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E2open Inc (NASDAQ:EOPN)

Q4 2014 Earnings Conference Call

April 24, 2014 5:00 PM ET

Executives

Greg Kleiner - Investor Relations

Mark Woodward - President, CEO

Peter Maloney - Chief Financial Officer

Analysts

Brendan Barnicle - Pacific Crest Securities

Richard Davis - Canaccord

Michael Huang - Needham & Company

Mark Schappel - Benchmark Company

Scott Berg - Northland Capital Markets

Yun Kim - B. Riley & Company

Alex Lujan - Stevens

Operator

Greetings and welcome to the E2open Fourth Quarter Fiscal Year 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I would now like to turn the conference over to our host Greg Kleiner, Investor Relations for E2open. Thank you, you may begin.

Greg Kleiner

Thank you. Good afternoon and welcome to E2open’s fourth quarter and fiscal year-end 2014 earnings conference call. Joining me today to discuss our fourth quarter and fiscal year end 2014 results are Mark Woodward, E2open’s President and CEO; and Peter Maloney, E2open’s Chief Financial Officer.

Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release. Non-GAAP financial measures exclude the impact of stock-based compensation, non-cash income taxes; certain accelerated revenue recognized in connection with the contract amendment, amortization of intangibles, acquisition expenses and the impact of a purchase accounting adjustment to deferred revenue.

At times in our prepared comments or in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results. Please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future on these metrics.

The primary purpose of today's call is to provide you with information regarding our fourth quarter and fiscal yearend 2014 performance in addition to our financial outlook for our first quarter and full year fiscal 2015.

Some of our discussions and responses to your questions may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission. Should any of these risks or uncertainties materialize or should our assumptions as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual company results could differ materially from these forward-looking statements.

I encourage you to visit our Investor Relations web site at investor.e2open.com to access our fourth quarter press release, periodic SEC reports, a webcast replay of today's call or to learn more about E2open.

Finally before I turn the call over to Mark, please be advised that during today's discussion, we may reference certain unreleased services or features not yet currently available. We cannot guarantee the future timing or availability of these services or features and thus recommend that customers who purchase our services make these purchase decisions based on services and features that are currently available.

And with that, let me turn the call over to Mark.

Mark Woodward

Thanks, Greg. Welcome everyone and thank you for joining us today. Our fourth quarter results shows strong growth in non-GAAP subscription and support revenue once again as we grew that revenue line to $16.5 million or 41% growth on a year-over-year basis, our highest quarterly growth in three years.

For the full fiscal year, we grew non-GAAP subscription support revenue to $57.1 million or 32% growth. Both figures are reflective of the combined strength of our business. In terms of new and upsell bookings while we have not broken out this metric into its underlying components in the past, we think it’s important to put our overall performance and the growth characteristics of our business into proper perspective. We showed very strong growth in our new and upsell subscriptions and support booking which were $70.8 million, up 79% over the prior year. In addition the fourth quarter we had the highest subscription and support bookings quarter in history of the company.

For the fourth quarter and the fiscal year, we had significantly lower bookings professional services as a result of the changes that we made in our go-to-market model in this area of our business. As a result our 17% annual growth rate for total new and upsell bookings were short of the 30% growth target for this metric that we had shared earlier. The rapid growth of our subscription support bookings and the overall mix shift in our business is further evidenced by the fact that 86% of our total new and upsell bookings came from subscription and support, versus 56% in fiscal 2013. This is a dramatic change in a 12 months period.

The mix of bookings was of course driven by the growing success of our partner program. We have moved beyond training mode and are fully engaged in the execution front with our three main partners, Accenture, KPMG and PWC. At a high level we’re seeing some strong traction. For example we’re the only vendor invited to present at the recent PWC Supply Chain Conference. It appears to have generated good deal of positive feedback and pipeline building activities.

With Accenture we have now implemented an incense of our platform in their dental center in Europe, which has served to expose us to even more of their customers and prospects. At a more tactical level, our respected sales teams are engaged at holding pipeline sharing and customer targeted meetings on weekly basis. We’re currently involved on sales cycles of all three of our SI partners. Overall this activity has resulted in multiple deals that close in the fourth quarter, but is also building a pipeline of deals that should have a growing impact to our business throughout the upcoming year.

One of the highlights in the fourth quarter was an expansion deal that we signed in conjunction with Accenture at a top global oil and gas company in Europe. While we did serve proof of concept filed in the third quarter, the rollout deal signed in Q4 was the largest initial deal in the history of the company.

