall we made great progress positioning the company to achieve our long-term revenue growth objectives of 15% to 20%.

Now let me turn the call over to Derek who will provide you with some details on our financial results for Q4 and full year. Derek?

Derek Irwin

Thanks, Ron. I’m going to summarize the 2014 financial results first for Q4 and then for the full year. After that I’ll provide our guidance for both Q1 and full year 2014. Throughout I will refer primarily to non-GAAP financial measures. Definitions of these financial measures as well as reconciliations to the corresponding GAAP financial measures are included in our earnings release and on the Investor Relations section of our corporate website.

Revenue for Q4 2013 was $62.6 million, above the high end of our $57.0 million to $59.0 million guidance and 9% more than our Q4 2012 performance. Our profitability measures for Q4 were in line with expectations. As anticipated, our margins were down year-over-year due to the investments that we are making in the business to position the company for future growth.

Q4 margins were as follows: adjusted gross margin was 76.0% compared to 76.8% for the same quarter a year ago. Adjusted operating income was $3.1 million, a 5.0% margin compared to $6.2 million, a 10.7% margin in the same quarter a year ago. Adjusted EBITDA was $8.8 million, a 14.1% margin compared to $11.3 million, a 19.6% margin in the same quarter a year ago. And adjusted net income was $1.5 million or $0.03 per share compared to $3.2 million or $0.06 per share in the same quarter last year.

Looking at our Q4 revenue performance by business line, M&A revenue of $31.2 million increased 19% compared to $26.2 million in Q4 last year. This growth was driven by larger deal sizes, increased deal count and market share gains in all geographies. For Q4 M&A comprised 50% of our total revenue.

Enterprise revenue was $24.5 million, up 1% compared to $24.2 million in the Q4 last year. For Q4 Enterprise comprised 39% of our total revenue. Lastly, DCM revenue was flat year-over-year at $7 million. For Q4 DCM was 11% of our total revenue.

Cash, restricted cash and short-term investments increased to $87.9 million at the end of the year compared to $75.3 million at the end of the prior year. Revenue for full year 2013 was $234.5 million, up 8% over 2012 revenues of $216.7 million. Year-over-year revenue growth of 21% in M&A and 1% in Enterprise was partially offset by a 5% decline in our Debt Capital Markets business.

Non-GAAP operating income for the year was $16.0 million or 6.8% operating margin compared with $18.8 million or an 8.7% operating margin in 2012. Adjusted EBITDA was $36.9 million or 15.7% of revenue versus $37.3 million or 17.2% of revenue in the prior year. The anticipated decrease in profitability year-over-year was due primarily to investments made in sales, marketing, and back office infrastructure to support our goals of accelerated revenue growth and long-term profitability.

We generated $42.0 million in cash from operations in 2013 compared to $35.2 million in 2012. The increase is due primarily to improved networking capital. DSOs was 55 days at the end of the year, a four-day improvement when compared to the prior year; and although we still have room to improve here this represents the company’s best performance on this measure since our initial public offering. Free cash flow for the year was $14.5 million compared to $9.2 million in 2012.

Yesterday we closed on the refinancing of our existing credit facility with an $80 million five-year term loan [due] credit facility. The term loan bears interest at LIBOR with a 2.00% floor plus 5.25% per annum for an effective interest rate of 7.25%. There is a 0.25% principle payment due on the last day of each quarter commencing on June 30, 2014, with a balance due in a final installment on February 24, 2019. In addition, the lenders have provided for a $10 million asset-based revolving line of credit.

Before I turn to our guidance let me make a brief comment on our backlog. At the end of Q4 our twelve-month revenue backlog both billed and unbilled, which is a measure of contractual revenue commitments, was $71.5 million, up 1% from $70.9 million last year. This is due to an 8% increase in M&A backlog offset by a 5% decline in DCM backlog and flat Enterprise backlog.

Regarding Q1 2014 we are providing the following guidance: we’re expecting revenue in the range of $56 million to $58 million; we are expecting adjusted operating income to be in the range of a loss of $500,000 to a gain of $1 million. We anticipate adjusted EBITDA in the range of $5.5 million to $7.0 million and adjusted earnings per share is expected to be in the range of a loss of $0.02 per share to breakeven.

For the full year 2014 we are providing the following guidance: we are expecting revenue in the range of $238 million to $246 million. We are expecting adjusted operating income to be in the range of $12 million to $16 million. We anticipate adjusted EBITDA in the range of $38 million to $42 million and adjusted earnings per share is expected to be in the range of $0.06 to $0.11.

