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ClickSoftware Technologies Ltd (NASDAQ:CKSW)

Q1 2014 Results Earnings Conference Call

April 30, 2014, 09:00 AM ET

Executives

Moshe BenBassat - Founder and Chief Executive Officer

Shmuel Arvatz - Chief Financial Officer and Executive Vice President

Analysts

Michael Latimore - Northland Capital Markets

Michael Martin - Small Cap Report

Hugh Cunningham - Oppenheimer and Co.

Nick Farwell - Harbor Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the ClickSoftware Technologies Ltd. First Quarter 2014 Financial Results Conference Call. All participants are at present in a listen-only mode. Following management’s formal presentation instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded April 30, 2014.

With us online today are Dr. Moshe BenBassat, ClickSoftware’s Founder and CEO, and Mr. Shmuel Arvatz, CFO.

Before I turn the call over to Dr. BenBassat I would like to remind you that during the course of this call, the company will be making express or implied forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and other U.S. federal securities laws. These forward-looking statements include, but are not limited to those statements regarding future results of operations, including our outlook for full year 2014 revenues and non-GAAP earnings per share, contribution from and financial impact of the Xora business unit, future benefits of products and services, visibility into future periods and pipeline, plans for investments and future rates of growth, growth opportunities, our future expected annual recurring revenues, risks and growth on profitability and market demand.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. Achievement of these results by ClickSoftware may be affected by many factors, including but not limited to, those discussed in today’s press release and in the Risk Factors section, and elsewhere in ClickSoftware’s Annual Report on Form 20-F for the year-ended December 31, 2013, and in subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by law, ClickSoftware is under no obligation to and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Also I would like to remind you that ClickSoftware reported net income and net earnings per share on both a GAAP basis and on an adjusted non-GAAP basis. Today's press release includes a reconciliation of non-GAAP information to the most directly comparable GAAP information and is posted in the Investors section of the Company's website at www.clicksoftware.com.

Dr. BenBassat, would you like to begin?

Moshe BenBassat

Yes please. Good morning everyone and thank you for joining ClickSoftware's 2014 first quarter earnings call. As usual I will start with a high level strategic overview of the business and a brief coverage of the operational results for the first quarter. Shmuel, our Chief Financial Officer will proceed with details regarding the first quarter financial results. We shall conclude this call with an outlook for the remainder of 2014 and open the call up for questions.

The momentum from last year continues with very important new cloud wins. Two specific examples include a large North American Fortune 100 company and the second is a large European company in the energy industry. Both cases were highly competitive bids and were one after long and in-depth evaluation processes. Not only will these wins contribute substantially to our future recurring cloud revenues but they also underscore our leadership position as the company with the most powerful cloud-based solutions for mobile workforce management and service optimization.

As for the evolution of cloud subscription revenues, based on subscription from existing users, signed contracts, anticipated drawn out progress with existing customers and projections for signing new business this year, we now estimate that we will exit 2014 with an annual recurring revenues ARR and ARR run rate in the range of $26 million to $30 million.

Recurring revenues as many of you know are revenues that are schedule to be received over the next 12 months on a regular basis pursuant to contractual subscription agreements in place. We should also note that support contracts from on-premise customers are estimated to reach a run rate of roughly $36 million in the end of 2014. Together with the cloud recurring revenues this is more than $60 million in annual recurring run rate at the end of 2014.

In the first quarter we closed the acquisition of Xora, a Mountain View, California Company that provide software-as-a-service solutions for companies whose success depends on the productivity and efficiency of always mobile workers. Xora focuses on the small and mid-market and has about 15,000 companies on its client list. Xora is well known market leader in its space and in fact only yesterday we announced that Frost and Sullivan recognizes Xora leadership with the 2014 North America Frost and Sullivan award for customer value leadership.

Xora's acquisition adds about 130,000 subscribers to our cloud-user base. Xora serves primarily via wireless carriers in North America, including AT&T, Sprint and Verizon. This opens for us an important distribution channel in North America, through which we can send additional apps for the SMB market as well as for the enterprise market.