This is the deal that Accenture pulled into initially and we beat out 16 other vendors over a rigorous six month RFP process. E2open will be used initially for track and trades for their oil and gas platform. Once deployed, our solution will be used across 200 sites by 8,000 users tracking over 1.5 million items. Overall this is a fantastic deal on number front. This moves us into the very large oil and gas vertical, continuing a pattern of successful vertical expansion that we’ve embarked on over the past several years. In addition Accenture is also planning on packaging solutions and presenting it to additional customers.

With KPMG, we signed a deal with Timken, a $5 billion industrial manufacturer and a new customer in the quarter. Timken was looking for an automated way to manage orders and logistics interaction with their customers and logistics partners. Today Timken has over 60 discreet systems comprised of mostly custom built solutions, which require a significant amount of human intervention. [indiscernible] E2open business network, we’re connecting Timken with it, to allow their employees to collaborate with all their customers through a single system. Through the use of E2open Timken expects to significantly improve productivity, produce arrears to the automation and processes and increase customer satisfaction.

A final deal I wanted to highlight is with Panasonic, one of Japan’s largest electronic manufacturers. While they have been smaller E2open customer for many years, Panasonic recently identified the need to replace the legacy customer portal that did not allow the customers to see their order status in real time. Customers therefore called in frequently to check on acknowledgement status shipment et cetera, which required a significant amount of manual effort to respond to these inquiries.

E2open solution integrates into Panasonic’s multiple ERP systems, extracts customer order information and presents it within the new customer partner portal. E2open's finite security and ability to integrate with Panasonic’s security framework provides single sign on for their customers. This is a key component in Panasonic’s decision to use E2open. Their customers will now have self service solution to check their order status anytime they wish. By moving from manual system to an automated solution to E2open, Panasonic expects savings from improved customer support productivity and enhanced customer satisfaction.

On the product front, we launched E2 Planning and Response version 11.2 during the quarter, the most significant aspect of this release as we now delivered our first level of planned integration with E2open platform and can now deliver the icon functionality through the cloud. The product offers advanced planning scenario management, what-if simulation, planned visualization and analytics along with a set of SAP certified ERP adaptors. The reaction to the extended product footprint in the planning segment continues to be strong and help drive several of the deals signed in the past quarter. Our ability to blend the planning and execution segments of the market remained unique and a powerful differentiator in competitive situation.

During the quarter some of our customers and employee received recognition as thought leaders in the industry. On the customer front, both Radisys and Avnet won 2014 Manufacturing Leadership Award from Frost & Sullivan for systems they have implemented in partnership with E2open. Avnet was recognized in the customer value leadership category and Radisys in the enterprise technology leadership category. Both strong testaments to the value we’re delivering to our customers. In addition three of our own employees were acknowledged by Supply & Demand Chain Executive magazine as 2014 Pros to Know, a listing of top supply and demand chain industry professionals, congratulations to all.

Before I turn the call over to Peter, I want to provide an update relative to one of our customer relationships that we have discussed in the past and how will impact our guidance for fiscal 2015. We have previously shared that in the second quarter of our fiscal 2013, we renegotiated contract with RIM or now BlackBerry due to the meaningful lower volumes that were being experienced at that time.

As you may have seen recently in the business press, the new CEO of BlackBerry was taking extreme measures to return their handset business to profitability, allowing to exit or sell the business altogether if the current situation cannot be rectified. In the last quarter alone, device sales were down 77% versus to prior year period. As a result BlackBerry is reevaluating the contract we currently have in place as they approach the next renewal milestone.

As we finished the planning for our fiscal 2015, we felt it was appropriate to remove the majority of the ongoing subscription and support revenue related to this contract from our forward looking outlook. Peter will walk you through the impact of that in a moment.

So before I pass the call over I want to thank the E2open team for a tremendous year. We believe that we have an incredible opportunity in front of us in this market and as the leading vendor in the collaborative execution planning space we have moved aggressively throughout the year for the right people in place to capitalize on this opportunity. We have completed partnerships with three of the leading global system integrators, expanded our market opportunity through the acquisition of icon and grown both our subscription revenue and bookings at high rates. I remain enthusiastic about the process for our business going forward.

With that, let me turn the call over to Peter for more detail on the financials.