We provide you with our expectations on our total revenue growth for the year which anticipates our M&A and DCM businesses performing fairly in line with our long-term model. With respect to our Enterprise business, based on relatively flat backlog growth in 2013 and a lag between bookings converting into revenue in our subscription business model we anticipate modest Enterprise revenue growth for the year.

As Ron mentioned, we are targeting twelve-month Enterprise backlog [growth] of 10% to 15% by the end of 2014 which we believe is the best leading indicator of our future Enterprise revenue growth. We expect our Q1 Enterprise backlog will be down mid- to high-single digits year-over-year due to the timing of certain contracting rules and our continued repositioning of our Enterprise offerings.

However, as we look to the balance of the year we expect our Enterprise backlog growth rate to improve each successive quarter, and for the full year we are projecting an Enterprise backlog growth rate of 10% to 15% as we continue to execute on our Enterprise growth plan.

We are confident in our ability to scale our Enterprise business this year due to the investments we made in 2013 to hire the headcount necessary in our sales organization to support this growth target in addition to the branding and renewal efforts discussed earlier.

Lastly, we expect our EBITDA profitability to improve modestly in 2014, even as we continue to invest in our products, brand awareness, and sales execution as well as our infrastructure and back office operations. We believe that these investments will enable us to scale profitably as we accelerate our revenue growth in the coming years.

With that we will be happy to take any questions you might have. Operator?

Question-and-Answer Session


Thank you, sir. We will now begin the question-and-answer session. (Operator instructions.) The first question we have comes from Jennifer Lowe of Morgan Stanley. Please go ahead.

Jennifer Lowe – Morgan Stanley

Thank you and congrats on a good quarter. I wanted to dig into some of the traction you’re seeing around VIA at this point and it was great hearing some of the referenced customers there, but even extending that out a little bit into the discussions you’re having and some of the customers that you mentioned that aren’t referenceable – what’s sort of the broader response in the marketplace and how are you thinking about the level of investment in place at this point to service the demand that you’re starting to see?

Ron Hovsepian

We’re real excited about what we’re seeing in terms of the market. We’re seeing two dimensions that I’d highlight to you. One is that we’re seeing the analyst coverage pick up over this past year – we’ve picked up another 27 industry analysts covering us which I think is a very important leading indicator. Two, I’m seeing just more requests for response from us engaged in those larger enterprises. And then obviously we shared with you some of the examples inside the business on this call and like I said, some of the other ones that we can’t talk about that are positive.

What I’m seeing behind that in terms of the build is an appropriate level of interest – all of that is what has led us to give you that guidance that we believe the year-end backlog for the Enterprise business will be in that 10% to 15% range of growth which is a real strong leading indicator of where we see that business going and growing from my perspective.

So I think the work we need to do there and the investments are really around continuing our work in the customer adoption area – that’s a critical piece of what we need to keep doing; as well as long term driving the adoption from a customer service perspective and a professional services. Those will be two areas where we’ll continue to work, in adoption and the basic services that go with that.

But I like what I feel, I like what I see and I think we’ll continue to drive that. Obviously the industry analyst coverage and things like that are really key things around long-term brand awareness and that’s probably you know, one of the top two things – not probably, it is one of the top two things that I’m focused on inside that business.

Jennifer Lowe – Morgan Stanley

Then as a follow-up to that, as you start to do more of these use cases with VIA what are you seeing there competitively? Are you displacing legacy on premise? Are you seeing competition from other SaaS providers? What’s the sort of tone of the competition with the VIA product?

Ron Hovsepian

Yeah, the tone of the competition shows up in several ways. For example, like in HSBC that was actually displacing an older system but we went through an RFP process. As you can imagine it was with the Procurement Team so there was an RFP process and that one was both Saas and on-prem. And then when you look at some of the more classical use cases we are seeing on-prem and cloud-based players inside of the market as well.

I think what’s most important that I’m seeing is I’m really pleased with the continued differentiation of us on the security and compliance fronts, on the way we’ve laid out our platform. The pieces are all integrated; the customer’s not stuck putting all the parts together. And truly our service differentiation – that’s where I’m seeing us really set ourselves apart as I look at where we’re going with the platform, with what the customers are feeding back to us.

Jennifer Lowe – Morgan Stanley

Just one last one for Derek: on the spending side you know, it looks like you came in pretty handily ahead on the revenue guidance you previously gave for Q4. But EPS was a little bit more in line which I’d guess spending might have been a little bit higher than what you anticipated for Q4. Is there anything notable that happened in the quarter from a spending perspective that we should be thinking about?