Building on our existing client base of more than 50 telecommunication carriers around the world we intend to expend globally to build partnership with wireless carriers as a channel for our products worldwide. The combination of Xora and ClickSoftware create a company with bright index for a much bigger market under one roof.

Let me now quickly review the first quarter financial performance. Revenues reached $28.4 million, 16% growth year-over-year. Cash at the end of the quarter remains at about $50 million level and this is after payment of Xora's purchase price. Short term backlog and deferred revenues increased substantially to $47.3 million, which is 43% growth year-over-year.

Let me note again that this amount does not reflect additional professional revenues from large cloud wins that initially signed for a small number of subscribers. Profitability, we continue to execute and invest in our global territory expansion and product development as part of our strategy to accelerate annual growth in 2014 and beyond. This investment impacted our profitability in the first quarter of 2014. Some level of quarterly fluctuation in our [analyst] projections was anticipated in our budget plans. However, we remain confident in our strategy to improve profit margins in the second half of the year as we deliver higher growth rate in revenues.

While we continue to see enterprises shift to a cloud strategy, the on-premise business continues to be solid with two wins this quarter in the ball park of 1,000 resources each. Additionally, our existing on-premise customers continue to show their loyalty and confidence in our solutions. The first quarter of 2014 had very significant repeat purchases of licenses, two of which were greater than $1 million each. Our partners continue to expand and strengthen and contributed to our success in the first quarter including SAP, IBM, Accenture and Salesforce. Specifically we are seeing substantial growth in the pipeline with Salesforce.

I'd like to conclude my part of the call at a most strategic level describing the remarkable evolution of ClickSoftware from where it was to where it is today. As new technologies were emerging right and left over recent years I've been updating you on directions we're taking and where we are investing. Many of the initiatives we invested in are now converging in perfect match to the same place industry trend are converging, and this of course is great.

As a strategy we focused on what we do best, which is the business functionality layer of software to manage service companies and accordingly we set the boundaries of our product. Simultaneously we ensure that our product will work in harmony with platforms and infrastructures of industrial leading vendors. Take mobility for example, our apps are designed to run on IBM MobileFirst, Worklight, S1 with Salesforce.com and SUP from SAP and we were one of the very first vendors to offer apps on this platform. As an example this week we are participating at IBM partner event in Vegas where we show our mobile apps for a variety of industry verticals running on top of IBM’s MobileFirst work light.

Similarly our mobile apps are based on HTML 5 and thus are device agnostic and run on Apple's iOS, Google's Android, and more recently Microsoft Windows 8. Furthermore recognizing that we do not live in a vacuum we envelop all of our products with well documented rich APIs to integrate with other software. For leading enterprise vendors we have ready to use adaptors for seamless integration such as SAP Oracle Siebel, Salesforce.com and more recently Net Switch. This approach continues with new technology such as big data and end to end machine to machine and the new products we are developing will run on leading big data engines and on leveraged stand out in platforms for machine to machine technologies.

A very strong differentiator we have relative to the competition is optimization and artificial intelligence that are almost everywhere in our product to drive superior incremental business value for our customers. We go way beyond the manual basic data processing functions that most competitors offer by providing higher level of automation for optimized decision making and field execution. For instance when disaster strikes we enable intelligence collaboration between all stakeholders and also ongoing optimized resource location and reply to our expected events, as opposed to answer their noisy long list of messages or time consuming manual searches looking for candidates for a set of emergencies spread all over the territory.

One more example is ClickButler, our award winning technology for context aware intelligence personal assistance for mobile devices. We started this initiative several years ago and it is now converging in perfect match with industry trends for mobile-based personal assistance. ClickButler is not just one or a few limited task. We enable ClickButler as a way of life in every app we have developed essentially creating a virtual personal assistant that shadows the user like his twin persona, anticipate his needs and act on them proactively. It never takes vacations nor goes to sleep.

Numerous business scenarios show how this practical and powerful tool improves customers' satisfaction and actually saves time and increases productivity. By the way ClickButler leverages many of the engines and technologies that already existed in our artificial intelligence development platform that is based on more than 20 years of investment. This is the same platform we have been using for our classic optimized scheduling, planning and forecasting products.

