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Callidus Software Inc. (NASDAQ:CALD)

Q2 2010 Earnings Call

July 29, 2010; 04:30 pm ET

Executives

Leslie Stretch - President & Chief Executive Officer

Ron Fior - Senior Vice President & Chief Financial Officer

Lorna Heynike - Senior Vice President - Marketing

Analysts

Michael Nemeroff - Wedbush

Ian Kell - Northland Capital Market

Kevin Liu - B. Riley & Co.

John Zaro - Bourgeon Capital

Greg Speicher - Moss Creek

Ted Ketterer - TK Associates

Gene Weber - Weber Capital Management

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 Callidus Software Incorporated earnings conference call. My name is Dominic and I’ll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Ms. Lorna Heynike, Senior Vice President at Callidus Software; please Proceed.

Lorna Heynike

Thank you and welcome to Callidus Software’s second quarter 2010 conference call. With me on the call today is Leslie Stretch, President and Chief Executive Officer, and Ron Fior, Senior Vice President and Chief Financial Officer of Callidus software.

Shortly after the market closed today, Callidus issued financial results for the second quarter of 2010. The press release was posted on the wire and is available on our website at www.callidussoftware.com.

We would like to remind you that during the course of this conference call we will make forward-looking statements, including predictions and estimates. These statements involve a number of risks and uncertainties, including statements regarding our business strategy, our on-demand bookings and business, estimates of third quarter 2010 total revenue, recurring revenue, services revenue, perpetual license revenues, operating expenses, margins and profits, stock based compensation and restructuring charges, as well as sales and marketing expectations and strategies, product development and strategic partnerships and operating results in the second half of 2010.

Actual results may differ materially from any future performance suggested in our forward-looking statements. We refer you to the company’s Form 10-K for the year 2009, as well as the company’s Form 10-Q for the first quarter of 2010 on file with the SEC, for important risk factors that could cause actual results to differ materially, from those contained in any forward-looking statements. We expressly disclaim any obligation to update this forward-looking information.

On today’s call, Leslie will begin with comments about our overall business and financial results and then Ron will discuss the financials in greater detail. We will conclude with a Q-&-A session.

With that said, let me turn things over to Leslie.

Leslie Stretch

Thanks Lorna. Good afternoon everyone and thank you for joining us. I will be speaking about the following topics on today’s call: Our Q2 performance, our services business, our retention rates and renewal rates, worldwide sales coverage, our product roadmap developments and finally our outlook for Q3 and for the rest of the year.

Let me start with Q2 performance. I am pleased with our progress in Q2. We grew overall revenues sequentially for the second quarter in a row, and we have now had three quarters of sequential growth in our recurring revenue base and the on-demand business. Our recurring revenues now account for over 75% of total revenues.

I’m especially pleased with the significant progress we have made in the bottom line. Recurring revenues have grown 12% year-over-year, while we have continued to reduce our operating costs significantly. From Q1 to Q2, we reduced our non-GAAP operating loss from $4.3 million to $1.1 million. These results move us close to profitability in the second half of the year.

Our cash position ended the quarter nicely ahead of forecast. Thanks to posted cash from operations, as well as solid working capital management. On the customer front, we signed contracts in North America and Latin America, in Europe and in Asia-Pacific, including contracts with brands such as MetroPCS, Comcast, AXA Apac, Isilon Systems, PINI Insurance, Horizon Blue Cross/Blue Shield of New Jersey, Vodafone, Vivo Brazil and Oppenheimer Financial, Tele2 in the Nordics and CoBiz Financial.

We also signed six multi-year contracts, including renewal of one of our largest on-demand lines, who made a three-year irrevocable commitment at a total contract value of approximately $16.5 million. Four other customers made multi-year commitments in excess of $1 million.

Our total deferred revenue increased once again to new a high of $29.2 million. We grew billings by 75% over Q2 of 2009. Billings are calculated as the change in the current portion of deferred revenue plus returning revenue.

Q2 was also a big quarter for customers going into production, as we went live with over 24 customers, including AXA Hungary, CareFirst of Maryland, Claro Brazil, JPMorgan Chase, Vivo Brazil, Vodafone Spain, Sanofi Aventis, Konica Minolta and Lenovo with Truquito [ph]. We’ve since taken another five company’s live in Q3, including Fujitsu and Veragie [ph] on the monitor platform.

Let me now talk about our services business. Whilst we faced challenges in growing a profitable business in consulting services, a large part of the challenge was due to the nature of our returning revenue business model. Revenue does not always flow consistently with bookings and is often dependent on customers’ production status with our solutions, a common situation for on-demand businesses.

Climbing up production stages may vary based on a number of factors, depending on the customers’ needs and their circumstances. We are carefully monitoring go-live dates, to ensure that we begin to recognize revenue as early as feasible. Even with these challenges, I am pleased to report that we had one of our best consulting bookings quarter in the recent times.

