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Callidus Software Inc. (NASDAQ:CALD)

Q1 2014 Earnings Conference Call

May 1, 2014 16:30 ET

Executives

Bob Corey - Chief Financial Officer

Leslie Stretch - President and Chief Executive Officer

Analysts

Chad Bennett - Craig-Hallum

Koji Ikeda - Oppenheimer

Mike Anderson - Credit Suisse

Richard Baldry - Roth Capital Partners

Scott Berg – Northland Capital Markets

Kevin Liu - B. Riley

Alex Zukin - Stephens

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2014 Callidus Software Incorporated Earnings Conference Call. My name is Glenn and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Bob Corey, CFO. Please proceed sir.

Bob Corey - Chief Financial Officer

Okay. Thank you, operator and welcome to CallidusCloud’s first quarter 2014 financial results conference call. A more complete disclosure of our results can be found in our press release issued about a half an hour ago, as well as in our related Form 8-K furnished to the SEC earlier today. To access the press release and the financial details, please see the Investor Relations section of our website.

With me today on the call is Leslie Stretch, our President and CEO of CallidusCloud. The primary purpose of today’s call is to discuss our first quarter results. However, some of the information discussed during the call including any financial outlook we provide may constitute forward-looking statements within the meaning of the U.S. Federal Securities laws. These statements are subject to risks, uncertainties and assumptions and are based on financial information available as of today. We disclaim any obligation to update any forward-looking statements or outlook.

Forward-looking statements involve risks, uncertainties and assumptions. If any of the risks or uncertainties developed or any of the assumptions prove incorrect actual results may differ materially from those expressed or implied by the forward-looking statements we make. These risks and additional risks are also described in detail in our reports that we file from time-to-time with the SEC including our most recent 10-K and 10-Q filings, which I encourage you to read.

With that said, I will now turn the call over to Leslie.

Leslie Stretch - President and Chief Executive Officer

Thank you, Bob. Good afternoon everyone. Today I’m going to discuss six key topics. Firstly our performance in Q1, 2014, secondly our channel momentum as a business driver, thirdly our international opportunity as a business driver, fourthly new product releases and entering new markets as a business driver, fifthly marketing activity on C3, 2014, our annual conference as a business driver, and finally I’ll give you some color on our outlook for 2014.

Before I begin though let me take a moment to thank all the members of the CallidusCloud team around the world for their contribution to another record quarter. In Q1, 2014, we achieved record revenues, record recurring revenues, record recurring revenue margins and record channel bookings. Our non-GAAP profitability was up three-fold and our EBITDA up four-fold. Our billings growth again was strong despite a tough comparison with last year. We expect top recurring revenue sequentially by almost $1 million. We added over 130 net new subscription customers in the quarter setting the stage for another sequential recurring revenue increase in Q2.

We signed several seven-figure SaaS agreements, several multi-year agreements and notable customer wins included, Optum360, a leading healthcare technology provider for our Lead to Money Bundle. Technical Consumer Products, a leader in energy efficient lighting signed for our Lead to Money Bundle. Bank of California, a top full service banking on organization for Commissions and Litmos mobile learning. Hilton Worldwide, one of the largest hospitality companies in the world for Commissions and Workflow. Total Merchant Services, a leader in payment processing services for Commissions, Sales Enablement and Configure Pricing Quote. Motion Industries, a leading distributor of industrial parts for Commissions and Workflow.

FusionStorm, a leading IT solutions provider for Commissions and Workflow. Telstra, Australia’s leading telecommunications and information services company for Commissions, Territory and Quota, Workflow and Sales Gamification. CareFirst, the largest health care insurer in the Mid-Atlantic region converted from an on-premise license, the cloud commissions and added workflow. The reason I highlight these particular new business Commissions wins is that they all emphasize the evolving customer’s thinking beyond incentive compensation management as a standalone challenge.

With our Lead to Money Cloud we had a significant competitive differentiator. Continued on some other wins in the marketing and learning cloud, Banner Managed Communications, a leading global marketing communications agency signed for Sales Enablement, Litmos Mobile Learning and Marketing Automation. Ultimate Software, a leading cloud provider of people management solutions and existing Litmos (auto) customer added Litmos Mobile Learning in the quarter. Redington UAE a leading IT service provider in the Middle East signed for marketing automation. These are just some of our new business wins in the quarter.

Let me update on our channel. The performance was strong in Q1. During the quarter we expanded our partner network adding 25 new alliance partners and resalers including DocuSign, a global standard and digital transaction management, Protiviti, a global business consulting leader and WalkMe, the cloud-based guidance and engagement platform. We had 88 contracts coming from resale partnerships up from just over 30 a year ago. On the technical front we’ve been working with a number of partners to expand our integration capabilities, most notably with SAP’s HANA in-memory data platform and SalesForce1, salesforce.com’s mobile customer platform.