Peter Maloney

Thanks Mark. First I will begin with the review of our bookings performance and then I will turn to the P&L. For fiscal 2014, our total bookings were 98.2 million compared to 125.1 million for fiscal 2013. Within total bookings new and upsell booking increased 17% to 82.1 million and renewal decreased 71% to 16.2 million. As we mentioned heading into the year due to the timing of previous contract signings, we did not have a large amount of business scheduled for renewal in fiscal 2014.

Within new and upsell bookings, subscriptions and support bookings were very strong, and increased 79% to 70.8 million. Professional services bookings declined to 63% to 11.3 million. As Mark discussed earlier, this was consistent with the ongoing changes to our go-to-market model during the year.

Please note our non-GAAP results exclude the effects of the BlackBerry contract amendment that took place during the second quarter of fiscal 2013, and the impact of a purchase accounting adjustment to deferred revenue from the ICON acquisition closed in the second quarter of fiscal 2014. This is similar to our non-GAAP presentation in recent quarters and is due to the fact that these items are nonrecurring and do not reflect our ongoing operating performance.

For the fourth quarter, non-GAAP total revenue was $20 million. At the midpoint of our guidance of 19.6 million to 20.4 million and compared to 18.1 million for Q4 of last year. These results were driven by strong growth in our subscriptions and support revenue offset by professional services being at the low end of our guidance range.

Non-GAAP subscriptions and support revenue was $16.5 million for the quarter, up 41% year-over-year and 13% sequentially. These results were bolstered by the early conversion of customer pilots during the fourth quarter. This was above our guidance range of 16.1 million to 16.4 million. Non-GAAP profession services and other revenue was 3.5 million compared to our guidance of 3.5 million to 4 million.

Our results here continue to reflect the accelerated implementation of our partner strategy. Non-GAAP gross margin for the quarter was 67%. This is consistent with Q4 of last year and up from 65% for the third quarter of this year. Our subscriptions and support gross margin was 82% for the quarter, down from 83% for the prior year and flat sequentially.

Non-GAAP operating loss was 3.6 million for the quarter compared to an operating loss of 1.4 million for Q4 of last year and an operating loss of 3.9 million for Q3 of this year. This is at the high end of our guidance for the loss of 4 million to $3.5 million. Non-GAAP EPS was negative $0.13 compared to our guidance of negative $0.15 to $0.13. This compares to negative $0.06 for Q4 of last year and negative $0.16 for Q3 of this year.

Adjusted EBITDA for the quarter was a loss of 3 million at the high end of our guidance of a loss of 3.5 million to 3 million. This compares to a loss of 1 million for Q4 of last year and a loss of 3.3 million for Q3 of this year.

Our total deferred revenue balance at the end of the quarter was 45.3 million. I would like to remind everyone that the change in deferred revenue was not a good predictor of our future revenue growth or our bookings in any given period. The amount that is visible on our balance sheet is determined by the timing and mix of bookings and billings that can be impacted by customer contractual terms, services delivery timing and the size and length of contracts. We do provide additional transparency into our business by providing new and upsell bookings guidance on an annual basis.

Cash flow from operations was 3.7 million for the quarter. After taking into account capital expenditures and the cash paid per acquisition expenses in the quarter, free cash flow was 4 million. We ended the quarter with 65.6 million of cash and investments, up from 12.8 million at the end of last quarter. This reflects 50 million of net proceeds from our follow-on offering completed in January. There can be quarter-to-quarter variability in our cash flow as this figure is impacted by the timing of invoicing under our contracts.

Before I turn to guidance I wanted to discuss the financial impact from the BlackBerry contract that Mark mentioned earlier. Under the current contract structure, the subscription portion of the contract is guaranteed for the first quarter of fiscal 2015. As a result, we have not changed anything in our current operating plans for the first quarter; however, there is roughly 2.5 million in subscription revenue at stake over the balance of the year and we’ve removed this amount at risk from our full year guidance.

Given the high levels of profitability of our subscription revenue, this action will also have a similar impact on our operating profitability. We very much view the BlackBerry situation as unique. We have chosen to continue our investments and growth, given the market traction we are currently experiencing, which is reflected in the strong subscriptions and support bookings that we reported today and the guidance for the upcoming years that I will share with you now.

We’re initiating guidance as follow which is all non-GAAP. For the full fiscal year 2015, we expect new and upsell subscriptions and support bookings of 89 million to 94 million, our growth of approximately 26% to 33%. We expect revenue of 86.5 million to 89 million, while going forward we will not be guiding to the subcomponents of revenue specifically, broadly we expect professional services revenue for our fiscal 2015 to be flat, to up 5% when compared to fiscal 2014.

