Rally Software's CEO Discusses F4Q 2014 Results - Earnings Call Transcript

Mar.21.14 | About: Rally Software (RALY)

Rally Software (NYSE:RALY)

F4Q 2014 Results Earnings Conference Call

March 20, 2014, 05:00 PM ET

Executives

Jeff Cooper - VP Finance

Tim Miller - Chairman and CEO

Jim Lejeal - CFO

Analysts

Nandan Amladi - Deutsche Bank Securities Inc.

Bhavan Suri - William Blair & Company, LLC

Patrick Walravens - JMP Securities, LLC

Mark Murphy - Piper Jaffray

Michael Huang - Needham & Company

Alex Zukin - Stephens

Rich Baldry - Roth Capital

Operator

Good afternoon, and welcome to the Rally Software Fourth Quarter Fiscal Year 2014 Earnings Call. Today's call is being recorded. (Operator Instructions)

At this time, I'd like to turn the call over to Jeff Cooper, VP of Finance at the Rally Software. Please proceed.

Jeff Cooper

Thank you, operator. Good afternoon, and welcome to the fiscal fourth quarter 2014 Rally Software earnings call.

Our press release and a simultaneous broadcast of this call can be accessed at the Investor Relations’ website at investors.rally.com. On the call today are Tim Miller, our Chief Executive Officer, and Jim Lejeal, our Chief Financial Officer. After the prepared remarks, we will open the call for questions.

Our commentary today will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS, unless we state otherwise. Reconciliations of our GAAP and non-GAAP results and guidance can be found in our earnings press release. During the call, we may offer additional metrics to provide further insight into our business or result. This detail may or may not be provided in the future.

The purpose of today's call is to provide you with information regarding our fiscal fourth-quarter and full year 2014 results. Some of our comments may contain forward-looking statements which are based upon information available to us as of today's date and are subject to risks and uncertainties.

Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. We encourage you to review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations.

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

Tim Miller

Thanks, Jeff, and welcome, everyone. Thank you for joining us today. Fiscal 2014 was a great year. We completed our IPO and follow-on offering, added 98 new Rally employees, including key Executive team members in sales and in marketing, while we continued to grow our business.

We are proud of our achievements throughout the year. It was a strong team effort. However, we also experienced challenges; most notably our execution in Q3 fell short of our expectations. We believe our Q4 performance demonstrates solid execution and notable progress in key areas of our business. There's still work to do.

That said we believe we've laid a solid foundation for success for fiscal 2015 and we're excited to get to it. With that, I will dive into the details of the call.

Q4 is a seasonally strong quarter for our business and this Q4 was no exception. I'm pleased to report total revenue for the fourth quarter that exceeded our guidance. Total revenue grew 27% year-over-year to $19.6 million and subscription and support revenue grew 24% to $15.4 million.

We added approximately 16,000 paid seats in the quarter, ending fiscal 2014 with a total paid seat count of approximately 214,000 seats. This represents a 27% increase over our paid seat count of approximately 168,000 seats at the close of Q4 of last year.

One key trend we are seeing is enterprise commitment to our platform. As we saw a number of existing large customers add significant seats as they make their continued investments in Agile at scale. Let me highlight a couple of examples.

But first understand that not all customers allow us to mention them publicly. We believe this is in part due to the fact they view their Agile transformation initiatives as strategic and not something they choose to share publicly.

This is a subtle but important characteristic of our market. We believe companies transforming their product innovation efforts towards Agile methodologies are doing so to gain competitive market advantage. This is a common theme of the stories we share with you each quarter.

For example, during this past quarter one of our top 15 customers, a Fortune 100 American multinational semiconductor chip manufacturer, renewed their existing agreement with us that included a significant seat expansion.

This long-term customer is partnering with Rally on an expansive Agile initiative to align the business with its execution, and deliver small increments of work twice as frequently. The two primary areas where they are using Agile and Rally are micro-processing, completing the lifecycle from idea to manufacturing to testing and quality; and also IT, where they are doubling down on velocity in all major service requests to become a more responsive and credible department.

We have a unique position in supporting the company's business strategies and cementing our partnership, evidenced through this continued investment in a renewal expansion license agreement and purchase of Rally's premium support Rally for good.

As a result, this customer's seat count expanded to a total of 12,000 seats, still has substantial room to grow and now stands as our number two customer in terms of this metric.

Another key expansion renewal Rally closed during the quarter was with a Fortune 100 multinational American conglomerate. This Rally customer was once operating in siloed business functions, including energy, aviation, healthcare, finance and transportation, but now it's setting the pace in the digital disruption movement by morphing into one of the world's largest software development companies. Rally is at the epicenter of this customer's transformation, helping to deliver an Agile process and platform at scale.

Rally is partnering with the Chief Development Officer who leads the company's big data solutions for the industrial internet to improve efficiency and productivity as the company uses big data to make predictive decisions. This customer's seat count is now just over 7,000 seats and has moved up the ranks to become our number three customer in terms of this metric.

Finally, there was a competitive aspect of this renewal and the clear reason for Rally's win was our solutions portfolio functionality at enterprise scale, an element of our product we believe our competitors cannot match.

Finally, in terms of large deals, I'm pleased to announce that Rally closed a renewal expansion multi-year agreement valued at just north of $2 million in total order value with a leading U.S. manufacturer of laser printers. They committed to Agile and lean practices across their business.

What was the primary motivation of this customer to commit so deeply in partnership with Rally? It was their desire to be market-leading with innovative features.

Unlike many of this company's competitors, the development and manufacturing of all products are done in-house, thereby providing an opportunity to speed production cycles and respond to market feedback loops.