Looking at the international opportunity. EMEA did better for us in Q1 than recent quarters and while it’s a small part of the business my recent visit confirm my view that the cloud opportunity is very real and growing in EMEA. At C3 our customer conference that is less than three weeks away we will showcase our brand new contract lifecycle management solution. Our updated Territory and Quota release, our Thunderbridge Big Data offering and our new mobile initiatives including SalesForce1.

Our cloud expertise continues to result much deeper and more intimate relationships with our customers and few of those relationships, it’s clear that customers do not see their universe in sales and marketing silos. Instead they understand their business needs to turn leads into contracts or leads to money as we say. As this insight that drives us forwards above all others and I can tell you we’re having more meaningful engagements than ever and this is showing through in our contract flow.

I think by now it’s clear though I’m most excited about our opportunity for our Lead to Money Cloud. We can prove to perspective customers of any size that companies who have individually implemented a marketing solution, a commissions solution, a configure price quote solution, a contract management solution and an enablement solution from separate providers are quite simply wasting time and money. We can provide one cloud that covers all these functions and more as it dramatically reduce cost of ownership for our customers. We achieved this through unique thinking about our data architecture and a unique approach to analytics through the Thunderbridge initiative. I’d emphasize again that we get a phenomenal reception across all industries and markets for the Lead to Money story.

Turning to our marketing activity, CallidusCloud sponsored key events in the quarter including DocuSign Momentum in San Francisco, RevTalks, the Revenue Marketing Conference of the Year in San Francisco, the Economist Big Rethink in New York, Forrester’s Sales Enablement Form in Phoenix, where one of our customers Cleaver Brooks and Industrial Manufacturer presented to a full house about their success with our configure price and quote solution. We attended the Learning Solutions Conference in Orlando. The International Franchise Association in New Orleans, Learning Technology in London and the Technology for Marketing and Advertising Show in London all in the quarter.

As I mentioned earlier we’ll be hosting our Annual Customer Conference C3 in Las Vegas on May 12 to 14. We’re expecting another sell-out event at double the size of last year’s conference. C3 brings together the most eminent thought leaders in sales, marketing and the learning space and focuses on sharing practical tactic for growth. We’re looking forward to sharing some of the amazing stories from our customers like Blue Cross Blue Shield in Florida, a healthcare insurance leader. Dell, the global technology innovator, Cree, the market leading lighting innovator, Telstra, the global communications information services provider, Brocade Communication Systems and Kimberly-Clark, one of the world’s largest consumer products companies will all be presenting at the conference.

Robert Herjavec from ABC Shark Tank will be delivering a special guest keynote, sharing his views on what it takes to survive and thrive in today’s economy. And during my keynote I’m really excited to be sharing our latest innovations, brand new products and future direction for the company. We have a record number of partners and sponsors involved in the events including Accenture, salesforce.com, Canadian Deloitte, PWC, Cognizant and Wipro to name by the few. And I look forward to seeing some of you in Vegas.

Looking ahead we intend to maintain our profitable growth strategy and our confidence is based on five key drivers. Firstly momentum in the business year-to-date. Secondly I see an expansion in our international opportunity for cloud. Thirdly, at C3 2014 we’re expecting over 1,200 attendees from across the globe and this will be our most impactful conference to-date. Fourthly, our channel momentum and finally I expect some incremental opportunity from new products and recently added sales resources.

I’ll now hand over to Bob to go over the financial picture in more detail.

Bob Corey - Chief Financial Officer

Thanks, Leslie and good afternoon everyone. Before I begin my detailed comments on Q1, I too want to thank each and every employee for their hard work that has contributed to our success in Q1. We would like to remind everyone that I will be referring to both GAAP and non-GAAP financial measures, the reconciliation of our GAAP to non-GAAP financial information provided in our press release which is available on our website.

Additionally in conjunction with the release of our earnings report, we posted on our website at Calliduscloud.com under the Investor Relations tab. Additional charts that trend identified performance metrics that we believe will aid in understanding and evaluating our performance over time. All the non-revenue financial figures I will discuss are non-GAAP.

During our first quarter, I’m very pleased to report that we continue to build on the momentum established over the last few quarters. Total record Q1 revenue increased to $31 million, an increase of 21% year-over-year and record SaaS revenue of $18.2 million increased 15% over Q1 last year. As previously noted, we closed two seven-figure deals in the SaaS platform, one of which was a conversion from on-premise commission’s customer to a multiproduct SaaS contract.