So the story of ClickSoftware is much bigger than it was. Today ClickSoftware is the largest and reaches variety of products and apps to cover the end-to-end needs of individual service providers of all, from five employees to 50,000 employees. Apps can be purchased alone as point solutions for well-focused business needs or in bundles for bigger needs or even larger transformation projects. Furthermore recognizing that partial or full outsourcing is pervasive all over the service industry our products also cover the needs of communities of service providers in a service marketplace environment.

This includes collaboration and intercompany business interactions, such as large service providers despatching jobs to contractors in an outsourcing mode of operation. ClickSoftware was and is today the premium choice for companies looking to delight their customers and achieve operational excellence.

With that I will pass the call onto Shmuel to cover the financial details.

Shmuel Arvatz

Thank you, Moshe. Before I begin reviewing the financial results for the first quarter I would like to inform everyone that on this call unless otherwise noted I will refer entirely to the non-GAAP financial measures when discussing operational results. Non-GAAP financial measures differ in certain respect from Generally Accepted Accounting Principles and exclude share based compensation, amortization of intangible assets, changes in deferred tax and certain special tax charges. A reconciliation between the GAAP and non-GAAP results are detailed in the press release which we issued earlier today and which is posted in the Investor Relation section of the company's website.

I would like to start my prepared statement by highlighting a change in the way we will report revenues today and going forward in the future. As we discussed on previous calls, demand for cloud-based solution from large enterprises and mid-sized customers has increased. As a result, more of our customers are opting to purchase our solutions on a SaaS model paying a subscription fees as opposed to an upfront license fees for our traditional on-premise solution.

In the effort to provide greater transparency we will break out our revenues into four line items, which are license fees, cloud subscription fees, support fees we receive from on-premise customers and consulting fees. We believe that this level of detail will provide investors greater visibility into our progress particularly as it relates to our cloud business.

During the first quarter, we signed and closed the acquisition of Xora. The total cash consideration paid net of Xora cash was approximately $12.7 million which was financed internally through our cash resources. The Xora acquisition will strengthen our leadership position by offering customers a broad range of cloud-based mobile workforce management solutions. It will also extend our market reach into SMB market and opens a distribution channel through leading wireless carriers. Xora revenues were included in our cloud subscriptions revenues starting March 5th.

Revenues for the first quarter were $28.4 million, up 16% year-over-year and down 8% sequentially. It is not about that's revenues from cloud subscription was $2.3 million which is up substantially from $300,000 in the same period last year and represent 8% of total revenue. Revenues from Xora following the closing of the acquisition were about $1.3 million and are included in our cloud subscription revenues for the quarter.

Bookings in the first quarter were strong and our book-to-revenue ratio was significantly higher than one. As a result our short term backlog as of at the end of the quarter was $47.3 million, up $4.6 million from the end of 2013. The geographical breakdown of revenues is as follows: $15.2 million from the Americas or 53% of revenues, $11.1 million from EMEA or 39% of revenues and $2.1 million from Asia-Pacific or 8% of revenue.

Moving on gross profit was $16.8 million, representing a gross margin of 69% compared to $14.4 million or 69% in the same quarter last year. Operating expenses for the quarter were $17.7 million, up 29% year-over-year. The increase was primarily a result of a high level of expenditure in our core research and development, sales and marketing activities, additional operating cost connected to the Xora acquisition as well as the associated transaction cost related to acquisitions which impacted G&A expenses.

As if the end of the first quarter we had 716 employees, an increase of 158 employees from the end of the first quarter last year. The increase includes the 139 employees we brought on from Xora as part of the acquisition. Operating loss for the quarter was $1 million or 3% of revenues compared with an operating profit of $700,000 or 3% of revenues in the same quarter last year.

Currency impact on our operating result was about $300,000 positive this quarter. This calculation is made in constant currencies as prevailed in the first quarter of 2013. Net loss for the quarter was $1 million or $0.03 per diluted share compared to net income of $800,000 or $0.02 per diluted share in the same quarter last year. Non-GAAP tax expenses for the quarter totaled $258,000 resulting mostly from tax liabilities associated with our subsidiaries outside Israel.