This year's win delivers Rally and Agile to this customer's 300-plus Agile teams, enabling world-class collaboration and increased business value.

Finally, recall last quarter we announced the closing of one of the largest credit card processing companies in the world with a 1,500 seat initial order. I'm pleased to announce this customer's Agile transformation is going strong as signaled by this customer's 500 seat expansion order just one quarter into the relationship, combined with an increase of professional services to support their product development transformation efforts.

Beyond the examples I've offered already, other notable accounts where we renewed or expanded Rally's footprint include Pearson, Autodesk, Betfair, InterContinental Hotels, Financial Times, Churchill Downs, Truven Health Analytics, Western Union, National Geographic, Edmunds, TomTom, and ServiceSource. We're excited these customers renewed and in some instances, expanded their relationships with Rally.

In addition to the continued validation of our existing customers, I'd like to quickly highlight some new customers who have started their Agile transformation with Rally. We’re excited to be working with these leading companies as we look forward to scaling with them as they find success through Agile.

A few notable new customers include Chipotle, Whole Foods, Jive Communications, Renaissance Learning, and eHarmony. We look forward to expanding these new relationships over time.

In Q2 of fiscal 2014, we announced the closing of one of the world's largest automakers with a 500-seat initial order. We reported in Q3 this customer executed a seat expansion order, nearly doubling their seat count as their Agile transformation began to take hold. And this customer's PMO implemented an Agile center-of-excellence to serve as an Agile resource to this automaker's product teams.

I'm pleased to announce that in Q4, Rally closed a $1.3 million professional services agreement with this automaker designed to support this customer with Agile transformation consulting, Rally Agile coaching, and on-site remote product training.

We reported last quarter; we thought we were at the heart of this customer's Agile transformation and believe this arrangement confirms our role.

This agreement highlights an aspect of our business that we've talked with many of you about -- that is the strategic value of our professional services offerings and the value they deliver to our targeted customer, the large enterprise adopting Agile.

We believe that our software solution is world-class at supporting the needs of a large enterprise. We also believe that these customers transform themselves by going Agile. Our professional services are at the ready to help them navigate the various cultural and product workflow transformation issues they face in their journey.

These services engagements create an intimacy with our customer as they go Agile and Rally is pleased to be their trusted partner in this role. In fiscal 2015 and coming years, expect us to lever the strategic nature of this part of our business, and for fiscal 2015 in particular, expect it to grow.

Regarding our competitive landscape, we're pleased to report that Q4 saw continued success with respect to win rates. We've reported to you over time.

Our internal analysis shows that our sales reps continue to identify that only 15% of our new upgrade and renewal transactions are competitive. Of those that are competitive, Q4 analysis shows that we won approximately 36% of these deals and approximately 70% of the dollars that are at challenge.

As the identified seat potential size of our deals goes up, so does our win rates. For deals where the seat potential is greater than 500 seats, our Q4 win rate was slightly better than 60%. When the seat potential of a deal in challenge is greater than 2,000 seats, our Q4 win rate was approximately 85%.

We believe this trend makes clear that Rally is the solution for the large enterprises going Agile. With respect to our Q4 win rate against IBM, we won six out of seven deals for 97% of the total dollars.

Turning now to some thoughts on fiscal 2015 product roadmap. We expect to deliver substantially against our benchmarking and analytics features. This is functionality in our solution that Rally is uniquely capable of bringing to market.

We believe we'll advance the capability of our portfolio of features currently offered as part of our Rally portfolio manager module. We expect to see Flowdock, the team chat functionality product we acquired at the start of fiscal 2014, more tightly integrated in the overall Rally solution.

Finally, before I turn the call over to Jim let me finish with some thoughts on our investment strategy for fiscal 2015. Recall that in our Q3 call, we said we would continue to invest in R&D and sales and marketing into the beginning of fiscal 2015 in order to grow the business at a rate we believe is possible.

We remain excited about the market opportunity before us. And the recent success we've enjoyed selling to enterprise customers further validates our investment decision.

This concludes my prepared remarks. And now I'd like to hand it over to Jim to go over our fourth quarter financial performance in more detail and our outlook for the coming period.

Jim Lejeal

Thanks, Tim. I'll start with providing some details on our Q4 fiscal 2014 and full year fiscal 2014 performance, and then offer an outlook for Q1 fiscal 2015 and for the full year fiscal 2015.

I remind us all that my review and discussion will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS, unless I state otherwise.

As Tim outlined, Q4 delivered meaningfully in the area of renewals with large accounts, substantive services engagements expanding on certain existing relationships, and metrics we believe exhibit continued strength of the business.

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

We ended the quarter with a total paid seat count of 214,047 seats. This seat count represents a 27% year-over-year increase when compared to 168,562 seats under contract at the close of Q4 of last year. The 16,241 seats added in the quarter represent an increase of 8% over the seats under contract at the end of last quarter.

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

As of January 31, 2014, our renewal rate calculated against this disciplined customer cohort was 116%. Adjusting this renewal rate for the non-renewal of RIM we experienced in Q2 of fiscal 2014 and the large downgrade we discussed in Q3 fiscal 2014, our renewal rate was 120%. We offer insight into a non-renewal rate metric or churn on an annual basis to provide visibility into the impact of seat losses we experienced over the measured period.

We calculate our nonrenewal rate by dividing the number of paid seats lost during the fiscal year divided by the total number of seats at the beginning of the fiscal year. This number does not include customer upgrades.

For the full year of fiscal 2014, our churn or non-renewal rate was approximately 12.5%. Adjusting this metric for the non-renewal of RIM and the large downgrade we just discussed, our churn was 10% consistent with what we've communicated in the past.