Derek Irwin

No, nothing really notable. We saw an opportunity to increase our investment, accelerate certain investments in Intralinks primarily around the sales and marketing side of things.

Jennifer Lowe – Morgan Stanley

Great, thank you.

Derek Irwin



Next we have Tom Roderick of Stifel.

Analyst – Stifel Nicolaus

Sure, hi guys, it’s (Inaudible) for Tom. So you talked a lot about VIA but I was hoping you could maybe dig in a little bit on the other Enterprise solutions, particularly with regards to what you’re seeing with regard to renewal rates and your thoughts around near- and long-term growth around these other products. Thanks.

Ron Hovsepian

Yes, in terms of renewal rates we’ve made a big investment this past year in making sure that we fix both our processes and our systems and our management disciplines there. So I’m very positive that we will drive the company towards those long-term growth renewal rates that we see at the peer level in our industry, which is at about 90%. We’re on that path to do that this year.

Obviously there’s always some timing things as Derek had covered in some of the Q1 stuff but in general I feel very good about our renewal maturation and where we’re going with that. The area that was really uncovered last year that we’re focused on into this year is really around the adoption piece of it. We’ll continue to improve that adoption part of it, so sell the customer the right amount at the right time and then we run into less issues when it comes time for renewal because they’re happy customers, and that’s part of our learning.

Analyst – Stifel Nicolaus

Got it. Thank you. And then with regard to M&A, can you maybe break down or give us some more granularity on how much is coming through share gains through acquisition maybe versus the growth in the macro?

Ron Hovsepian

Yeah. All the numbers we reported are organic so it’s all organic growth, and from a deal count perspective for the full year we saw five more points of share gain building on the last two years of share gain on a deal count basis. So we’re continuing to do a good job there. The general market data I have not seen finalized but I believe it was about 1%-ish type growth is what we saw at the market level, total industry market level; and as Derek and I have shared with you we grew over 20% for the full year.

So we’re definitely taking somebody’s share there and somebody’s lunch money but I’m pleased with that performance. That team is executing extremely well, very focused, and that’s what gives us the confidence for the long-term model – for us to see those mid- to high-single digit growth rates because we’re performing well as a team.

Analyst – Stifel Nicolaus

Got it. And then one question for Derek: you’re calling for gross margins to decline here in Q1 and it looks like they’re going to bounce back throughout the year. Can you talk about what’s going on there? Is there anything in particular that’s pushing that down in Q1?

Derek Irwin

So in Q1 we have a couple things going on. We have the sales and marketing expenses, we’re anticipating that to go up a little bit and really that’s due to the effect of some sales headcount hires that we hired in the latter half of 2013. So we’re getting the 2014 effect of that. We also had a (inaudible) sales kickoff in Q1 this year that happened during Q3 last year, so that’s sales and marketing. And then with regards to the general and administrative expenses, we’re going to see that go up a bit in Q1 as well and the big driver there is just ongoing investment to improve our operational effectiveness and efficiencies – everything from a new ERP system, phase two of a market cache system as well as the customer adoption process that Ron spoke about.

Ron Hovsepian

Yeah, I think what’s important also on the expense side of it from my perspective was to make sure that we had the full complement of sales coverage in place in the Enterprise business as we rolled into ’14. And Derek and I and the team worked very hard to make sure we had the right coverage, so you are seeing the full effect of that expense. The good news is, as that team has now been brought in, trained, onboard, now the selling begins; and as Derek had mentioned, you will see this successive improvement through the year in the Enterprise business from a backlog perspective.

We’ll report to you that growth rate each quarter and then at the year-end you’ll see the full numbers, and that’s why we’re forecasting that out to you now, projecting that out to you as a 10% to 15% growth inside of that business. That’s a very important piece of what’s underneath that expense, that I want to make sure you understand why we did what we did.

Analyst – Stifel Nicolaus

Perfect, thanks guys. Nice quarter and we really appreciate all the detail.


We’ll go next to Jeff Van Rhee of Craig Hallum.

Jeff Van Rhee – Craig Hallum Capital Group

Great, thank you – I’ll echo that as well, very nice quarter. First I guess to start with the backlog side, just a little more color there – I know, Derek, you touched on it being down early in the year and then we’ll see the accelerating growth as the year plays out. Maybe if you can just color in a little more on just a bit of your explanation of the Q1 dynamics in terms of why down, and I guess along those same lines when you look at the year and 10% to 15% backlog growth, what’s the composition in there? And I’m thinking sort of legacy Enterprise impact on that backlog offset by the VIA impact – if you can just sort of contrast those and give us a little more color that’d be great.