Turning to the balance sheet, our cash reserves which is comprised of cash, cash equivalents and investments at the end of the first quarter totaled $50.3 million down from $58 million as of March 31, 2013. The reduction in cash reserves was primarily a result of Xora acquisition. During the first quarter we generated $3.7 million from operating activities.

In terms of guidance following the closing of Xora acquisition and the result of the first quarter of 2014 we're raising our full year revenue guidance to $126 million to $132 million. We also expect non-GAAP fully diluted earnings per share to be between $0.04 to $0.12.

In summary we executed well in the first quarter and remain focused on our long-term growth strategy. Demand for service optimization and mobility tools continued to grow and we're well positioned to achieve our annual financial target in 2014. The integration of Xora is progressing as planned and while the acquisition will not be accretive on a non-GAAP basis this year the synergies and the growth opportunities are significant and we're confident that it will positively contribute to our earnings beginning in 2015. I would like to turn the call back to Moshe for closing statements.

Moshe BenBassat

Thank you, Shmuel. To summarize with the new cloud wins we've been reporting over the past quarters and the installed base of Xora we believe that we're now the number one cloud company in our space, both in terms of the size of the user base in the cloud and the spectrum of our state-of-the-art cloud solutions we offer for companies of all sizes. The velocity with which we're winning cloud customers clearly proves that ClickSoftware is executing very well the transition of large companies to cloud-based solutions. With that we proceed to the question-and-answers part of the call today.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session. (Operator Instructions). The first question is from Mike Latimore of Northland Capital Markets. Please go ahead.

Michael Latimore - Northland Capital Markets

Great, thanks a lot and congratulations on the quarter, looks excellent. In terms of the two large deals you referenced; one in North America, one in Europe. Can you provide little more clarity around that, maybe number of mobile worker in aggregate? And then just in terms of the deals themselves was it pretty clear that they were going cloud from the onset or was a lot of the discussion on premise versus cloud?

Moshe BenBassat

It was pretty clear that they are going for the cloud solution. And we're talking about thousands of users, subscribers that are going to be added to the cloud. Not all of the potential has already being signed and at least there is enough room to grow even further, these are very substantial large companies.

Michael Latimore - Northland Capital Markets

Great, and then you talked about $18 million to $20 million of cloud revenue in your guidance this year. I think on the Xora call you talked about Xora contributing low to mid-teens I guess. Of the $18 million to $21 million roughly what would you envision Xora?

Moshe BenBassat

Keep in mind that Xora only closed in March, so part of the year for Xora's revenues would not be there. I would assume somewhere between $12 million to $14 million.

Michael Latimore - Northland Capital Markets

Okay, and then just to be clear on the quarter you just reported, it looks like Click's own organic cloud revenue was about $1 million in the quarter versus $300,000 last year, is that the right comparison?

Moshe BenBassat

That's exactly correct, exactly what you said.

Michael Latimore - Northland Capital Markets

Okay, great. There's one last question, gross margin how should we think about gross margin overall for the year now that you have Xora in the mix.

Moshe BenBassat

I think that's 1% up or down, this is the ball park.

Michael Latimore - Northland Capital Markets

Okay, alright. Thank you.

Moshe BenBassat

Thank you.

Operator

(Operator Instructions). The next question is from Michael Martin of Small Cap Report. Please go ahead

Michael Martin - Small Cap Report

Good morning and congratulations. Just a couple of things. Can you give us some help on how many shares are likely to be outstanding for the year?

Moshe BenBassat

In a second, let's take the second one and we will see in a second.

Shmuel Arvatz

It's about 33 million shares.

Michael Martin - Small Cap Report

Okay, great. Going back to few years your operating margins were close to 15%. Do you have any goals that you can share with us looking out over the next several years what's the potential of the business you have here.

Moshe BenBassat

As we reported earlier when we made the annual plans, right now the potential for Click is very high in terms of revenue growth. And we're trying not to restrain it because of lack of sufficient investments. On the other hand profitability is important and so for 2014 I believe we have been targeting between the 5% to 10% rate. And then as the years continue we see the potential for revenue growth and accordingly we'll make the decision for 2015. Clearly we would like the profit to be higher but this will come too much at the account of revenue growth I'd like to believe that my shareholders would prefer we invest in growth.