Total revenue for the quarter was $19.6 million which represents a 27% year-over-year increase over the same period. Subscription and support revenue for the quarter was $15.4 million, which represents a year-over-year increase of 24%.

For the full year of fiscal 2014, our total revenue grew to $74.3 million which was above our previously raised guidance range of $73 million to $74 million and represents a year-over-year increase of 31%. Our subscription revenue reached $57.9 million which represents a year-over-year increase of 32%.

In terms of geography, for the full year of fiscal 2014, our growth continues to be driven by the U.S. market which accounted for 86% of revenue in the period. In addition, our investments internationally are starting to pay dividends. In fiscal 2014, our international revenue grew over 40% and we have continued to lay the groundwork for future growth in EMEA and Asia.

In terms of customer concentration, for the full year of fiscal 2014, no customer represented more than 4% of our total revenue. Calculated billings, a non-GAAP measure, which we define as revenue plus the change in deferred revenue, closed the quarter at $26.7 million, representing a year-over-year increase of 12% as compared to the fourth quarter of last year, and a 63% increase over the prior quarter Q3 fiscal 2014.

As we have repeatedly discussed with many of you, there is a wide array of factors that influence calculated billings. And quarter-to-quarter situations in the calculated billings metric should not be taken as an indicator of changes in future revenue.

One dynamic that can have an effect is the occasional occurrence of a customer electing to contract with us for multiple periods and prepay against the contract as well.

Where this dynamic exists and as I have done in the past, I will provide the information necessary for all of us to understand the impact of prepaid contracts on the calculated billings measurement. No normalization is needed for Q4.

Our backlog or off-balance sheet deferred revenue, which we define as future contractual right to invoice the customer was $19.7 million at the end of the fourth quarter. Gross profit for the quarter was $15.5 million compared to $12.4 million in Q4 of fiscal year 2013, reflecting an increase of $3 million or 24%.

Total gross margin for the quarter was 79%. For the full year fiscal 2014, our total gross margin was 79%, our subscription and support gross margin was 89%, and our professional services margin was 16%.

Now, I'll turn to operating expenses for the quarter. Sales and marketing expense was $10.5 million, representing a year-over-year increase of $1.8 million or 21%. This increase was mainly driven by increased headcount across our sales and marketing organizations, increased commissions due to the increase in bookings, and variable spend in our lead generation activities.

As a percent of revenue, sales and marketing expense was 53% for the quarter compared to 56% for the same period in fiscal year of 2013.

Research and development expense was $5.3 million representing a year-over-year increase of $0.9 million or 21%. This increase was mainly driven by increased headcount as we continue to invest in product development.

As a percent of revenue, R&D expense was 27% for the quarter compared to 28% for the same period in fiscal 2013.

G&A expense was $4.5 million, representing a year-over-year increase of $1.4 million or 45%. This increase was mainly driven by increased headcount to support our company's growth and certain legal, accounting and insurance expenses related to operating as a public company.

As a percent of revenue, G&A expense was 23% for the quarter compared to 20% for the same period in fiscal 2013.

Net loss for the fourth quarter was $4.7 million or a net loss per share of $0.19 per basic and diluted share. For the full year fiscal 2014, our total operating expenses increased 36% to $73.1 million. For the year, we recorded an operating loss of $15.1 million.

We’re currently generating a net loss and as such, our basic weighted average shares outstanding for the fourth quarter was approximately 24.6 million and does not include the impact of vested stock options.

If we were profitable today, our fully diluted share count would have been approximately 25.5 million shares when applying the treasury stock method to these vested options.

Cash flow from operating activities was negative $7.9 million for the quarter, compared to cash flow from operating activities in the prior year's fourth quarter of negative $1.4 million.

Turning to our balance sheet, as of January 31, 2014, our total cash, cash equivalents and accounts receivable balance, and excluding restricted cash was approximately $110.7 million compared to $106.6 million as of October 31st, 2013 and $33.9 million as of January 31, 2013. We currently carry no bank debt.

We ended the quarter with accounts receivable balance of $21.8 million. Total deferred revenue increased $2.6 million year-over-year to close the quarter at $40.8 million. Compared to Q3 of fiscal year of 2014, total deferred revenues increased $7.1 million or 21% on a sequential quarter basis.

Our days sales outstanding were 75 days at January 31, 2014 as compared to 62 days at January 31, 2013. With respect to headcount, we added 50 employees during the quarter for a total company team headcount of 458 employees. We increased sales headcount 39% year-over-year to 156 employees at the end of fiscal 2014 from 112 in sales at the end of last year.

Let's turn to our outlook for the first quarter of fiscal 2015 and the full fiscal year. For the first quarter of fiscal 2015, we currently expect revenues between $19.4 million and $19.6 million, representing year-over-year growth between 21% and 22% over Q1 fiscal 2014 revenue of $16.0 million.

For the first quarter of fiscal 2015, we currently expect a non-GAAP net loss per basic and diluted share between negative $0.53 and negative $0.50 with weighted average shares outstanding of approximately 24.8 million.

For the full year fiscal 2015, we currently expect total revenues in the range of $91.5 million to $93.5 million, representing year-over-year growth between 23% and 26% over fiscal 2014 total revenue of $74.3 million. This is consistent with a $92.5 million implied outlook we provided during our Q3 call.

For the full year fiscal 2015, we currently expect a non-GAAP net loss per basic and diluted share between negative $1.61 and negative $1.56 with weighted average shares outstanding of approximately 25.2 million.

Some additional color that we’re comfortable providing on an annual basis to enable you all to better understand our business, we currently expect perpetual license revenue to be in the range of 6% to 8% as a percentage of total revenue on a full year basis. We currently expect professional services revenue to be in the range of 15% to 17% as a percentage of total revenue on a full year basis.