Let me now talk about our retention and renewal rates. Our retention rates in Q2 were over 90%, in both the core part of our on-demand business and our maintenance business. Procuring the very large renewal I mentioned earlier represents one of the biggest single commitments we have ever had as a company, and locked in by contract, recurring revenues for the next three years. We are very pleased that our service is highly guarded by customers. I do not believe that any of our competitors can match this performance, all our standards of operational excellence, for small or large clients.

Let me update you on our sales coverage. In the second quarter we added sales coverage in India, as well as Latin America, in Singapore and Hong Kong. The increased costs from these additions were offset by other cost-cutting measures we took earlier in the quarter. Indeed our Asia-Pacific investment was rewarded with a significant new business wins in the quarter, that was hotly contested.

For the balance of this year, we’ve structured the sales force into new business and installed base teams. The installed base team will be focused on more recurring up sell opportunities and extending our product footprint with our current customers. We are now working several interesting campaigns at present in both the installed base and the new business territories.

Let me tell you about our progress and the product roadmap. We continue to make progress here, filling out the sales time and life cycle management roadmap. In the quarter we launched the newest edition of the Monaco suite sales coach. With this new SaaS product powered by ForceLogix, Callidus now enables business to coach and optimize their sales forces execution, as part of a comprehensive sales performance management solution. We are already generating a lot of interest with our customers.

In Q3 we are taking our first customer live for our new sales service insurance agent on boarding solution. With this new solution, we now enable our customers to drive improved efficiencies and accelerate the time required to license appoint, contract and deploy new income producers to meet corporate capacity targets.

In Q4, we plan to release the latest update of the Monaco suite. With this release, Monaco will provide enhanced, out of the box, forecasting and modeling capabilities, enabling customers to easily optimize sales capacity and coverage, quota setting and sales incentive strategies. It will also enable discretionary allocations of salary, bonus and stock.

Let me finish by telling you about our outlook for Q3 and the rest of the year. Looking-forward, good progress is expected again in Q3. Our total revenue will be in the range of $16.7 million to $17.7 million. Our non-GAAP operating expense will be in the range of $8 million to $9 million.

Analysis of our trending performance in today’s guidance shows that at the top end of the guidance we will show positive year-on-year growth and we expect to show good progress on the bottom line, as well as again generate cash from operations. We’ll continue to make progress towards our goal of profitability in the second half of 2010.

In Q4, we see double-digit top line growth year-on-year, as well as positive non-GAAP operating profits. I am pleased we are seeing the benefits of the cost expense actions we have taken in the past couple of years, as they move along the path towards sustainable profitability.

Ron will now go through the financials in more detail.

Ronald Fior

Thanks Leslie and good afternoon everyone. The second quarter demonstrated significant progress in the continued growth and health of our SaaS business; the full impact of the actions we took in Q1 on our operating results, the solid cash from operations and somewhat less than expected revenues in our services business.

Recurring revenues of 13.3 million were at a record level for the company and represented 77% of total revenues. Deferred revenues also grew to a record high of $29.2 million, a $1.9 million increase over the prior quarter, reflecting the growth from new bookings, as well as strong renewals for the quarter. Our retention rates for our core SaaS offering, as well as maintenance for our legacy on-premises customers continue to be above 90%.

Now I’ll walk you through the Q2 results in more detail. Unless I mention otherwise, the comparative percent increases or decreases are as compared to the same period in the prior year. Let’s look at total revenue. Total first quarter revenues were $17.1 million, down 23% from the prior year, primarily due to the change in our business model. The second quarter decline in license and services revenues, as compared to the prior year was mostly as expected.

On a sequential basis, total revenue increased from $16.2 million to $17.1 million or approximately 6%. By geography, 91% of second quarter revenue was generated in North America. This compares to 88% in the second quarter of 2009. Revenues continue to be diversified by vertical, which breakdown as follows: Insurance, 26%; high-tech, manufacturing and pharma, 40%; telecommunications, 13%; banking, 14%; and retail and distribution, 7%, all roughly comparable to Q1 levels.

Now let’s look at the recurring revenue business. Recurring revenues represented 77% of our total revenues in the second quarter. We expect recurring revenues to continue to run at over 75% of revenues through the balance of 2010. Recurring revenues for the quarter were $13.3 million, up 12% due to the growth in our on-demand subscription revenue and our term license revenue, which together were up 24% compared to the same period last year.

On a sequential basis, recurring revenues were up 8%, reflecting a 13% increase in our on-demand subscription revenue and term licenses. This was the result of new bookings in the last couple of quarters. Maintenance revenues are flat sequentially and down slightly on a year-on-year basis, primarily due to conversions of on-promises customers, to our on-demand offering and some attrition.

Recurring revenue gross margin for the second quarter was 54%, equal to the prior year period and up from 48% in the prior quarter. The increase in margin from the prior quarter reflects the increase in recurring revenues, while third-party royalty costs were down from the prior quarter.

Services business. Services revenues for the quarter were $3.5 million, down 63% to the same period last year and 4% from Q1. The decrease in services revenues from prior year was mostly as expected, as we transitioned to shorter and less expensive on-demand implementations. While there is a small decrease from the prior quarter’s revenues, we saw slight improvement in the margin.