Michael Martin - Small Cap Report

Understood, thanks so much.

Moshe BenBassat

Very welcome. Thank you.

Operator

The next question is from Hugh Cunningham of Oppenheimer and Co. Please go ahead.

Hugh Cunningham - Oppenheimer and Co.

Thank you for taking my question. Two questions, one is about your capacity. Given your investment in the cloud last year what sort of levels of clouds volumes are you able to support. In other words, this year do you need to be spending more and more in support the cloud? And are you seeing a shift in customers' willingness to adopt cloud and is it broken by size? Do you see a different willingness to try the cloud for the larger customers versus your small investors?

Moshe BenBassat

I'll answer quickly the first one. We don't expect the major investments in cloud hardware of the like because either we use already the hardware that we have and this would be sufficient for at least another 12 months. And as far as the other public clouds we use Amazon so we can pay as we consume and there is no need for an investment.

Back to your questions the shift by large companies to the cloud continues. And by now almost 50% of our pipeline for the large companies is for cloud solutions. So we believe that it continues although on the other hand there is sufficient large enterprises that stay with an on-premise solution. So this gives us enough room to generate the revenues over the short term by from these on-premise customers as we build very quickly the recurring revenues in the cloud and we reported the structure of this -- the composition I mean.

Hugh Cunningham - Oppenheimer and Co.

Okay. Thanks for taking my questions.

Moshe BenBassat

You are very welcome.

Operator

The next question is a follow up question from Michael Latimore of Northland Capital Markets. Please go ahead.

Michael Latimore - Northland Capital Markets

Yes thanks. I think you mentioned this. But what was the kind a one-time acquisition-related expense in the quarter. What was that amount?

Moshe BenBassat

It was about mostly for professional fees slightly higher than $300,000.

Michael Latimore - Northland Capital Markets

And then the small change, the EPS guidance for the year that, is that all related to Xora?

Moshe BenBassat

Xora look it's slightly down and the internally we raise the guidance slightly up so overall this was the net impact.

Michael Latimore - Northland Capital Markets

Thanks, and what is maintenance, are maintenance renewal rates still similar to what they’ve been in the past?

Moshe BenBassat

Yes, it's very high.

Michael Latimore - Northland Capital Markets

Okay, and how about just the cross sell opportunities at Xora, I know you’ve only had it for a little over month and a half now. But can you may be talk a little bit about anymore visible opportunities cross sale opportunities? And then if they do play out I would assume it's more of a second half effect?

Moshe BenBassat

Yes, as I started to explain in the strategy part of my part of the call even before Xora joined we have had in our strategy to join forces with wireless carriers in order to sell to the lower end of the market. This is a trend just about all over the road, I mean we’ve been to the Barcelona event the World Congress and almost everywhere you were talking to wireless carriers they were pointing at selling mobile apps to small businesses, it's a very important channel for them to generate more revenues at higher profit rates as opposed to selling to consumers.

So on the other end carriers as you know are not software developers so they do look for partners. Xora did a magnificent job over the past 10 years in really pioneering the space and starting to work with AT&T Sprint and Verizon. We were selling to these companies, and as you may remember I’d mentioned that we are around the world more than 55 or more than 50 carriers, large carriers around the world from I won’t mention names so as not to give but we see at our website all sort of names.

Now each one of these carriers in principal is a potential partner to resale the mobile apps of Xora as well as additional mobile apps that ClickSoftware will contribute to it. As you all have heard me saying in the past we are developing mobile apps for either point solutions as well as for larger needs. So there are lot of potentials for cross selling in North America with the existing partners and even bigger potential in expanding to additional wireless carriers around the globe to sell mobile apps for small businesses.

Michael Latimore - Northland Capital Markets

And then in terms of the license software business, sounds like relatively stable conditions there? I guess how much of the pipeline for this year is follow-on orders from to last year sales? I know you had a lot sort of a lot of customers but smaller initial orders. So how much of the pipeline it's going to follow on orders may be from last year?