Regarding upcoming conferences we’re attending, we attend conferences when they are scheduled outside of our quarterly quiet period and you can expect to see us at the William Blair Conference in June and the Deutsche Bank Conference in September. If you are available to meet at these conferences, please let us know.

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

Tim Miller

Thanks, Jim. Q4 was a nice finish to a good year and we're excited about what fiscal 2015 has to offer. I'll conclude by saying the word is out about RallyON, our annual customer conference. It's scheduled to be held in Washington, DC on June 9 to 11 this summer.

The conference will feature presentations on our product roadmap, training and workshops on Agile, and presentations by our customers. Our company website has details on this annual event and how to register. Please attend and see the power of Rally and Agile firsthand.

With that, we’ll now take your questions.

Question-and-Answer session

Operator

(Operator Instructions)

Our first question comes from Nandan Amladi at Deutsche Bank.

Nandan Amladi - Deutsche Bank Securities Inc.

Hi good afternoon. Thanks for taking my question. The guidance you provided, particularly on the earnings side, is a little bit lower than where the Street was. And obviously you talked about investing more in R&D and sales and marketing. Can you talk about the balance between those two as you look forward for this year?

Tim Miller

Thanks Nandan. This is Tim here. As you know, we've been making some pretty significant investments in our go-to-market activities that you see through the increased headcount and a lot of other areas. So, that's really what represents that investment.

Nandan Amladi - Deutsche Bank Securities Inc.

Okay. But I was asking about the balance between adding headcount as well as just overall expenditure between R&D and sales and marketing. I know you grew the sales and marketing headcount I believe you said 39%.

Jim Lejeal

That's correct.

Nandan Amladi - Deutsche Bank Securities Inc.

What should we -- how should we think about it for this year relative to balancing the two investment types?

Jim Lejeal

Yeah, this is Jim, Nandan. The way to think about it is, we feel that we have a full and rich roadmap to execute against and so there's measured investments in R&D. I would characterize the investment in G&A as behind us in terms of becoming public ready.

Sales and marketing is where the bulk of our investment will go and it's designed to execute against the growth rates that we expect to achieve.

Nandan Amladi - Deutsche Bank Securities Inc.

Okay. Thank you. And a quick follow-up, if I might. Last quarter's large customer that had a negative seat renewal, has anything changed for that customer in the conversations that you're having?

Jim Lejeal

No. That customer had a downgrade and -- but renewed on a portion of their seat count. And they remain a customer and will be so for the period that's contracted, which I believe is a year.

Nandan Amladi - Deutsche Bank Securities Inc.

Okay. Thank you.

Jim Lejeal

Yeah. Thank you, Nandan.

Operator

Our next question comes from Bhavan Suri at William Blair.

Bhavan Suri - William Blair & Company, LLC

Hey guys, thanks for taking my question.

Jim Lejeal

Yeah. Thanks Bhavan.

Bhavan Suri - William Blair & Company, LLC

Yeah, just a couple ones. First just to follow-up on Nandan's question here. On the expense side, given the increase in services revenue as a percentage of revenue and the focus you're putting there, does it make sense to think that gross margins are also trending down overall for the business maybe a couple hundred basis points for 2015?

Jim Lejeal

I think that's an appropriate way to think about it as the mix shifts a little bit in favor of services. I think if you look at fiscal year 2014, percentage of revenue for services was 14.2%. At the midpoint that we've given for the outlook it's 16%.

Bhavan Suri - William Blair & Company, LLC

Right.

Jim Lejeal

That being said, this component of the business is one that we can control our gross margin in a thoughtful way. The 16% gross margin for the period is actually on a comparative basis pretty efficient.

That being said, this is a strategic component of the business. When we sell services, it creates intimacy with the customer. And setting that price in an artful way to make sure that there isn't price friction in the transaction to make sure the customer engages it meaningfully, I think that's a sound strategy.

So, that all said, our gross margin is, as you may recall the low end of our long-term model thinking that we've shared with you over time. And when we benchmark ourselves from a gross margin perspective, we consider our performance here as top quartile. So, that's a couple ways to think about it. I know Tim can add to that.

Tim Miller

I think you covered it.

Jim Lejeal

Yeah.

Bhavan Suri - William Blair & Company, LLC

Okay. And then turning to license portion, given, (NYSE:A) the price increase there, and given your natural inclination to sell SaaS, I guess I'm surprised that's even that's ticking up a tad. As -- it's not increasing so much as a percentage, but you're still expecting a robust amount of license revenue.

Jim Lejeal

Yeah, here's my view on that. There are international customers who are predisposed to buy this way. And the conversations start in this way. And so we want to set expectations in a careful way. So hence the range we've given you for the year. That also being said, we have a fair amount of customers that have already purchased in this way. And when they upgrade, they by default continue to buy in that license model.

So, 6% to 8% I think, for a full year thinking basis, I think is appropriate. If we see that trending in the wrong direction, I can imagine we may consider actions we've taken in the past to guide it in the right way. But there are existing inherited dynamics of that revenue line and a predisposition of international customers, so I think it's appropriate to be thoughtful about that range.

Bhavan Suri - William Blair & Company, LLC

Okay. And then turning to the sales org, obviously Q3 maybe a little lighter than you guys had expected, but now looking at Q4, healthy seat count additions, to drive the subscription part of the business. Tim, maybe a little color on how the reps were responsible for closing their own large deals, how that played out versus your expectations for the quarter?

Tim Miller

Sure thanks. Let me start by saying we've retooled a bit over the last several quarters. And that's all really came together in Q4. Dan was initially focused internationally. And we've now laid the foundation with three new key hires.