In the second half of the year, while we expect a number of projects to go live and the impact of our change in services executive management to take hold, we are expecting relatively flat quarterly service revenues.

Services gross margin for the second quarter was negative 16%, down from 18% in the prior year and up from negative 21% in the prior quarter. The negative services margin reflects lower than planned utilization, resulting from the delay in projects and a decrease in our average billing rate. All the major deals we signed in prior quarters are now fully underway, so we expect improvement in the margin in Q3.

In the quarter, we saw some signs of recovery as we booked more dollars and statements of work in the quarter, than we have in any quarter in the last two years. These statements of work will generate services revenue over the balance of 2010 and into 2011. While we expect improvement in our services margin, we do not expect services revenue to return to the level it was under our old perpetual license business model.

Perpetual license business. Perpetual license revenues were $387,000 in the quarter, down 67% from the prior year period, reflecting the shift in our business model. During the second quarter of the prior year, we recorded $1.2 million in perpetual license revenue.

Overall gross margin. The overall gross margin for Q2 was 40%, consistent with Q2 of 2009. On a sequential basis, the increase from Q1’s 32%, was primarily due to the improvement in our recurring revenue margin.

Operating expenses. We continued to manage operating expenses aggressively. In Q2, overall operating expenses were $10.5 million, down 16% from the prior year. On a non-GAAP basis, excluding the impact of restructuring charges totaling $452,000, stock-based compensation expense of $1.9 million and amortization of acquired intangible assets of $159,000, operating expenses were $8.3 million. This represents a decrease of approximately $1.6 million for the first quarter on the same basis.

The reduction in current quarter expense reflects the full impact of the changes we made in Q1 and as well as the impact of reductions in marketing and G&A spend. Stock-based compensation by line items is disclosed as a footnote to the income statement included in our press release. The restructuring expense resulted from headcount reduction efforts initiated during the quarter.

The employees. Our total head count at June 30, excluding contractors was 270 employees, downed 15 from the end of March.

Now let’s talk about our balance sheet and our cash flow. We finished the quarter with $29.7 million in cash and investments. This is a decrease of $0.5 million from March 31. While we generated $2.3 million in cash from operations, it was offset by a combination of deposits for our new premises, acquisition of intangible assets i.e., prepaid software licenses and capital expenditures.

Our net accounts receivable balance at June 30 was $14.3 million. Day sales outstanding for the quarter were 80 days, effectively flat with Q1. Excluding the impact of changes in our deferred revenue, DSO would have been 61 days.

Total deferred revenue, including both short and long-term, increased by $2 million to a record high of $29.2 million. The increase is primarily related to the addition of new recurring revenue deals, as well as renewals of existing recurring revenue and maintenance agreements. It should also be noted that capital expenditures were approximately $400,000 in the quarter.

At June 30, we continue to hold approximately $2 million or in par value auction rate securities secured by student loans. We will continue to carry these auction rate securities until we are able to sell them. We exercise the put option on June 30 for settlement on July 1, so we are now left with approximately $800,000 of auction rate securities, classified as long-term due to the lack of liquidity.

Now let’s turn to Q3. I want to remind you of the Safe Harbor language provided at the beginning of the call. It should be noted that we plan to update any guidance only during our quarterly conference calls. As we have indicated, we are focusing all our energies on recurring revenue streams. At the same time, we expect to realize some perpetual license revenues on a quarterly basis, primarily from Latin America and Asia Pacific, as a number of customers in those geographic areas prefer perpetual licenses.

For Q3, we are expecting total revenues to be between $16.7 million and $17.7 million. This would represent a decline of approximately 4% in the low end of the range and an increase of 2% on the high end compared to the third quarter of 2009. Total revenue is made up of recurring revenues and services and other revenues.

Operating expenses are expected to be between $9.6 million and $10.6 million and include approximately $1.6 million of stock-based compensation. Therefore on a non-GAAP basis, this would translate into a range of $8 million to $9 million, down significantly from the third quarter 2009, but effectively flat to slightly up on a sequential basis.

We remain committed to achieving our first full quarter of operating profitability on a non-GAAP basis in the second half of this year. Over the past few quarters, we have been executing on a number of our key operating objectives that are critical to this effort. We have reduced operating costs, while further leveraging our proven offshore resources. Much of the impact of these actions was realized in Q2, with the balance expected in Q3.

At the beginning of Q2, we executed the lease for our new Pleasanton headquarters, which will yield quarterly savings of over $300,000 starting in Q4. We are actually moving there tomorrow. So you’ll be able to find us at our new location as of tomorrow.

In the services business, we have new executive leadership. We’ve reduced full-time capacity while adding contractor capacity, and we generated a solid Q2 services booking quarter. We have over $750,000 of quarterly recurring revenue expected to come online in Q4, as projects sold earlier in this year go live.