During the quarter, we signed 132 net new subscription customers. In addition, we added 297 net new subscription customers from the acquisition of LeadRocket bringing our total net new customers to 429 for the quarter. Despite the headwind we faced from the previously disclosed large customer loss that took full effect in our second quarter last year, we’re able to report SaaS billings growth of 23% for the quarter. We did benefit from a multi-year billing within the quarter. I do want to point out that a variety of factors influenced reported billings growth, therefore quarter-to-quarter fluctuations in this method cannot necessarily be used as an indicator for changes in future revenue.

Additionally, SaaS deferred revenue on the balance sheet at March 31st was a record $47.2 million, an increase of 55% from the prior year. Our non-GAAP earnings is $0.03 per share. During the quarter, we accelerated hiring of sales reps and marketing personnel and increased investments in marketing programs. We made these investments while still posting earnings within our guided range for the quarter. We believe these investments to be prudent and will contribute to future SaaS revenue growth.

Lastly, the LeadRocket acquisition was breakeven in the quarter and did not have a diluted effect on the reported earnings per share. Okay, let’s move on to some specific results for Q1. Unless I mention otherwise, the percentage increases or decreases are as compared to the same period of the prior year.

Looking at the recurring revenue business. Total recurring revenue for the quarter was $22.3 million, a 13% increase in last year and up sequentially by nearly $1 million. SaaS revenue was totaled $18.2 million, increased 15% compared to $15.8 million in the same period last year. Our SaaS revenue growth rate when adjusted for the loss revenue from our previously disclosed customer loss would have been 29%. The actual dollar of loss revenue in Q1 last year from this former customer was about $1.7 million. I only mentioned the adjusted rate to clarify the momentum we’re seeing in our business.

This quarter Q1 is the last quarter where we have a comparison to prior quarters that included revenue from this former customer. Overages were not material during the quarter. Maintenance revenue of $4.1 million was as expected and we anticipate consistent maintenance revenue in over the next several quarters.

During the quarter, the mix of contracts with annual versus quarterly payment terms came in at 78% of the annual terms compared to 67% with annual terms in Q4. The increase in annual terms is due to the mix of large enterprise deals and the focus on executing deals with annual terms. We’re pleased with the mix of annual terms as it provides additional visibility into our business. Lastly, our enterprise customer attention rate continued to be 90% plus based upon the number of contracts. Our gross margin expanded during the quarter is 71%. This is up five percentage points from the 66% reported in Q1 last year.

Turning to professional services and license revenue. Services and license revenue for the quarter was $8.7 million, an increase of $2.8 million or 47% growth in the prior year. Professional service revenue were $6.6 million in Q1, an increase of 38% over last year reflecting increased implementation services resulting from the momentum in our SaaS business and billings and recent license deals. Separately, we closed one seven-figure on-premise license deal with an international insurance company in the quarter and the total license revenue for the quarter was $2.1 million. We anticipate to continue closing the small number of on-premise license contracts in future quarters based upon customer needs.

Non-GAAP services and license gross margin was 44%, a 25 percentage point improvement from the 19% reported in Q1 last year. The significant increase in services and other revenue gross margin is primarily attributable to the increase in license revenue and improved gross margin contribution from professional services coming in at 28% for the quarter. The improved gross margin is primarily based upon continued efficiencies in our professional services organization. We anticipate the gross margin on professional services to trend between 20% to 25% in upcoming quarters. Our non-GAAP operating expenses were $18 million for the quarter, an increase of 23% from last year. This is on the high side of our internal expectations for the quarter as we increased our hiring in sales and marketing and incurred higher than planned commissions due to license revenue recognized in the quarter.

Sales and marketing expenses were $9.9 million, or 32% of revenue, an increase of $3.1 million from Q1 last year, where the percentage of revenue was 27%. The increase from last year primarily reflects the additional costs associated with increasing our hiring of sales reps and increased investments in marketing headcount and programs. During the quarter, we added additional 10 sales reps ending the quarter with about 80 sales reps worldwide.

Research and development expense was $4.4 million for the quarter, an increase of 12% over Q1 of last year, but represented 14% of Q1 revenue compared to 16% of revenue in the prior year quarter. We anticipate R&D expense to remain around 12% to 14% of total revenue in the near-term. G&A expenses were $3.7 million, a decrease of 4% over Q1 of last year and represented 12% of revenue in the first quarter compared to 15% of revenue in Q1 last year.

Our non-GAAP operating income for the quarter was positive $1.5 million compared to an operating loss of $700,000 last year. Non-GAAP adjusted EBITDA for the quarter was $2.6 million representing substantial improvement from an $800,000 negative EBITDA in the same period last year. Our non-GAAP net income for the quarter was $1.3 million or $0.03 per fully diluted share compared to the prior year quarter loss of $800,000 or $0.02 loss per share. Non-GAAP income loss per share is calculated based on 49.7 million diluted weighted average shares outstanding.