In Q3, we saw a new leader in Singapore, Q4 we added a new leader in Australia, and we've just announced internally a new leader in Europe, which we'll announce shortly. So, these are all three highly capable folks.

We've made some similar changes in the U.S. I could go into more detail. So, there's been a significant change in the leadership within the sales organization that we've layered in over the last three quarters.

As you know, we hired a lot of people especially back-ended. And we just finished our sales kickoff a few weeks ago and I can tell you the morale and the mood of the sales team is extremely high.

We've got a lot of really terrific new people that are excited about the product, they're excited about the market opportunity, and they're really excited to be part of Rally. So, many of those new folks have not been completely productive yet. We see them typically ramp over a two to three-quarter period, but there's a lot of energy and excitement in the sales organization. But this all really came together over the last quarter.

Bhavan Suri - William Blair & Company, LLC

Okay. And then you sort of indicated at the end of Q3, given the revenue guidance of 26%, or whatever, that you had felt like you would be at the high of the range of sales hires and you set out with a structure that should deliver nice growth in fiscal 2015. But now it feels like you're making more investment incremental to that in sales and marketing, fairly robust investments. Help me understand that a little more.

Tim Miller

Well, I think the simple way to answer that is those are investments that we've already made that we'll continue to pay for throughout the year. I'm not sure where you're going.

Bhavan Suri - William Blair & Company, LLC

Well, I guess I thought that, sort of, if I looked at the business end of, let's just say Q3, you were sort of indicating that what you were going to make was substantial enough to get us through 2015 from a growth perspective, maybe 2016.

And then if I look at the current sales and marketing expense, even at a reasonable model, that's growing faster than revenue and I guess I'm trying to understand you're now increasing that even more incrementally. And so I was just wondering if whether that's a 2016 outlook that you're thinking about or did you not hire enough in 2015 or how we should think about that -- in 2014, sorry?

Jim Lejeal

I think you're touching on the right dynamic. If I recall some of the fact pattern that we laid out over the course of last year, we started the year with 112 people in sales and we ended the year with 156.

The range that we had communicated throughout the year was we were targeting 145 to 160 heads in sales.

Bhavan Suri - William Blair & Company, LLC

Right.

Jim Lejeal

As we -- clearly that's a meaningful investment for the execution of this year, right, 39% year-over-year growth in this particular headcount metric.

Bhavan Suri - William Blair & Company, LLC

And given the bookings, you feel -- I would feel that that translates into 2016 growth, too a little bit.

Jim Lejeal

That's right, that's exactly right. And so as we lay a foundation for 2015, we -- as we continue to layer in the support headcount and the additional headcount where we feel like we need to fill what remaining gaps we have, it does lay a groundwork for investment in additional headcount and all complements of the business from Q1, Q2 and through the remainder of the year. So, you'll see incremental investment, but as Tim mentioned, the bulk of its laid in place, at least for FY 2015 already.

Bhavan Suri - William Blair & Company, LLC

Okay. Helpful. Thanks, guys. Thanks for taking my questions.

Jim Lejeal

Hey, Bhavan, thank you.

Operator

The next question comes from Pat Walravens at JMP.

Patrick Walravens - JMP Securities, LLC

Great, thank you. Hey Tim, I asked you last time so I'll ask you again. Overall, how happy were you with the production of your sales force in the quarter?

Tim Miller

I'm trying to remember what I said last time.

Patrick Walravens - JMP Securities, LLC

Last time you weren't too happy.

Tim Miller

Yeah. I won't repeat that. I can share that we’re generally happy. We believe we were firing on a lot of cylinders as we talked about. We made a lot of investments. We haven't seen those investments come online yet, but for those that were onboard and executing, we're pleased with their outcome.

Patrick Walravens - JMP Securities, LLC

Okay, good. And Jim, how do we think about -- because the 12% billings growth rate doesn't seem very exciting compared to some of the other metrics, like the seat count and the revenue growth. And then -- but you said there's no need to normalize it this quarter. What points would you make to sort of help us understand that difference?

Jim Lejeal

Yeah. So, Pat, I normalize when I have a quarter condition where I have a material prepaid dynamic that in a past period. And Q4 of last year and the prior year, because in some cases customers can prepay multiple years, I don't have that dynamic. So, I don't have to work us through the math and I've made a commitment to you all that I'll do that when that exist.

I'll need to do that for Q3 -- sorry, Q2 and then modestly for Q3 and this full year. 12% year-over-year, Q4 was I think there's a bit of tough compare involved in this in terms of last year. But one of the things we focus on is the 63% sequential quarter growth rate. I think I'm pleased with where that number came out in terms of sequential growth.

And then another way I look at it is how it sets a foundation for the coming year. And when I think about our full year revenue for this fiscal year and I look at the amount of billings that we closed in this particular most recent quarter Q4 and how it sets a foundation, $26.7 million in Calculated Billings for Q4 sets the stage for revenue production in full year FY 2015. It’s 29% of that number. So, Q4 in its seasonal aspect is very productive for us and it sets a tone for a year so I'm pleased in that respect.

Patrick Walravens - JMP Securities, LLC

Okay. And your billings comp getting a lot easier in Q1, right?

Jim Lejeal

Q1 of last year, was not -- it's not an easy comp, it's not a hard comp. Its -- Q1 was a good year -- Q1 was of last year was a good quarter for us and so we have our work set out for us.

Patrick Walravens - JMP Securities, LLC

I have 14%. Maybe that's wrong from Q1 of last year. And then just very big picture here for a second, you guys talked about how your sweet spot is large enterprise Agile. What about software companies? And is there something different about that vertical for you guys and is it something that you're targeting?