I would like now to open the question-and-answer session. Operator, will you please prompt for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Nemeroff of Wedbush. Please proceed.

Michael Nemeroff - Wedbush

Thanks guys. Nice quarter.

Leslie Stretch

Thank you, Michael.

Michael Nemeroff - Wedbush

Just trying to Ron, reconcile the revenue guidance for Q3. You said services you expect to be flat with Q2 and you are going to get a little bit of license of the geographies and sounds like you had a pretty strong quarter of signings on the bookings with subscriptions, and this quarter was $1 million increase sequentially. So just trying to see how much conservatism you are building in there.

Ron Fior

Well, I don’t know how to answer that. I think we’ve tried to set a reasonable range of looking at where we might be able to be on both opportunities in the services area, because we do have some opportunities for up side there.

We have some opportunities for up side in the license side and obviously in the recurring side its pretty well baked in, where we are right now. There’s a few goal lives that are going to have an impact, but there is not a lot of change that we can see in there. So there is definitely opportunity to be well within the range, if not over the range.

Michael Nemeroff - Wedbush

Then, for Leslie on the services, obviously a little bit of disappointment, very good quarter otherwise. I mean even without strong services revenue it was a solid quarter, but just curious, what specifically have you done? It sounds like you have maybe just more people there who have contracts coming online? Is there anything that you can do in the near term to maybe boost that services line or is that something that you don’t want to do?

Leslie Stretch

Well, I want the margin improved slightly from negative 21 to 16, but if we can deal with that margin, a make-even or breakeven business, that’s a huge contribution going forward.

The new leaders in a month and a half, six weeks whatever has made huge strides and the morale in the team is very high. They are all out working. In Europe we are out of people. We can’t have people on the bench, that’s a drain on the margin; everybody understands that and the business realism of that. So that’s been a regime that’s been worked fairly closely.

We’ve got partners doing a lot of implementation. So I don’t know about boosting the revenue. My focus is to get that margin piece sold in the next quarter or two, not longer and that’s why we brought the new guy in, that’s what we are focusing on. There’s more offshore and the off-showering capability is very real now in services and it’s readily accepted by customers and that’s a big shift for us.

So, it’s work in progress. It was a workman like quarter for them. The consulting team worked very hard to improve the position and I’m very pleased with what they are doing. We also had a great bookings quarter for consulting. So all the signs are moving in the right direction.

Michael Nemeroff - Wedbush

That’s very helpful. And if you could maybe talk about the $16.5 million bookings, signing of one of your top customers. I know that’s something that you guys have been looking forward to. Could you just maybe give us a little bit more detail, whether that was an expansion of the services and products that they currently have and a little bit more detail around that would be helpful.

Leslie Stretch

Yes sure. That’s a customers that has been doing two single annual years. [Inaudible] looking forward we had only two years annual contracts. Keep in mind, just two years ago we only had one on-demand customer operating, but this one was a pretty substantial complex and important customer and renewal is actually due later in the year.

We just have this big renewal thing going on in December. We came to an agreement based on the quality of service. They really wanted to extend the commitment and lock it down and so did we. There is some pieces of expansion in that and that we have displaced some competitive elements, but I can’t give you more color than that, but we are very pleased. The main thing is it’s a testament to the quality of the service and it’s a very, very big commitment to us.

Michael Nemeroff - Wedbush

I guess you can breathe easy until 2013. Thanks very much for taking my question.

Ron Fior

I would add one other point. It’s a quarterly billed item, so it does not flow through the deferred revenue.

Michael Nemeroff - Wedbush

So none of that is in the deferred revenue currently?

Ron Fior

That’s correct.

Michael Nemeroff - Wedbush

Okay.

Ron Fior

It’s billed quarterly.

Michael Nemeroff - Wedbush

Okay. Thank you very much.

Operator

Your next question comes from the line of Ian Kell of Northland Capital Market.

Ian Kell - Northland Capital Market

Yes, hi guys. Thanks for taking the call; nice quarter. Leslie, can we go back to what you said about the service. If you can give a little guidance there, and I’m sorry I was just behind writing quickly, I couldn’t quite keep up. Just in terms of margins, what you expect to see going forward for the rest of the year?

Leslie Stretch

Well, we had a slight improvement from Q1 to Q2. I expect it to continue to improve. The teams are working very hard. Our consultants work very, very hard on our behalf. We put in our 18 miles. We don’t have benchwarmers. We either have business and we have consultants working or we use a flexible contract tool. We put in a regime of off shoring capability, and we also like to see our partners implementing in our on-demand environment and our on-premises environment.

So, it’s a work in progress, but I really want to see that improve. I want to see that negative margin go up and all our efforts are focused on bringing that down. The bookings that we did in Q2, in consulting a part of that, we also have sort of time implementations and timed our live. But our drive is, we are not going to sit happy with the negative margins in the consulting business.

The people aspect is now sorted. We’ve got the right team from the top to bottom in that business, I’m very happy with it. It’s just a question of making sure that we are cheating the utilization and that we are doing the right quality of business, we have the right rate levels and so on and that’s what we are working on.