Please keep in mind that the BlackBerry item I discussed a moment ago reduces the implied guidance for fiscal 2015 non-GAAP subscriptions and support revenue growth by more than 4 percentage points. Operating loss is expected to be 14 million to 13 million leading to a non-GAAP EPS loss of $0.47 to $0.43 based on a diluted share count of 31.3 million. Over the course of the year, we will be working to return on profession services gross margin to normal levels while continuing to invest in growth.

We also expect the adjusted EBITDA to be a loss of 12 million to 11 million. Finally our free cash flow is expected to be negative 10 million to 9 million. For the first quarter of fiscal 2015, we expect revenue of 19 million to 19.8 million. As you consider the mix of revenue for Q1, please recall the positive impact to subscriptions and support revenue from pilots that converted early in Q4. As a result we would expect subscriptions in support revenue to be flat to slightly down sequentially.

Operating loss is expected to be 4.8 million to 4.4 million leading to a non-GAAP EPS loss of $0.16 to $0.15 based on a diluted share count of 31.1 million. Adjusted EBITDA is expected to be a loss of 4.2 million to 3.8 million. In summary, we were pleased to report strong growth in both our subscriptions and support revenue and doing upsell subscriptions in support bookings. We believe that the growth initiatives we had put in place are working and we will continue to yield strong results in the future. And now we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question comes from [indiscernible] William Blair & Company.

Unidentified Analyst

Hey guys. Thanks for taking my question. Could you just clarify here, so we are very clear -- on the non-GAAP revenue for Q1, the guide, you're not excluding any of the re-contract on RIM at mid 19 million to 19.8 million?

Peter Maloney

We aren’t -- the one thing I point out on the subscription side and I mentioned it in the script, there’s about $300,000 of conversions of pilots that occurred early in Q4. And so if you’re sort of correct for that it would take 300,000 out of Q4 and put it into Q1.

Unidentified Analyst

Got it, got it. And then the full year guide, if I'm seeing that in a different way -- I think in a different way it would be that, it'd really be 2.5 million above the 86.5 to 89 if you weren’t doing the RIM? Just assuming if that goes away.

Peter Maloney

That’s right. I mean another way to think about it is just isolating subscription, and we didn’t give specific dollar guidance, but if we excluded RIM from the numbers from both years, the subscription would be up between 28% to 30%.

Unidentified Analyst

That’s very helpful. Thank you. And then when you look at the customer ads, I know you guys have been targeting sort of 15 to 20 and we walk through the math before were 15ish can get you to sort of a nice 30% kind of bookings, new and upsell bookings number as well. But sort of -- just talk, you know it feels like we go a little plan. How are you guys thinking about that?

Peter Maloney

See, when we talk about 15 to 20 -- at the end of the day what we’re really looking for is a bookings number, right, because that’s what really matters. It’s not the number of customers, it's the amount of bookings, you see we broke out new and upsell subscription booking, it was extremely strong. Q4 is our biggest bookings quarter ever and you saw for the year, the new and upsell subscription was up over 70%. So it really depends on just the deal mix, we talked about this large oil and gas deal which was probably more like -- it was like adding three or four customer just in that one deal. So it’s really more about the bookings number and that 15 to 20 is what we think is just kind of average deal size. So, if we get a couple of large deals in there, the number of customers isn't important as the amount of bookings.

Unidentified Analyst

Fair enough. And then with the SIs and you look at the business that Accenture is doing, which is phenomenal KPMG and price. Obviously they're good in the services components but on the core subscription do you feel that there’s any pricing pressure there at all or do you think you’re able to maintain pricing? Is there a chance to get a little better pricing?

Peter Maloney

So you know it is early days obviously, we've just done a small number of deal so far. But I think we actually have good pricing leverage, I would -- I mean I had said actually the end of last year that I -- based on what we’re seeing the pipe already, I expect the average deal size from this integrator type thing tend to be larger because there is less pressure. We often, the E2open fee if you will from these deals will often be the smaller component. So far our experience has been less pricing pressure through the integrators.

Unidentified Analyst

Great. And then just one quick last one from the – you’ve obviously book a number of applications in the platform and that’s a good part of the subscription growth, Are the SIs starting to build their own applications within the environment? Obviously they set up a development environment, Accenture seems to indicate that but sort of help us think through that and sort of how that ends up driving revenue for you guys as they do that?