Moshe BenBassat

First, your reading it's wrong. The market for mobile workforce management software solutions is in fact growing very nicely. And the question is do they buy on premise or by cloud, so it terms the market itself is very strong both the large companies the mid-size companies and for small companies.

Now in terms of whether they go on-premise or go in to cloud I say before at present is 50-50 but my feeling is that it may roughly 50-50 in the pipeline. But my feeling from what I’ve seen the trends it is likely to go more in favor of the cloud and may be in five years from now most of them would be in the cloud I cannot speak for this. But simply there is enough pipeline of large deals that we win on-premise as well as in the clouds. So it's not like just stable or surviving or like it's growing at its own rate.

Michael Latimore - Northland Capital Markets

Yeah. I guess I was just curious you had a lot of on-premise software sales last year, you had indicated that they were may be initially smaller order with the potential for follow on. So I was kind of curious if there was some follow on or not?

Moshe BenBassat

That’s correct and but I guess as I mentioned before I mean the repeat orders even this quarter was very strong. But there is no change in the year except to say that may be in the past and I do recall saying it, in the past a large company with big pockets it would come and negotiate good price in favor of giving you all the licenses upfront. In recent years it has been going down and they would agree to pay perhaps higher value per license and then start small and then buy the rest of the licenses.

Michael Latimore - Northland Capital Markets

Okay great, congratulations on the quarter.

Moshe BenBassat

You are very welcome. Thank you.

Operator

The next question is from Nick Farwell of Harbor Group. Please go ahead.

Nick Farwell - Harbor Group

Well if I may follow-up on Mike’s question is that is I want clarify to the best of your ability the incremental revenue projection is from Click if you will as separated from Xora if you look at the delta of roughly $15 million in terms of your change in guidance for this year versus the beginning of the year and you provided guidance of say $12 million to $14 million or something in that area for Xora that would suggest a couple of million from Click itself, ex-Xora, am I correct in that?

Moshe BenBassat

Yes, you do.

Nick Farwell - Harbor Group

Okay, the next question is can you talk a little bit about the ways in which Click maybe able to leverage Xora as you commented in the press release into other telecom companies but more importantly from the eyes of your key partners and to what degree this opportunity provides them and correspondingly an opportunity to integrate or implement Xora within a large telco that product offering that App within a large telco?

Moshe BenBassat

Xora does not sell to telcos so we do not implement in telco. Xora sells to relatively small businesses of maybe 10, 15 business each, there is very minimal implementation effort. In fact the one of the beauties of Xora that is almost I would say the on-boarding process is measured in days and most of it is done over the telephone. So there are no implementation cost involved for Xora's customers and I wish all software in the world would be like this, you download it from or you get it from somewhere and then within a day or two of -- plus some telephone guidance potentially you’re up and running.

Nick Farwell - Harbor Group

So how does a telco know exactly what the run rate is, are they purely sales channel and rely on you or Xora to help them what their…

Moshe BenBassat

No, it works like this, the telco itself a small business, data plans devices correct?

Nick Farwell - Harbor Group

Correct, I understand that.

Moshe BenBassat

So what you believe you package together data plan, devices and several apps and you sell it as a package.

Nick Farwell - Harbor Group

Right.

Moshe BenBassat

Now once a small business buy this as a package there needs to be some to enter his data, to put the names of his employees and so forth and this is a straight forward process and does not require any substantial effort by professional ITs like the Accentures of the world or the IBMs of the world. It’s very straight forward.

Nick Farwell - Harbor Group

Okay so the acquisition of Xora has really no impact on the opportunity set associated with your partners, your current enterprise partners?

Moshe BenBassat

No, with the implementation partners, now this takes me though into the part which I described that Click software in general has been working and will continue to develop more apps to support communities of service providers. In typical large service company outsources to contractors a very substantial portion sometimes it’s 20% sometimes it’s 50%. So let's say they outsource it to a small company with 400 people. This small company with 400 people may by itself outsource it to smaller company with 10 people. Essentially the service sector works as a network community of service providers of all sizes and they would love to level at each other in order to do business more efficiently with no need to hire more or not run into problems when you lack capacity.