Ian Kell - Northland Capital Market

And I think last quarter, I think you talked about; you thought you can get back to the gross margin breakeven model there. Maybe even as early here as Q2, but it looks like that’s not going to be the case for the next two quarters at least?

Leslie Stretch

We just have to keep working it. We need to keep making an improvement, but we are not going to be happy going into 2011 with a negative margin consulting business. That’s not in our plans.

Ian Kell - Northland Capital Market

Okay. Obviously the recurring margins are real strong where they are. Can we get above 55 with continued expansion here through the rest of the year?

Leslie Stretch

55 this year. Based on the other mix of business that we do, we’ll see as we meet the guidance that we gave there. We gave you a Q3 firm outlook and we gave you a view of Q4, we’ve never done that before. So 55 kind of does it there, but depending on the mix.

For the longer term, the margin characteristics of the business become quite sighting, because it’s a blended margin for recurring. We have term licenses in there. And once we have a number of significant term licenses built, they are not by any means all flowing through revenue yet. So I see margin expansion in 2011, and our long-term target is to get that up above 60%.

Ian Kell - Northland Capital Market

Okay, and that is an on board license now. Is it a strategy changed now in Latin America and should we expect license revenue coming in kind of under this $0.5 million level? Is that something we should think about?

Leslie Stretch

Yeah, we’ve always said that in emerging markets, there are a number of factors that play. There is a propensity for procuring perpetual and premises licenses. We are not going to valueize. In spite of having valuizing some [Inaudible] on the recurring revenue model at this stage, we’ve got other things to focus on.

Same in Apac; we find that people have a framework that they want to buy against and we also have one or two kind of -- we have a nostalgia competitor who keeps offering people cheap licenses out of Canada and we deal with that as well, so that’s kind of part of the picture. So I suspect we’ll have this little run rate until competitors like that move into the modern world with the rest of us.

Ian Kell - Northland Capital Market

And then my final question; just give us an idea of how bookings trended through the quarter. Did we have some acceleration at the end? Was it pretty linear all the way through and how has the start of Q3 here gone?

Leslie Stretch

Yeah, it’s a good question. It’s never linear, bookings are always lumpy and the pattern changes honestly quarter-to-quarter. We did a few good bookings early on, but there was always an up tick in the end. We claimed our customers to buy on a quarterly bases.

Now this quarter we’ve started with a few nice deals. We’ve just signed a European Telco this week, about yesterday. In on-demand we got a major bank, one of the top banks in the world underway and on-demand, which is a nice new development for us to have a major bank in the on-demand space and we signed a few other small deals in North America.

So it’s not a back-ended world that it was in the license business, but it still is a bit of a little hockey stick at the end.

Ian Kell - Northland Capital Market

Sure. Alright, good quarter guys.

Operator

Your next question comes from the line of Kevin Liu of B. Riley & Co.

Kevin Liu - B. Riley & Co.

Hey good afternoon guys. In terms of the billings spread that you realized this quarter, could you help us understand how much of that was kind of the result of preferred licenses on the perpetual side versus new on-demand bookings?

Leslie Stretch

Most of our signings are on-demand. We did 60, on-demand transactions.

Kevin Liu - B. Riley & Co.

Okay, got it. And then, as it relates to just the perpetual licenses that you are getting, are you still getting perpetual from some of your existing customers that have been on the products for some time or is it any of these new deals that were coming in?

Leslie Stretch

We’ve actually had a mixed sort of results there, where we have existing customers, some that converted the term. We have some existing customers; I think we had one in the quarter that was perpetual.

When we have existing customers that have frameworks and agreements in place, it’s often easier to just work with that than evangelizing [ph] the contract model, especially when we are selling lots of new business on-demand. So you can see the level now, that we are getting through the licenses at a fairly small level each quarter. There still will be that I predict for a few more quarters.

Kevin Liu - B. Riley & Co.

And it looks like you’ve resolved any further third party royalty issues that was hitting that subscription gross margin line. How should we expect that to start to trend upwards as you guys continue to grow the on-demand business. I mean are there certain targets at various revenue levels that we should keep in mind?

Leslie Stretch

We’ve actually locked a reasonable level in right now. That should keep us at a reasonable cost on any new customers. There is opportunity for improvement and with some of the other pieces of our stack, we could use a number of other pieces that fall in within our software product and I think as we get larger we’ll be able to leverage those better, but at this time I don’t see any really large changes, at least for the next couple of quarters in our cost of goods sold related to that.

Kevin Liu - B. Riley & Co.

Yeah, and I wasn’t referring specific to the royalties. Just wondering how much leverage we expect to get out of this on-demand business as the revenues expand, especially as we look forward to kind of Q4, when you get all those deals that come in live?

Leslie Stretch

There is definitely some leverage that goes on there, because actually the environments are up and running and we are in fact expensing those at this point in time. It is definitely an opportunity there.

Kevin Liu - B. Riley & Co.