Peter Maloney

Yes, it’s a two things, one is that the situation at the Accenture, it’s like a customer demo center. We’ve installed this E2open, we’ve trained them how to demo it, so they’re basically demoing basic E2open capabilities to their customers and prospects which is great. In terms of them building functionality, one of our big R&D initiatives this year is to really build out the platform for allowing partners to integrate in through much easier to use FDI’s and publish you know FDKs to help them do that so. So while we have their capability today, that’s a big key initiative for this year is to make that much simpler to really encourage, not only integrators but also other software vendor solutions providers to integrate to our platform as well.

Unidentified Analyst

Thanks for taking my questions guys. That was really helpful.

Operator

Thank you. Our next question comes from Brendan Barnicle from Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks guys. I wanted to delve in the Q1 guide a little bit more. If I look at the sub and support number, it seems to imply that that would be down sequentially. And I want to try and understand why it'd be down sequentially in Q1? We haven’t seen that in Q1s before. What are the puts and takes that might be driving it that way?

Peter Maloney

Sure Brendon, so in Q4 we actually had a couple of pilots that converted early, so I pulled about $300,000 of revenue into Q4 from Q1. So if you adjust from that you actually see about 2% increase in Q1 sequentially over Q4. The other thing that I point out is that that quarter will be up over 30% year-over-year, and so it’s a very, very strong quarter. And then the last thing I’d mention is we did have really strong new and upsell bookings last year, big Q4. And what happens is that revenue doesn’t start right away, they can take up to a quarter sometimes for milestones to be met for subscription rep to start. So I wouldn’t read into anything on that sequential growth rate. And the 2% is what would the adjusted growth rate would be, if we adjusted for those pilot points.

Brendan Barnicle - Pacific Crest Securities

Great. And then similarly on pro-services, should we be expecting that to sort of be flat sequentially, to have bottomed out or would drop a little bit or still here?

Mark Woodward

Our guidance is 3 to 3, 4. It’s pretty much within the range of where we were in Q4. And it’s always going to be $200,000 or $300,000 put or take base on the timing of when the PS work is done. So, pretty consistent with Q4.

Brendan Barnicle - Pacific Crest Securities

Great. Then on the RIM contract, so we’re taking out the 2.5 million presuming that something happens with that contract. But you are just doing that for planning purposes, it’s not a done deal right that RIM walks away, is it?

Mark Woodward

The way that it is structured out with the customer, they have actually given us notice and it happened a couple of days ago actually. And so the way that we’ve restructured with them based on their notices is that, it will roll out until Q3. Now Q2 and Q3 revenue from that is really de-minimis amount but we’ll continue to have them as a customer and provide services through Q3. And then our sales people are actually working with them to see what other services they would need beyond that. But right now they have committed pretty much through Q3.

Brendan Barnicle - Pacific Crest Securities

Then lastly Mark, what about sales hiring plans for this year?

Mark Woodward

So pretty consistent with what we have been saying that we plan to hire sales capacity roughly in line with the bookings growth expectations, so similar to last year about 30%.

Operator

Thank you. Our next question comes from Richard Davis from Canaccord.

Richard Davis – Canaccord

Thanks. How many deals do you guys see occurring in a given year and if you kind of included those that you would compete for and those that you had conceivability paid. I am just trying to think about, I mean I know you’re a moving target because you add features, functionality and verticals. But how do you think about that? It’s kind of an indirect pam question I guess.

Peter Maloney

Before Mark goes into the actual deal, I just want to remind you that more than 50% of our new and upsell bookings come from upsell. So there was a lot of activity we continue to get on the land and expanse strategy within our install base and then Mark can touch on the…

Mark Woodward

I’d just say it's kind of broad brush. We’re probably doing about 50 transactions a quarter, both new and upsell, obviously majority has been upsell. And in the range of dollar value is pretty dramatic, right. So you have some customers who are adding a few B2B connections at the low end and then of course we get like a big oil and gas deal like the one we got. And in terms of where we compete versus where we win, I think one of the things we pay a lot of attention to is qualification upfront, because we invest a fair amount of time and resource into these deals because these are big enterprise sales and before we go invest a lot of time we really qualify them pretty hard. So we’re winning more than we’re losing. But we’ll self select out of deals if we think we’re not a good fit.

Operator

Thank you. Our next question comes from Michael Huang from Needham & Company.

Michael Huang - Needham & Company

Great, thanks so much. First question around kind of new and upsell bookings which obviously was really impressed in the quarter. I was wondering if you were to normalize for term length and was there any differences around term lengths in the quarter which perhaps either benefited or made that compare a little bit less useful for us on a year-over-year basis?