Jim Lejeal

I referenced it a little bit. We talk about the industrial internet. I can't talk about these particular names, but know that the cohort includes Intel, Cisco, AT&T, and GM. When we look at the largest companies that are redefining themselves as software companies, that represents a big population of current Rally users. In fact that cohort represents 50,000 seats.

So those folks are really in our sweet spot. Those are folks that are building Agile software products at scale. And we continue to see a tremendous opportunity to grow in that cohort as we talked about in the past our ISP. What we identify as our seat potential, we see the possibility to grow that group 50% this year.

So, that's a core focus but know that when we talk about software companies that includes the hardware and firmware and the systems that get built, but software tends to be the innovative feature that drives differentiation.

Patrick Walravens - JMP Securities, LLC

And Tim, what about pure software companies, particularly like the SaaS, the Workday, the Netsuite and ServiceNow and now Adobe's of the world, what do companies like that do? And is it…

Tim Miller

So, a lot of them are earlier in their journey as far as Agile at scale. When we look at some of those companies, you see numbers of developers in the hundreds or approaching a thousand. Our sweet spot comes in an initial transaction, merely that size and goes to thousands and tens of thousands. So as they continue to mature their software development efforts, those look like key opportunities for us.

There are other products that help supports small teams. Again, our differentiation is really when you're trying to build multiple programs, multiple products across multiple divisions. One of the large customers we talked about the American conglomerate. We're in four divisions in 35 different business units. That's when portfolio management is a key attribute of going Agile.

Patrick Walravens - JMP Securities, LLC

Okay. That's helpful. Thank you.

Jim Lejeal

Thanks Pat.

Operator

Our next question comes from Mark Murphy at Piper Jaffray.

Mark Murphy - Piper Jaffray

Thank you. Jim, I wanted to ask you a question on the topic of growth versus margin that you just think about it philosophically. I believe you're doubling the loss per share forecast, but the revenue guidance is unchanged. And I'm just tying to -- I'm trying to reconcile that. It seems to suggest that there's really a massive increase in hiring, but the productivity associated with those hires is not going to occur within the fiscal year. Is that -- is there something I'm missing, or is that a fairly accurate way of thinking about this.

Jim Lejeal

I think you're directionally right. A good number of our new team members joined us in the second half of this year, at least in sales and marketing investment. And the return on their full productivity once they reach that and -- we're not going to start to see the good benefit of that until the second half of now this year. So we need to keep that in mind.

And then, in terms of investment, we look at all of the key metrics that show how we're performing in competitive landscape and whether we should continue to invest. And our perspective is that that we should do this. So I -- and then, finally, I would say, Mark, as you know about us, when it comes to setting revenue and EPS expectations we do so in a very thoughtful and careful way, and our record of beating in each of these categories for the four quarters that we've been public demonstrate that we're careful when we set these particular metrics.

Mark Murphy - Piper Jaffray

Great. Okay. So Jim, I guess I saw it going back a quarter or two that you had made some commentary that recent hires were becoming productive in essentially in real-time or in fairly short order. Is there something different about the nature of these hires, or may be the changes that you had in the sales leadership where just essentially it's just going to take a little longer than it has in the past for them to get productive?

Jim Lejeal

I think our message has been pretty consistent here. We've always articulated that when we hire a sales person we model and expect them to perform against about a three-quarter ramp. And we are slightly more generous in time for our international team members because some of those markets are not as mature as the domestic market is. And I think that modeling remains true.

Where we can get hurt is when we hire somebody, they are two or three quarters, and we expect them to be fully productive. And for whatever reason they are no longer a team member and we have to start over on that particular team member's contribution to our total performance.

I would say, with respect to modeling, FY '15 and our years, given our experience with Q3 and thinking through Q4 we've modeled a little bit more generosity in terms of some of the ramping just to be conservative.

Mark Murphy - Piper Jaffray

Okay. And then, may be, could you walk us through some of the headcount and hiring plans? Because just given the aggressiveness of the investments that you're making, I'm wondering you ended this year with I think you said 156 quota carrying reps, what is the goal for the end of this fiscal year?

Jim Lejeal

Yeah. While you're pulling that up, first of all, we've been pretty clear, 156 in the sales organization of which roughly half are quota carrying reps. I believe that ratio has improved a bit on this particular number and we've seen that in shop. But again, there were a lot of hires that were back-end loaded into the quarter -- into the year, I mean. And for them to become productive, it takes time.

Mark Murphy - Piper Jaffray

You're right. I misspoke. I did not mean to say quota carriers; I meant to say the total sales organization.

Jim Lejeal

Yeah.

Tim Miller

Yeah. Mark, we'll target for the end of the year in terms of sales headcount is in the -- probably in the 175 to 185 range in terms of total headcount in sales. And then, in other areas of the business I would characterize it as measured growth relative to the absolute number and the absolute number of year-over-year growth and I guess I'd leave it at that.

Mark Murphy - Piper Jaffray

Okay. Great. I'm going to just keep going here for a minute. I think these seat additions in the quarter are -- it just seems like a really solid number compared to Q3, and I wanted to congratulate you on that. I was trying to understand just one element of that number. I'd say I'm probably misreading it in the press release, but you're talking about two large customers that it says representing 19,000 total aggregated seats. And I just wanted to be clear that's -- if I understand this right -- those customers already had some number of thousands of seats. They had expanded and now they total 19,000 seats. I just wanted to be clear that there's two customers did not add 19,000 seats during the quarter.

Jim Lejeal

That's correct, Mark. No, they already had a substantial amount of thousands of seats and then including their add-on for the quarter cumulatively those two now sit at 19,000.

Mark Murphy - Piper Jaffray

Okay. Got it. Thank you. And third, are you willing to quantify how many seats they added during the quarter between those two?