And last one, just on the sales and marketing, you guys took down those expenses both sequentially and versus the prior year. It sounds like you are adding internationally, so just curious where those cuts are coming from.

Leslie Stretch

They are coming actually from marketing. I hate to say that, but poor Lorna here is sitting next to us, but she’s delayed some of her projects, but we are still driving for lead generation and it’s still a focus. But some of the extra nice-to-have things we are not doing right now.

Kevin Liu - B. Riley & Co.

Great. Thanks for taking my questions.

Leslie Stretch

Thanks Kevin.

Operator

(Operator Instructions) And your next question comes from the line of John Zaro of Bourgeon Capital.

John Zaro - Bourgeon Capital

Well, that’s good. Hey. Most of my questions are already answered. I guess what I really have a question about is, what’s the business like out there in general these days?

Leslie Stretch

I think it’s better. If you talk to some of the third party selection companies, there are more selections going on. It’s not easy, but it’s better. It’s improving steadily, people have gotten used to it. People are investing. We’ve had a lot of different industries last quarter buying from us. We always do well in telco and in insurance, but we had a mix of different buyers. So I’m hesitating to say it feels good, but it certainly feels better and the pipeline is exciting at the moment and we are working very hard, there’s a lot of activity.

John Zaro - Bourgeon Capital

I must say that, I’ve known you guys a long time and this is the most relaxed I’ve heard you sound on a call in a while. So congratulations. I’m glad everything is going well and looking forward to the next quarter.

Leslie Stretch

Thank you.

Ron Fior

Thank you, John.

Operator

Your next question comes from the line of Greg Speicher of Moss Creek.

Greg Speicher - Moss Creek

Hey guys, its Greg.

Leslie Stretch

Hey Greg.

Greg Speicher - Moss Creek

So on a lot of the newer on-demand business, it sounds like there’s a lot of renewals in existing customers. Is that fair or was it a good mix of new versus renewals?

Leslie Stretch

No, somewhat this is good. We had, keep in mind that great big renewals not in the deferred. It’s a quarterly bill thing. We had a good mix and we have nice new business and yes, we had good new business.

Greg Speicher - Moss Creek

Okay.

Ron Fior

Yes, we had really good new business. I think the one of the interesting things that has happened was that we’ve seen, at least in this last quarter an increase in the average term from I don’t know, maybe 1.3 years I think it was before, to almost 1.8 years, but it isn’t necessarily flowing through deferred revenues. So that’s just really a function of the billing.

Greg Speicher - Moss Creek

And I know you are also trying to sort of spread out between small companies through the very largest companies. How is the low-end business coming?

Leslie Stretch

We are just doing more of it. We are just talking about it actually. We are just doing more transactions, and the competitive environment is such that some of those players are bringing us as the market leader anyway into their deals. We end up in those deals. People rarely evaluate their solution in this area without looking at us and we have a capability there now. We want to make it better, we want to make it the ultimate self-service solution, but we are seeing more transactions.

Greg Speicher - Moss Creek

Okay great. And Ron, that very last statement in the prepared remarks. Did you say $750,000 worth of service projects are beginning, not $750,000 quarterly, but $750,000 total?

Ron Fior

No, that’s actually $750,000 of recurring revenue, i.e. it goes in the recurring revenue line, on-demands/term. That’s a quarterly numbers that will start in Q4 and it’s based on goal lives of projects that we had signed, some as late as Q4 of last year. So, that’s a recurring revenue numbers that will go in starting in Q4 and then roll forward from there.

Greg Speicher - Moss Creek

I thought you said those were delayed service project, but those were more on the on-demand side.

Ron Fior

Yes, those are on-demand.

Greg Speicher - Moss Creek

Okay. Thank you very much.

Ron Fior

Thanks.

Operator

Your next question comes from the line of Ted Ketterer of TK Associates.

Ted Ketterer - TK Associates

Hi guys.

Leslie Stretch

Hey Ted.

Ted Ketterer - TK Associates

Good work. I just had Ron, looking at the cost, the move to the new built, the new space.

Ron Fior

Yes.

Ted Ketterer - TK Associates

It’s going to save you about $1.2 million a year?

Ron Fior

Yes.

Ted Ketterer - TK Associates

Okay, and those will kick in. The space you are in now, is that lease space?

Ron Fior

Yes.

Ted Ketterer - TK Associates

Okay.

Ron Fior

So the least on this premises expires at the end of August, but we are moving in -- literally, the movers come here tonight and we’ll be moving all day tomorrow and we’ll be in our new premises on Monday. But we’ll start having the real benefit, the savings will not occur really through till Q4. Because in this quarter even though there’s a month savings, we are also spending on the move as you correctly noted.

Ted Ketterer - TK Associates

So Q4 should be a very significant pickup. Lower expense and even more diverse. Good. Leslie, can you characterize the pipeline sort of contrasting it to the end of last year and the end of Q1?

Leslie Stretch

It’s definitely getting better, definitely. We talked to a couple of independent selection companies just as recently as yesterday and they confirmed the same thing. We are in more selection opportunities.