Derek Irwin

Sure. So I would break it out into two categories for why backlog will be down mid- to high-single digits during Q1 2014. The first is the timing of certain contract renewals and the second is our continued repositioning of our Enterprise offerings. So for example, the team’s worked pretty hard to tighten up the value proposition with regards to our Enterprise offerings. We standardized our offering framework. We also tightened up the internal renewal discipline just to make sure that we put in place processes, systems, discipline and rigor around the renewal process.

And from a timing perspective, certain contracts – and this will also help us be able to lock down certain contracts before they go past their anniversary date, get them to renew on time. So for example, a contract that could be due to renew at the end of March, you know, if it slips into early April that can have a meaningful impact on our Q1 backlog. And we’re seeing a little bit of that right now.

And also, Jeff, just to make sure that we can avoid some of the right-sizing issues that we have now in 2014 we’re going to be implementing the customer adoption process to ensure improvements in this area as well. And by doing all these things we believe that we’ll improve our renewal rate, be more in line with our peer group and be able to develop a revenue model that is more definable, repeatable and predictable.

And I think the important thing also to note here is that while we do expect Enterprise backlog to be down in Q1 we expect the growth rate to increase with each successive quarter and by the end of the year the Enterprise backlog will be up 10% to 145% compared to the prior year.

Jeff Van Rhee – Craig Hallum Capital Group

Got it, okay. And then I guess just backtracking to the sales side, can you just expand a bit more – clearly you went through establishing the telesales organization. You’ve sized up the market, you brought the products to market and sort of played with the different go-to-market messaging and positioning and structure. Can you talk a little bit more about what the Sales Team is right now, how many heads we have, where they are and how it’s changed in say the last three to six months as you’ve gotten market feedback on VIA?

Ron Hovsepian

Yeah, we’re not going to break out the sales coverage model in detail because we don’t classically share that with you but I will give you the general framework by which we’re operating on that one, Jeff, so you can see how we thought about it.

To your point, we took the learnings that we had in the first six, eight months out there with the product, and we actually clearly identified certain market segments that we wanted to go after that we learned how to sell into those particular market segments. That then dictated a very clear coverage model for each one of the segments that we highlighted. And inside of there the general filters we used were highly secure, high collaboration, high IP and regulatory filters are the ones that we focused in on.

That gave birth to customer segmentations that we then mapped out the right coverage model to allow ourselves to reach those pieces of the market. We’ve then taken the marketing engine and aligned our demand gen by each one of those segments that we’ve identified. Additionally on top of that we’ve kept the commonality of the sales methodology and process that we drove everybody through in training and we’ve continued that through what you and I would call the face-to-face large account sales folks with also then the direct telesales folks who are covering both dimensions of all the segments that we’ve highlighted depending on where the customer is, etc.

So that model’s all in place now, it’s very clearly defined, and that was part of the learning as we came out of ’13, into ’14; which then gave us the clear growth. What I would share with you on the Enterprise side, because of your earlier question – the amount of growth that we expect inside the Enterprise business is coming from VIA and that’s the key piece there.

So what I would share with you just in a macro statement is that the coverage we’ve built in is enough, more than enough right now to cover that 10% to 15% growth rate that I talked to you about for the year and backlog so that we can achieve that growth. That then puts us right on the path to the revenue growth that we want to get out of this business, which is as I shared with you, in that 25% to 30% range.

So I can see that line all lining up, and we accounted for any of those timing issues or other downdrafts that we had on some of the other older contracts. We’ve accounted for all that and still with that we fundamentally believe that we can drive this business at that 10% to 15% growth for year-end backlog, which is obviously the leading indicator of where we’re going – a critical leading indicator.

So the coverage is in place. As Derek highlighted the product is plenty good enough now. We’re showing it with wins like HSBC, BAT, AmEx, etc. So I feel pretty good that we’ve got the pieces in place now. To your question, the segmentation is in place and we’ve already assigned the territories. Everybody’s got their territories; everybody’s got their quotas and we’re marching, and we’re driving ourselves through our regular cadences that we’ve put in place over the past year and a half from a sales perspective – very similar to what we did in M&A, candidly.

Jeff Van Rhee – Craig Hallum Capital Group

Yeah, okay. Okay great, I’m all set. Thank you.

Ron Hovsepian

Jeff, thank you.


(Operator instructions.) The next question we have comes from Ross MacMillian of Jefferies.

Ross MacMillian – Jefferies & Co.

Thanks for taking my questions. So I guess just on this Enterprise backlog guidance you’ve given, in theory you could grow backlog with longer-duration contracts rather than increases in annual contract values. So I’m just curious as to, if we thought about Enterprise ACV or short-term backlog growth, how should we think about that in the context of double-digit total enterprise backlog growth?