Jim Lejeal

We didn't break those out. I imagine we'll present a top 15 chart and we may show that agnostically at some point in time or anonymously at some point in time that's our intent. And we may present that at a conference. So you recall our top 15 chart and so there maybe some deduction there based on our past history in that. But we're not really -- we didn't really say at this time.

Mark Murphy - Piper Jaffray

Okay. And the last one for me, so there -- I'm just trying to understand again one of the dynamics here. You have stronger paid seat additions in Q4 than you had in Q3, but then the Q1 revenue guidance is a little below what we are all expecting. And so, I just want to make sure I understand. I think we probably would have thought the seat additions convert to subscription revenue downstream.

And so, I guess I'm trying to reconcile that versus the guidance. Was there -- and part of my question here was, was there any material change in ASPs, one way or the other, or is there some other dynamic at work there?

Jim Lejeal

Yeah. As you know, we don't disclose ASP and -- but we talk qualitatively about ASP. So let me repeat some of that pattern here so it helps inform us. When we analyze customers by their category of seat potential and we look at our existing customer sets, we see that ASPs are increasing in all of the categories, in some cases modest increase, in some cases more than modest.

With the exception of customers that have seat potential of greater than 2,000 seats where we have seen the past average seat price decline based on our negotiating algorithms discounting for greater commitment, but in exchange we get more revenue and more cash from the customer. But for the trailing year period, average seat price for this category of customer has been generally flat.

So, the way I would think about it is this way, pattern matching or calculated billings to the growth rate and seat count I think is a flawed assumption. The two don't work necessarily hand-in-hand, right? So the 28%, the increase in seat count for the year doesn't necessarily match the calculated billings, but as it layers into the year and other revenue mix, it sets the stage for at least being confident about the revenue outlook we provided for Q1.

Mark Murphy - Piper Jaffray

Okay. Got it. Thank you very much.

Jim Lejeal

Yeah.

Operator

The next question comes from Michael Huang at Needham & Company.

Michael Huang - Needham & Company

Hi guys. A couple of quick questions for you. Thanks for taking my questions. So, first of all, just another question, kind of, around aggressive sales ramp, which shouldn't be surprising, given the magnitude of the opportunity. I was wondering how we should think about as we're layering on the productivity of the sales guys, and obviously you guys are being very thoughtful around kind of what kind of growth rate that you're looking to target in kind of fiscal '16 and beyond.

Just trying to get a sense, I mean is that like -- are you thinking that this market and your competitive positioning, and does that support kind of seat growth that's closer to kind of what we're doing now, or is it going to be normalized and closer to kind of what you're seeing around like billings growth.

And I know that billings growth is not an indicator of a seat growth, but I'm just trying to get a sense. I mean, you're layering on sales guys; you're thoughtful about what these guys are impacting. The seat growth continue to kind of look like its in the kind of mid to high-20s, or is there any reason to think that larger numbers drive some more deceleration kind of around that?

Jim Lejeal

So Mike, here's how I answer that. We don't guide on seat count growth, as you know. And the reason for the revenue mix outlook that we provided for you is to help better understand and inform all of our models.

So I guess I'd have to defer to the particular parameters we've given you, right, which is full-year revenue, revenue mix, and then further the renewal rate as its trended, and then the retention rate that we've offered you in this particular quarter, which I've committed to giving you -- giving all of us annually, which for the measure period making the adjustment was the 10% number. And I just want to point out that that number is both non-renewals and downgrades.

So what those numbers are, if you're building a model that thinks through how our business grows targeting to revenue, you should -- with those assumptions and drivers, you should be able to conclude, get a sense of where you think seat count will drive.

Michael Huang - Needham & Company

Okay, okay. Fair enough.

Jim Lejeal

Yeah.

Michael Huang - Needham & Company

So, from a product standpoint, so at the highest level what are you guys or what are you sales guys are most excited about for 2015? Is there any meaningful product announcement that you might be able to hint at ahead of kind of -- there's upcoming customer conference, I mean is there going to be any meaningful announcements during that event?

Tim Miller

So I can say a couple of things, Mike. This is Tim here. From product standpoint, we're currently in the biggest private beta that we've had in our history. This represents about half of our core engineering team and the work that they've been working on our private beta for about half a year.

We're right about to go live with what we call an open beta and allow our customers to start using that capability. This is a highly customer-driven set of features. It will significantly modernize our core applications. So that's thing one.

The second thing I would comment on, and you'll hear more about this at the conference is, the work that we've been doing around analytics and benchmarking we continue to see very large customers trying to get scale with agility, be able to use our analytics and benchmarking capability to really improve and hone their Agile processes.

They look to us to help them do that and these product features along with services capabilities that we have around that will be launched in a much bigger way in the coming months and quarters.

So that's really exciting for us. It's exciting primarily because we value and leverage the platform that we've built with the 200,000 plus users on it. We're able to mine that data and then provide that intelligence back to our customers. So, keep tuned on that. We'll have a lot more to say about that at our conference.

Michael Huang - Needham & Company

Got you. And last question for you. In terms of some of the large expansion deals that you called out, certainly very impressive. I was wondering if you could share. I mean were any of -- were these competitive like IMB or others, or given kind of the strategic relationship and kind of how end satisfaction, etcetera? Were these essentially kind of non-competitive opportunities for you guys to expand on?

Tim Miller

Yeah. I'll call out one in particular. With the big, sort of, American conglomerate, we have been in a competitive situation with them actually for a period of years. And we have slowed our growth over time as a result of that competition.

When they decided that they really needed to go big, they looked at our competition and they said that that competitor won't scale with us. And that was a huge differentiator in our ability for that win. Another just sort of quick way to characterize that is when they were in research mode, our competitor was winning. When we went to development mode, that's when we really won.