Mark Woodward

For the full year there was an increase in the term length by few months.

Michael Huang - Needham & Company

For the quarter itself, no meaningful difference?

Mark Woodward

No.

Michael Huang - Needham & Company

I guess then obviously oil and gas -- nice ideal there, but from a product standpoint was there any greater attach rate across your broader product footprint? Maybe you could talk a little bit about kind of the product mix and what you’re seeing around tax rates of products?

Mark Woodward

Yeah really no great change there, other than we’re now seeing some of the technology we bought from the Icon acquisition being mixed into a lot of our deals. In some cases it’s the what-if capabilities and in some cases the scenario management and in some cases it’s just kind of higher level analytics. So I would say we’re seeing that mixed into more deals as we had expected, but that’s about it.

Michael Huang - Needham & Company

And Mark, can you remind me, if you were to attach Icon as well, how much does that layer onto annual pricing? Just from a rough standpoint, if there is a way to ballpark it?

Mark Woodward

We know there is six of these modules that are priced between like -- $150,000 and $200,000 each, of course that you know it's less priced and we know when you lump it in with some other stuff, the average deal price can be a bit less from that. So, I think on average a deal includes to that ICON functionality is going to have two or three of those. So big picture, if somebody is going to implement kind of a classic planning suite on top of our execution platform is probably in the $400,000 to $500,000 range for that.

Michael Huang - Needham & Company

Great. Okay. And then just kind of around the pilot activity, where is the comment on kind of remaining pilots that you have in action right now and in terms of what drives the earlier conversion of some of the pilots that saw in Q4? And maybe you can just touch on what was of that going to help them get through that pilot faster rather than wait until Q1? Thanks.

Mark Woodward

Sure, we’re not really disclosing on a quarter-by-quarter basis the number of pilots, I would say that from on average if you look at what we were selling and how many deals we’re selling it’s pretty consistent. We did have some good success relative to our financial forecasting converting some pilot early. And it really has to do with two things, really good definition in the sales process of what that pilot is and how you define success and then secondly us just executing better and faster and showing value to the customer. Sometimes when the pilot is actually converted early, we don’t finish every single item on the list, we’re just doing so well and the customers starting to see value before all the pilots done that they simply agree to flip into the non-cancelable contract. So it’s really about defining the pilot better and then good execution.

Peter Maloney

Yes, I was going to add on that, it really is, at the end of that kind of sales execution in some came because we always want -- some of these pilots there is a risk until they flip in to being that non-cancelable deal. So we always want to close business as soon as we can, so some of that is just sales execution.

Operator

Thank you. Our next question comes from Mark Schappel from Benchmark Company.

Mark Schappel - Benchmark Company

Hi, good evening. Peter, for modeling purposes, help us out a little bit with the professional services business. Has that line item reached a low yet or is it bottomed out yet? And what do you expect growth wise in the line item for the next year?

Peter Maloney

So if you take a look at the guidance that we gave, it does, it is consistent with sort of bottoming out, if you will. And so we expect that business, that part of our business to grow flat to 5% for the year. And as I’ve mentioned also we’re going to be working on improving the gross margins through the year and the goal is to get back to sort of normal gross margins and try to approach that by the end of this fiscal year.

Mark Schappel - Benchmark Company

What exactly our normal gross margins in that business?

Mark Woodward

So, I think long run sustainable normal gross margins for that business for us is 25% to 30% gross margin.

Mark Schappel - Benchmark Company

Okay, great. And then with respect to R&D expenses, they came in lower than what have expected, especially with the work you’re doing with ICON. Should we use the Q4 numbers baseline to go forward with?

Mark Woodward

You can but it will grow. What I'll tell you is that -- when I look at total expenses for next year, I expect total expenses grow around 15%, and in R&D one of the places that we do invest in.

Mark Schappel - Benchmark Company

And then finally Mark moving on a little bit here. With respect to the ICON planning applications, is the supply planning solution still generating the most interest with your customers?

Mark Woodward

If you look across our entire product line, the answer is no, but I think that we did get -- there has been significant amount of interest. I think it is discussed -- I would say in more cases there are not some components of that is in all the new deals we’re doing, so it is certainly now a differentiator. The look and feel of the product is pretty exciting for our customers. And so while it comes up often it is still not our single largest seller kind of core. E2open process apps are still where the majority of the business is coming from, but it is -- I’ll stay in the pipeline now maybe 20% to 25% of the pipeline.