Ron Hovsepian

When we’re talking about the 12-month backlog we’re specifically talking about a 12-month number – not a total, to your point. We do have set targets, so the team around total, i.e. multiyear which is your point, Ross, but the numbers I’m talking to you about are the 12-month backlog, the 12 months of ACV as you would imagine. That’s the only way I can make sure that we’ve got the company on the track towards the higher growth rates from a revenue perspective. So all the numbers we’re talking to you about on the year-end Enterprise backlog are 12-month in nature.

Ross MacMillian – Jefferies & Co.

That’s helpful, thanks for that clarification.

Ron Hovsepian

Thank you for asking the question. It’s a very important subtlety and I’m glad you raised it because we’re absolutely talking about the more important part, the harder part – not just winning one contract for five years and feeling good about that. We’re talking about the 12-month because I need to make sure that revenue’s tracking as we go into ’15 at the right trajectory.

Ross MacMillian – Jefferies & Co.

Agreed. Just on billings then versus backlog, so obviously you’re talking about 12-month backlog for Enterprise. You’ve obviously got some expectations around backlog and billings for all segments. Can you just help me frame again how we would expect to see billings trend on the assumption that your Enterprise 12-month backlog improves and whatever assumptions you have for the other parts of the business? How should we think about billings just quantitatively if you’re not going to I guess give us a range of guidance for billings, I’m curious? Thanks.

Ron Hovsepian

Well as you know part of the company realizes the revenue very quickly, the M&A portion. So as a general statement, that bookings and backlog happen very quickly in a, let’s call it a six- to nine-month window in general, right? Now when you ask that question about the Enterprise business, which is where I think you were really asking the core question around but please correct me if I’m not answering it – that is going to actually parallel itself.

In general the correlation between that 12-month year-end backlog, that will correlate really directly to revenue as you see it unfold. So that’s why it’s important to understand the growth rates as we go through the year and that’s why we’re going to share that with you on a quarterly basis so you can measure our progress as we accomplish that each quarter, what the growth rate is. So that growth rate will clearly give you an indication each quarter of how we’re proceeding on the 12-month.

We did anticipate some of the things that Derek had highlighted in Q1 and then the successive growth that we see in the out quarters which will lead to a strong year-end backlog. But in general, because it’s that 12-month view of it that’s going to translate fairly steadily as you look at it from a revenue perspective. Does that help, Ross?

Ross MacMillian – Jefferies & Co.

Yeah, that helps. I guess the key question is really are there any changes to billings terms around VIA versus the heritage Enterprise business?

Ron Hovsepian

In general, no. I would say in general, no. If anything we tightened up all of our offerings and drove more clarity as to what the prices are, and consistency across the business this past year – that’s all in place which was critical. And I feel very good about that. But no, those products that are “more subscription-like” or “classically subscription,” those are what we’re talking about and there’s really no major changes in any of the billing things that would unduly change any influence I think is your question – is there any influence happening to those numbers, and the answer is no.

Ross MacMillian – Jefferies & Co.

That’s helpful. One last one, Derek – just any thoughts on CAPEX and capitalized software for ’14?

Derek Irwin

We’re pretty much in line with ’13.

Ross MacMillian – Jefferies & Co.

On an absolute basis or percentage of sales?

Derek Irwin

On an absolute basis.

Ross MacMillian – Jefferies & Co.

Great, thank you. Congrats.

Ron Hovsepian

Thank you.


At this time it appears that we have no further questions. We’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Ron Hovsepian

Great, thank you Operator. You know, when I look back at ’13 I think we made very solid progress. The company’s growing again which is the most important thing from my perspective. I see ’14, I see continued growth in our M&A businesses that I had indicated.

I’m very excited about the opportunity to show the growth in the Enterprise business. Seeing that business with a year-end backlog of 10% to 15% really should send that strong signal of our ability to perform in that market and win those deals, so I’m excited about that. That will line us up really nicely for growth in the Enterprise of the 25% to 30% variety which is what we want to get in order to meet the long-term model we set for the company of 15% to 20% growth. And I see the pieces lining up and now it’s really just driving more execution, and I think the milestones we gave you are a good way to help measure us as we go through the year, that we continue to perform against that.

So with that I’ll close the call. I thank everyone for their attention and support and we’ll talk to you later.


And we thank you, sir, and to the rest of the management team for your time today. This concludes today’s teleconference. We thank you all for attending today’s presentation. At this time you may disconnect your lines. Thank you and take care, everyone.

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