Michael Huang - Needham & Company

Great. That's very helpful. Thanks guys. Appreciate it.

Jim Lejeal

Yeah. Thanks Mike.

Operator

Our next question comes from Alex Zukin at Stephens.

Alex Zukin - Stephens

Hi guys. Congratulations on the solid quarter. I have two questions kind of going back to Mark's question around the incremental increase in operation expenses. Should we assume that that incremental increase should be a third, a third, a third in terms of proportionality from sales, R&D and G&A, or is the bulk of it going to go under sales and marketing? And how does that layer through? Does that accelerate as we go through the year, is that accelerate -- does that start high and go lower? Can you help us work through those dynamics?

Jim Lejeal

Yeah. I think its most in sales and marketing, next the investment and hierarchy would be R&D, and then G&A is I think not a distant third, but certainly less so. And I would characterize it as front-end loaded or first half loaded -- first half year loaded with the declining investment through the second half of the year. So hopefully, that's helpful.

Alex Zukin - Stephens

Got it. And then the second question is, if you look at the guidance range for the first quarter versus the year, it assumes that the revenue growth accelerates through the year. Can you help us understand -- I understand the variability in the perpetual license aspect, but why from a subscription growth perspective does it accelerate year-over-year, or does it for those dynamics?

Jim Lejeal

Yeah. I'm thinking -- I'm pausing as I think, Alex, to answer your question. The nature of our business having the three revenue lines, it requires you to kind of depending -- you have to focus in on at exactly what revenue line we're talking about, right? And that was one of the motivations on our part to offer revenue mix at the beginning of this year and then continue to do so annually, not quarterly.

Clearly, services is an area of the business that we feel confident about growing. And perpetual is a legacy line of the business that we'll carry. And as those customers order an add-on and new customer that will only buy that way, they'll purchase those items.

The subscription line, as you know, because of the ratable recognition pattern is a bit more predictable. And I think this is where looking at our deferred revenue on balance sheet using the metric that we've offered in this particular quarter, and I will do so on an annual basis from an off-balance sheet deferred revenue, the contracted but unbilled.

A portion of that let's say $5 million to $6 million will be recognized, will be invoiced and then recognized through the course of this year. So what those components, if you will, from a modeling and decomposition perspective, it should give you good confidence in that particular line item as you model through the year. And then as you decompose down to Q1, I think your conclusion will be, you'll see how the pieces fall into place. I'm answering your questions indirectly, but I fear I have to.

Alex Zukin - Stephens

Got it. And the last question on backlog. Are you able to tell us what that number was in the prior year?

Jim Lejeal

I can give you a range. At the beginning of the year it was, let's say, approximately $6.5 million -- $7 million.

Alex Zukin - Stephens

Okay.

Jim Lejeal

Yeah.

Alex Zukin - Stephens

Okay, guys. Thank you.

Jim Lejeal

Hey Alex, thank you.

Operator

Our next question comes from Rich Baldry at Roth Capital.

Rich Baldry - Roth Capital

Thanks. Sort of asking the same question, but in different way. On a sequential basis revenues are potentially even. In Q4, total OpEx spending was $25 million. So to take your adjusted loss from the $0.19 we saw into $0.50 level, you have to incrementally grow expenses somewhere on the order of $8 million increase over the $25 million we had in Q4.

Can you just talk about how feasible it is to grow in the single quarter in that total spend by that amount? Your headcount hasn't increased that dramatically. Is really discretionary on marketing ad budgets over a short term period that you can push at that level without having to change the headcount dramatically?

Jim Lejeal

Yeah. My answer is we added 50 heads in the quarter. A lot of that was back-ended. Those 50 heads are going to be carried through the quarter. And as we continue to hire against our goals, which we characterized as first half emphasized, first half of year emphasized, and it sets the right carefulness. We're -- further we're setting expectations here in a thoughtful, careful way, Rich.

Tim Miller

May be this will help little bit too. So we've talked about the quantitative on the hiring, but we've really moved into an enterprise sale. We are clearly focused on the Fortune 1000. We have clearly moved to named account strategy where we have the Fortune 1000, about 600 other named accounts in the U.S. and 400 around the globe.

Attacking these larger companies require some -- in some cases, higher level skill set. So we've got a great new, young sales force that has been augmented and is just really coming on-board. These larger opportunities take more time to close. And that's one of the dynamics that you see even though we brought them last year we're really incurred that expense going forward.

Rich Baldry - Roth Capital

Then kind of just to check sort of figure, but can you talk about where you see receivables in terms of seasonality in Q4 and Q1. It spiked up pretty solid in the quarter, but deferreds is up similarly. And most of the collections on that take place in the next 90 days and you come back, sort of, to what we look as more normalized in Q1?

Jim Lejeal

That's right. I think if you look at past Q4, Q1 dynamic, Rich, you're going to see the typical pattern here. And I think if you look even back in some of our historicals, you're going to see that Q1 has been a quarter where we've been operating cash flow positive where other quarters were negative. And it's because of the anomalous large billings that Q4 presents and the seasonal aspect of our business that we've talked about from time-to-time-to-time. So I think if you look at past pattern, you'll be able to pattern -- you ought to be able to pattern this Q4 and Q1 appropriately.

Rich Baldry - Roth Capital

Right. Thanks.

Jim Lejeal

Yeah. Thanks Rich.

Operator

At this time, I'd like to turn the conference back over to management for any closing remarks.

Tim Miller

Well, again, thank you everyone for joining us today. I look forward to continuing the dialogue.

Jim Lejeal

Thanks everyone.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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