Operator

Thank you. Our next question comes from Scott Berg from Northland Capital Markets.

Scott Berg - Northland Capital Markets

Hi, Mark and Peter. Congratulations on a strong bookings quarter. Couple of questions -- given that the selling through the SIs and that whole process was really new for you in the quarter and I know you have been working on building towards that for several quarters. How much contribution from them is in your expectations and your new and upsell bookings guidance for the year?

Mark Woodward

Really none. So the modeling that we’ve done around booking is purely based on our own sales capacity. So we view those guys as extension to the sale force. Our expectation that we’re certainly the investment we are making in time and money is, we would like to see these guys contributing, and we think the majority of that contribution will come later in the year versus early in the year, but the direct answer to your question is the bookings guides we have given is based off of our sales capacity build up.

Scott Berg - Northland Capital Markets

Okay. Great. So then would you assume that the size of the deal is on average to be larger than your, the one of your direct sales force is? Certainly the deal signed in Q4 would reflect that, but is that why we should think about them in general with regards ASPs?

Mark Woodward

So I would say that our early indicators are that I think on averaging deals will be larger, again that oil and gas deal is quite larger. On the other side of the Temkin, the initial Temkin deal is not all that big, but it was very strategic and they got it in to a place that we would not have gotten in ourselves, they mean in KPMG. So, but I think my expectation is that we will tend to see larger deal sizes from those integrators, because when they go in, they're typically going in pretty high and doing large transformation products. As I said earlier of which that, we’re relatively I don’t want to say small but -- we’re a smaller portion of the whole deal, so there is less price pressure on our component of the deal specifically.

Scott Berg - Northland Capital Markets

Great. And the last question for me is, if my math is right, you added three customers in the quarter new customers, it looks like you lost one in the quarter. Is that a) RIM or if it’s not b) can you talk about general attrition just for the year as a whole outside of the RIM components that are moving?

Mark Woodward

So RIM was not included in that customer -- the one customer reduction we had in Q4, so for the year we had a great year, right. Over 97% customer retention, there were two that we lost, one talked about HAVI previously and then secondly there was a pilot that did not convert and that was our only other customer lost during the quarter or during the year. Small amount of revenue, but it was one that did not convert.

Peter Maloney

And I would just add to that, it was really more for I would say political reasons and technology reasons, they were very happy with the result of the pilot, exceeded our expectations but it was just a political reasons that things did not convert. It still may in the future actually, but it didn’t this last quarter?

Scott Berg - Northland Capital Markets

Great. That’s all I have, I’ll jump back in the queue. Thanks for taking questions.

Unidentified Analyst

Thanks, Scott.

Operator

Thank you. Our next question comes from Yun Kim from B. Riley & Company.

Yun Kim – B. Riley & Company

Great. Thank you. Congratulations on a strong bookings growth for the year Peter and Mark. So given the traction that you guys have with a system integrators right now, can you just talk about a how much of your business is currently being influenced by system integrators today. And where do you think the ideal level would be, given the caution that you have with them right now. And obviously, if, I am assuming if they have to assume that your big deal activity especially with the new customer will increase although you had to gain more traction with system integrators. Is that a fair assumption? Thanks.

Mark Woodward

Yeah. I think, the way I classified today is that we are in pipeline building mode. So we have the one large deal with Accenture, I think they were ahead of the other integrators because of the long relationship we have with them in Vodafone where they have been dealing with the E2open managing, E2open solutions at Vodafone for years. And part of that team was repurposed on this other opportunity and so timing we’re just fortunate with that. And same with the Temkin deal with KPMG timing was just, worked out well. We were starting to deal from scratch, they're still going to take by four to eight months. So we are in significant pipeline building mode and I have reviewed that myself and by with every individual integrator we have you know, in all of the resource signed on both sides and we have identified all this deals we are having our pipeline. It’s a significant amount.

So yes, at this point, my first goal myself for the company is I would love it if we can get to a points with 20% of our bookings came from our integrators. I don’t know if we'll change that this year or not, but that’s kind of how we’re thinking about and how we’re investing in that channel. And as I said before to at least our early indications are these deals will tend to be larger because these large integrators are looking for multimillion dollar implementation. And so that’s what -- that's the business that we are looking forward for those multimillion dollar implementations are going to drag a pretty good sized software deal with them of which we get a 100% of that business. So the early integrators are there that’s true and we’ll just give more color as we get more experience.