We want to win them all, probably we’d like to, but we are in a more -- that’s one of the reasons we actually structured the sales force into an installed base and a new business team, because the new business demands on us were becoming frankly overwhelming in terms of request for proposals, bid processes and campaigns. So, we now have a dedicated team in North America running at that new business and we’ve got another team managing the installed base, because the opportunity set there is actually just as big.

So I feel pretty confident about the pipeline and where it’s at today. The economy is still not magical, we are sure of it. We see people investing, people are more used to the situation and there’s some pent up demand that people have held off these projects for a while.

We’ve also got more reference able customers who are closing the source of savings and benefits that they are getting from our solution more than we had ever before and they are talking about it vocally. So we are getting some rally good references now as well.

Ted Ketterer - TK Associates

Good. How do you feel about your competitive win rate; is it changing at all?

Leslie Stretch

We had a little bit of noise from these Canadian guys shopping around in their snowshoes there for a while, but they just don’t do what we do. We spend $800 million on software. It’s a big barrier to entry to do it properly. You can sell a nice thing, but to get it live and make it work and do the hard work and also to work out how to make money out of it is really tough.

We got used to that and so I think we prevail there, but more competitors actually list the market. So our success doesn’t depend on their failure. So I hope that they are winning business and making money, hopefully not at our expense in expanding the market. All I can say is, we see more requests for proposal as a result of that competitive activity.

Ted Ketterer - TK Associates

Great. Good work guys. It’s been a long, long, long slog.

Leslie Stretch

It’s good fun.

Ted Ketterer - TK Associates

God. I’m glad you enjoying it.

Leslie Stretch

Thanks Steve.

Operator

Your next question comes from the line of Michael Nemeroff of Wedbush. Please proceed.

Michael Nemeroff - Wedbush

Hey guys, just a couple of follow-ups. How many of your customers -- I just want to flush into this quarterly billing and what’s really off balance sheet and what we can see? How many of your customers that are paying you subscription on recurring revenue are quarterly billers?

Ron Fior

Maybe a quarter.

Michael Nemeroff - Wedbush

Okay.

Ron Fior

And that’s a best guess right now. I don’t have it right in front of me here.

Michael Nemeroff – Wedbush

Okay, and then the breakdown in the subscription and support revenue, what’s the split of on-demand versus maintenance revenue from the still perpetual license business?

Ron Fior

Yes. We had roughly $5 million in maintenance and the balance in recurring.

Michael Nemeroff – Wedbush

Just looking at the amount of new business, right. New revenue that you had picked up in Q2 over Q1, almost $1 million; was that a particularly large booking from a previous quarter or how should we think about that step function up. For the last couple of quarter it’s been about half a million and sequential increase from quarter-to-quarter and then it’s like a big step function up here. How should we think about that going forward?

Ron Fior

It was a little unusual. We had 20 some customers go live. It was a big, big quarter for go lives. So I wouldn’t count on a “$1 million”. That’s not going to happen right away.

Michael Nemeroff – Wedbush

I thought it would that be nice, though?

Ron Fior

It would be nice, we would love it, but it’s not realistic.

Michael Nemeroff – Wedbush

Well, building on an earlier response that you gave, you said there was 750,000 that is going to come on in Q4 in recurring revenue. Is that going to repeat going forward? So should we expect 750K on top of sequentially growing each quarter?

Ron Fior

No, what it is, so there is a number of customers who ultimately have roughly a recurring amount each quarter of 750K. So once it comes live, it will stay going live. It’s not going to grow from that 750. Any growth on that will be from new customers that we had over the last quarters and others that go live.

Michael Nemeroff – Wedbush

So, just to paraphrase, in Q4 we should see a step function up of about $750,000 at least, just from those customers on the subscription and support revenue line?

Ron Fior

Yes, that is correct.

Michael Nemeroff – Wedbush

That’s going to be a healthy, healthy spike in Q4. Its similar to what happened in Q2.

Ron Fior

Again it’s a step. Unfortunately when we went through the bad times we made a lot of deals that had ‘go lives’ on them. We still are dealing with those go lives and when they go live it makes a big difference to our numbers, because we are in fact as I said earlier, we are in fact incurring the infrastructure in many cases to manage those customers, yet we can’t recognize any revenue until they actually go live.

Michael Nemeroff – Wedbush

Well, I guess I know why John thinks you sound so relaxed. You got a lot in your back pocket coming up in the back half of the year. Alright, thanks for taking my question guys.

Ron Fior

There’s still work to do, so don’t take it for granted. We still have work to do, believe us.

Michael Nemeroff – Wedbush

Thanks very much guys.

Operator

Your next question comes from the line of Gene Weber of Weber Capital Management.

Gene Weber - Weber Capital Management

Hi Leslie and Ron.

Leslie Stretch

Hey there Gene.

Gene Weber - Weber Capital Management

I’ll try and ask a couple of new questions. You mentioned that you added 54,000 new payees. I’ve got a couple of questions on that. What does that bring your total to and then by new payees, I assume that’s people who’ve gone live, right?