What we enable then is really to have a greater visibility in to the capacity that each one has or the need that each one of them needs. And streamline all the business interactions of course make this a very attractive proposition to everybody. Now Xora’s customers are the small ones and they also have some bigger ones. We have the mid-size ones and very large ones. Now picture a very large community where all of them can interact with each other and you can see the potential.

Nick Farwell - Harbor Group

Okay to take a little lightly different tack on this. And you commented that roughly cloud is 50% of backlog. If you are to project pipeline -- of pipeline I am sorry you're right on the pipeline. If you were to project that out Moshe and try to in vision what it might look like in the fourth quarter? And what do you think it might look like at time? Would be substantially different and if so in what direction?

Moshe BenBassat

Quite frankly it takes more than a few seconds to think and analyze it I cannot answer right now.

Nick Farwell - Harbor Group

The reason I asked obviously is as companies in the market place have transitioned to a cloud based model from an on premise model as a gross generalization the magnitude of that swing from one revenue stream to another of course has a big impact on their income statement and investors perception on success. And so and you commented earlier in your general session that fortuitously there were still a number of on premise opportunities sitting in the back log and in the pipeline that would help quick presumably make those transition smooth as possible and I was trying to follow up on that particular comment. Do you have any further comments?

Moshe BenBassat

Yeah. As I said I mean I don’t have -- I thought that your question was a much more general markets trends question. But as far as click owns pipeline we have what we need to generate the numbers for 2014 and that’s why we feel so confident about it and it would be a mix between on premise days and cloud days.

Nick Farwell - Harbor Group

Right. So if we look into ’15 obviously our focus is going to be on that mix of business to determine when cloud becomes profitable, or at least break even and when and if the company starts to generate as Shmuel commented in the second half of this year. But start to generate sustainably higher operating margins leveraging the incremental revenue and that’s the direction of this question.

Moshe BenBassat

Yeah, I guess. But yeah I gave I believe the numbers of how I see us exiting from 2014 and I think that these were quite impressing numbers. Today we had like if you take the $2.3 million in cloud revenues and multiply it by 4 it's an annual run rate of 8 million to 9 million. So we were talking about going this to a run rate of $26 million to $30 million by the time we exit 2014. And as 2015 starts then the geometric effects of rapid growth in cloud revenues will play its role and definitely would be more profitable.

Nick Farwell - Harbor Group

Okay one last quick question. Shmuel what is the impact of changing mix on DSO’s and what was due to that metrics? You didn’t mention what DSO’s are I am curious what they are and whether there is shift in revenues that…?

Moshe BenBassat

Try to get rid of the section that we’ve shredded here. So it went up slightly to 74 days this quarter compared to 66. So this is in the ball park of our target model and there is no change to the model.

Nick Farwell - Harbor Group

Okay. So the fact that you end up with cloud which is a recurring payment and therefore presumably only 30 days in duration doesn’t bring down DSOs over time?

Moshe BenBassat

Not yet.

Nick Farwell - Harbor Group

Okay. Thank you.

Moshe BenBassat

You are welcome.

Operator

Next question is from [Mack Lussi] of Victory Capital Markets. Please go ahead.

Unidentified Analyst

Hello Moshe, nice job in the quarter, very, very strong. A couple of questions for you, you mentioned that you had developed a pretty strong backlog with your Salesforce.com partnership. Can you give us some more comments in terms of how that channel is developing and how they that could express product in particular is progressing?

Moshe BenBassat

Yeah. First we’ve had several cases of customers who were Click cloud customers and elected to go to the cloud via the Salesforce.com. So it was a very good opportunity for us to bring customers to sales force and that everybody is happy. Generally speaking as Salesforce announced that it's going into a vertical isolations our software is verticalized. Technology wise we did a good I guess job in terms of developing what is need to be developed so that our software can -- Click it's called Click workforce can run in the workforce environment. We are one of the very first to develop mobile apps for the S1 new platform of Salesforce.