Yun Kim – B. Riley & Company

Okay. Great. And then if you look at your strong bookings trend in the fiscal year 2014, this past fiscal year, just simply looking at a differed revenue trend it seems it as clearly back and loaded. Do you expect that back and loaded trend to play out in the fiscal year 2015?

Mark Woodward

I would, that would be consistent with historically how our links have occurred in our backlog and historically our biggest bookings quarters are Q3 and Q4.

Yun Kim – B. Riley & Company

Okay

Mark Woodward

Yeah. Our largest backlog now is Q3-Q4 by a significant amount.

Yun Kim – B. Riley & Company

Okay, great. And then one lastly, you mentioned previously that more than half of your bookings is coming from upsells. Can you go into little details around that, is that our mainly selling more applications or -- and also do this deals tend to be smaller than the first initial platform deals or are some of these upsells are just expansion of the platform itself? Thanks.

Mark Woodward

So often times the first upsell will be larger than the original deal. In fact we've kind of taken a sales approach that personally goes that way, so we’d rather get the customer locked in on a smaller footprint, if we can do it faster. And then our experience has been that once they get tied into the platform, our ability to the improved value and get a larger upsell has increased significantly and we can ultimately get more business in a shorter period of time with that strategy. And what was the other part of your question?

Yun Kim – B. Riley & Company

Just wondering whether or not some of those expansions are really a platform or application based?

Mark Woodward

It is absolutely across the broad. It's adding new process applications. It’s expanding the usage to different divisions or products, which then require more trading partners and more users. It is a combination. I think what we generally say is it probably about 70% based on -- no I take that back. It's probably about 75% based on the process applications. Maybe 70% or about 30% based on trading partner user expansion.

Peter Maloney

And I want to add one thing on the deferred revenue, just be clear so -- and we’ve talked about this in the past. Our deferred revenue is not really good indicator of what we’ve sold that we haven’t recognized yet, right. So for instance we have off balance sheet 162 million of unbilled deferred or what we call backlog. So if you look the total of the deferred revenue both what’s been built and what has not been built, it’s 207.2 million. So I wanted to make sure that you had exposure to that number.

Operator

Thank you. Our next question comes from Alex Lujan from Stevens.

Alex Lujan – Stevens

Hey guys, congratulations on the quarter. Could you make the same adjustment that you’ve made for guidance if you exclude RIM from both years on the top line? Could you make that similar adjustment for what EPS guidance would have looked like, if you had not lost RIM?

Peter Maloney

I haven’t done that math down for the earnings. I can tell you that the subscription growth rate is 28% to 30%, its $2.5 million the impact this year.

Mark Woodward

Pretty high gross margin…

Peter Maloney

If you look at last year’s total revenue for subscription revenue for RIM, it’s about $3.6 million in that range.

Alex Lujan – Stevens

Understood. Next question, as for the 30% guidance that you have for subscription new and upsell bookings growth next year, are you maintaining the same assumptions around new versus upsell for those numbers?

Mark Woodward

Yes. We do a pretty detailed bottoms of buildup which is assumption of productivity by wrapping what those actual deals look like. We have still people that sell just new stuff or kind of for the first year after we sold that there are also the upselling to that. At some point, customers didn’t go into our different sort of sales reps that just to install base selling. So the buildup that we do is very bottoms up based on the accepted productivity by sale rep.

Alex Lujan – Stevens

Understood. And then if you look at the component of booking for professional services, how should we – should we think about total kind of new and upsell bookings growth is still possible to be in the 30% range or do you expect that lower professional services bookings in fiscal '15 than you had in '14?

Peter Maloney

I would assume that fiscal '15 on new and upsell PS bookings are equal to revenue. So the revenue guidance right 0% to 5% growth and so the same thing for bookings for PS.

Alex Lujan – Stevens

Perfect. Thank you. And then last one for is on renewal. As you’ve mentioned, last year you had a very strong -- last year before this year you had a very strong renewals year than this year, you just didn’t have any contract up for renewals. What’s the right way to think about renewals for fiscal '15?

Peter Maloney

So it should be a little bit more than '14, but it’s not a significant year like '13.

Alex Lujan – Stevens

Perfect. Thanks. That’s it for me guys.

Mark Woodward

Thanks.

Operator

Thank you. At this time, I will turn the call back to over Mark Woodward for closing comments.

Mark Woodward

I just want to thank everybody for attending the call. As Peter and I usually do, we’re now planning a potential marketing trip. So will certainly advise everyone of where we’re going to be, when we’re going to be there. And hope to see many of you soon. Thanks.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for participation.

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