Ron Fior

No, that’s new signings. So, we are not now and we count them twice when they go live. Where we are at now in the on-demand business, it’s roughly 170,000 payees in the on-demand business, which is a big step up from where we were this time a year ago, so a steady progress.

Gene Weber - Weber Capital Management

That’s great. I’m sorry Ron. I interrupted.

Ron Fior

That 54,000 relates to the total payees that we added in the quarter.

Gene Weber - Weber Capital Management

Yes. That’s the total you added during the quarter.

Ron Fior

Correct.

Gene Weber - Weber Capital Management

Which is a pretty big number if you are now up to 170, percentage wise.

Leslie Stretch

No, let me make the distinction. There is 170,000 on-demand customers. In the press release, that was a total payee accounts. So there was some on-premises term and there was one perpetual deal, but the bulk of it is...

Ron Fior

A big piece of it is the on-demand.

Gene Weber - Weber Capital Management

Okay and the 170 is…

Ron Fior

Straight, on-demand.

Gene Weber - Weber Capital Management

Straight on demand. Got it.

Leslie Stretch

So we’ve got about 2.5 million payees on premises still.

Gene Weber - Weber Capital Management

Wow okay. Good, and something you just mentioned earlier in the call, maybe you can clarify a little bit. Independent selection companies, are those consultants who help customers select a vendor?

Leslie Stretch

Yes.

Gene Weber - Weber Capital Management

Okay, and are they big companies, small companies or are they the systems integration firms?

Leslie Stretch

It’s both end of the spectrum exposed. So we typically will pull them when we can. We don’t always get the data for contracted selections. We are not interested in stories about prospects that are just talking. When people contract those guys to run a process, that’s a very clear qualification that there’s an up-tick and there’s been an up-tick.

Gene Weber - Weber Capital Management

Okay. So roughly what portion of your business activity or maybe the easiest way to describe it is pipeline, involves some sort of independent selection company?

Leslie Stretch

It might be a first, it varies, it might be a first. That’s a good proxy for the rest of the market.

Gene Weber - Weber Capital Management

Okay yes. No, that I can understand. Okay, that’s fine. The last comment I’ll have to make is great job on the expense reduction. I know you are talking about it for a long time, but it’s nice to see it in black and white. Congratulations.

Leslie Stretch

Thank you.

Operator

Your next question comes from the line of Mr. John Zaro of Bourgeon Capital. Please proceed.

John Zaro - Bourgeon Capital

I still think you guys are relaxed. The only other question I had was about sales force. You guys are getting any traction on the sales force?

Leslie Stretch

Yes, we actually got a couple of leads that are impacted in the sales force and the sales force can actually now as of 60 days ago, make money from selling our solutions and that’s a brand new initiative. It’s not produced any big up-tick at the moment, but we’ll see what happens over time.

Almost every customer that we talked to has some interest in the compensation plan for stock format. So, but these are small contributions to the bookings and revenue that brought significant market for us and we keep working on it.

John Zaro - Bourgeon Capital

Well, thanks again.

Leslie Stretch

You still there? Still there, John?

John Zaro - Bourgeon Capital

Yep.

Leslie Stretch

Listen, I’ll relax when I die pay. We are not relaxing, we are working hard.

John Zaro - Bourgeon Capital

It’s not what I meant, but I think it’s just the progress. Moving forward makes everyone more relaxed.

Leslie Stretch

Thank you for this.

Operator

Your next question comes from the line of Ted Ketterer of TK Associates.

Ted Ketterer - TK Associates

My question was answered, but don’t relax Leslie.

Leslie Stretch

Okay. Thank you.

Ted Ketterer - TK Associates

Thanks guys.

Operator

Your next question comes from the line of Greg Speicher of Moss Creek.

Greg Speicher - Moss Creek

Okay, one final question and I may have missed this, but with the bookings you had in services, is it fair to say that that line should flat line increase at this point or might there still be some decline sequentially?

Leslie Stretch

It’s definitely getting better, but the bookings depend on the structure of the contracts. If we have go lives, then we will defer a revenue to that point. We defer services and the recurring revenue. So, it really does depend on the structure of the contract.

I’d just be conservative about that, until we see that business sort itself out and I’m just going to repeat what I said earlier. I am not massively worried about the top line. I want the bottom line to solve in that business. It’s a good business. I still want tons of our partners to do that, and I want the people that we’ve got here to build good careers doing it, but I want us to make money doing it. I don’t us to be losing margin on that.

Greg Speicher - Moss Creek

Good enough. Thank you.

Operator

This concludes the question-and-answer session of today’s call. Ms. Heynike, I would now turn the call back over to you for closing remarks.

Lorna Heynike

Thank you. I’d like to thank everyone for joining us on our call today and we look forward to speaking with you again next quarter.

Operator

Thank you for your participation in today’s call. This concludes today’s conference. You may now disconnect and have a wonderful day.

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