So right now we are tightly integrated, people like it and they like the power and the value that our own software delivers. And when it's integrated with the overall environment of Salesforce this give the most inline work flows for the customers. So all-in-all we see a growing pipeline growing interest of working together with the sales force I mean the field force of -- Salesforce got the name, I mean the sales people of Salesforce, and the sales people of Click and it looks good.

Unidentified Analyst

Great appreciate that. Another question on a different note. You mentioned at the close of the Xora acquisition that's you had -- you currently about 630,000 users. I'm just curious as to what your expectations might be for the year-end 2014 and say looking out over the next two or three years. What are the company's goals for their number of users?

Moshe BenBassat

I don't think I'd like to go into this discussion. Now first I don't have good enough data to say it's only been one month after the closing. So we will have to wait and see how will develop the market in general. But look having more than close 700,000 field force managed by ClickSoftware it really a statement for market leadership isn't it.

Unidentified Analyst

Did you say that you're approaching 700,000 you think?

Moshe BenBassat

So whatever number you mentioned before, but it's six, I don't recall the exact number now, but whatever it is it's by far by far the biggest relative to any other player in this space.

Unidentified Analyst

And so given that can you sort of describe the competitive dynamics given what you just stated as well as those certain large flagship deals you've been winning in the SAP space clearly it's been evolving here over the last year. I'm just curious as to your sort of take on this point on the competitive environment.

Moshe BenBassat

Yes I mean at least in my opinion okay to think that in terms of the cloud we have the best spectrum of options as to what large and small and mid-sized companies would like to have. And the cloud of Xora offers the very small ones all the way through the big Amazon public clouds or very large ones and in between. We now how to do it, it is not only in the United States we now to do this worldwide.

In terms of the functionality of the software it's well known all around the world that when it comes to the optimization which of course brings business value it's by far the biggest in terms of ongoing management of the schedule in real time on a massive scale. Employment booking which are very sophisticated to give on the one hand when the customer would like you to come. And on the other end which person and which time slots so that your operational cost would be minimized.

Certainly when you go to complex business operations, that require operations of multiple days most of our competitors cannot handle jobs that last for more than one day. Or job that require multiple person team to deliver the job most of our competition do not know how to automate or optimize this kind of allocation. So when it comes to covering the need for the service sector we have both the functionality, the business functionality that they need to really optimize customer satisfaction and minimize cost. And now we have within the cloud with the most powerful offerings in this space.

So and we continue to expand also by the way they can start by deploying the mobility solution and then add the schedule optimization solution. Or they may say all I like to do right now is start with the schedule optimization and they buy the mobile. With most of the competition the options with mobility are very limited. They don't have this motion that we adopted five years ago that it's a road of [opting] the cloud that's kind -- that's the mantra around ClickSoftware.

And as I said five years ago in of the calls whatever iCubes brought the world of apps to the consumer world, the same is going to happen in business world and indeed it's happening these very days. The investment we need for five years and now we have the largest collection in terms of their variety, in terms of power, the largest collection of mobile business apps in the world and companies can just purchase one or two of them or all of them or comprehensive solutions.

We give them so much choice that just a company of each size or every need can find what they need at ClickSoftware.

Unidentified Analyst

Thanks for that. And just to go back to my previous question, so the number of users was that sort of one-time metric you announced or is that something that you are going to make available going forward?

Moshe BenBassat

No, I am going to stay out of it, I don't want to become like a [cradle] company that on every call people start checking how many they lost and how many they won and rather focus on developing the business on much more sound business metrics.

Unidentified Analyst

Okay. All right I appreciate it, nice strategy guys. Thank you.

Moshe BenBassat

Thank you a lot and I understand this was the last call -- the last question. So thank you all for attending today's call and I look forward to seeing you on the next future calls. And have a great day. Thank you a lot.

Operator

Thank you. I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S please dial 1888-326-9310, in Israel please dial 03-925-5901 and internationally please dial 972-3925-5901. Dr. BenBassat, would you like to make your concluding statement?

Moshe BenBassat

Well I always say thank you all for participating and have a great call.

Operator

Thank you. This concludes the ClickSoftware Technologies first quarter 2014 financial results conference call. Thank you for your participation. You may go ahead and disconnect.

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