Turning to the balance sheet, cash and investments decreased to $34.3 million at quarter end. This is a decrease of about $1.8 million from the prior quarter, reflecting continued positive cash flow from operations of $5.5million, utilization of $2.5 million for the acquisition of LeadRocket, and final payout of indemnity holdback from the Webcom acquisition. Days sales outstanding remained consistent at 77 days in the prior quarter within our expected range. Total deferred revenue, including both short and long-term, increased by $2.8 million to a record $59.4 million.

SaaS deferred revenue was $47.2 million, an increase of $4.8 million sequentially with the balance relating to maintenance and services. SaaS deferred revenue benefited from the billings of a multiple-year contract. SaaS deferred revenue balance has increased by 55% year-over-year, primarily as the hiring of the previously announced additional sales personnel. Headcount has increased from 612 employees in Q4 of 2013 to a total headcount at March 31 of 648 employees. We will continue to prudently add headcount in sales capacity and professional services to support the growth in our customer base.

Okay, I am going to turn to guidance and I would like to move on to the forward-looking financial outlook and I want to remind you of the Safe Harbor language provided at the beginning of the call. For Q2, we are anticipating total revenue to be between $30.4 million and $31.4 million, representing an increase of approximately 17% to 21% compared to the second quarter of 2013. Non-GAAP operating income for Q2 is expected to be between $1 million and $1.5 million. The non-GAAP expense for Q2 was projected to include cost associated with additional headcount, primarily in sales and professional services, and an expanded C3 as we are anticipating an almost doubling of attendees. We are guiding non-GAAP fully diluted earnings per share of $0.01 to $0.03 per share. And lastly, we’re projecting the cash flow from operations in the upcoming quarter remains positive.

Turning to our guidance for the full year of 2014, we are raising the range of our earlier total revenue guidance to $127.5 million to $132.5 million. This represents 14% to 18% total revenue growth over last year. We’re projecting SaaS revenue growth at 25%. Previously noted, our goal is our remain slightly positive on income and cash flow while allowing prudent investments in expanding our sales and marketing operations in an effort to stimulate SaaS revenue growth.

Consequently our guidance for non-GAAP operating income remains unchanged at $7 million to $9 million for the year. Our guidance for the non-GAAP fully diluted earnings remains unchanged at $0.12 to $0.16 per share. We anticipate to continue generating positive cash from operations and positive cash flow for the full year.

I’d now like to open up the Q&A session. Operator, could you please pass for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Chad Bennett with Craig-Hallum. Please proceed.

Chad Bennett – Craig-Hallum

Good afternoon, guys.

Bob Corey

Hi, Chad.

Chad Bennett – Craig-Hallum

Hi. Bob, is there any way even directionally to look at the SaaS billings growth rate and if you just excluded the multi-year deals, multi-year billing deals year-over-year, would it be better or worse than that 23%? Is there a way to kind of look at that?

Bob Corey

Yes, I’m sure we can do an analysis internally etcetera and we continue to report the SaaS billings growth. We are really trying to emphasize, it is subject to variations like one of the questions – one of the components of your question is multiple year billings etcetera. The change in the mix from annual to quarterly billings were influenced that number as well. The timing of renewals in the installed base influences that calculation as well. So, what we’re trying to emphasize while continuing to report billings growth is SaaS revenue growth, increase in deferred revenue on the balance sheet, and cash flow from operation so, yes.

Chad Bennett – Craig-Hallum

Okay. And Bob, considering it seems like the incentive structure, or Leslie, for that matter, around shifting that billings mix to annual, you definitely have seen kind of the swing towards annual. Is this a mix to think about going forward or to plan on, kind of 80-20, give or take 5% or so?

Leslie Stretch

Yes, I think 80-20 is a target mix, yes, that’s what we’re trying to do with incentive plan and the direction for sales and sales management. As you know we still have deals that were, for whatever reason, new business deals, competitive pressure or whatever where we will work with the customer on a monthly or quarterly billing regime. But even those tend to be irrevocable annually. We just would characterize them as monthly or quarter billings. We’ve got incentive regime is worked well in Q1 and I believe that we will be in that target zone through the year.

Chad Bennett - Craig-Hallum

Okay. A couple more from me. Leslie, for the last few quarters at least, you have rattled off a lot of multiproduct deals, lead to money deals if you want to call it, I guess is there a way to look at it year-over-year whether it is an increase in ACV or an increase in average deal size and kind of can you directionally talk about as you move to more multiproduct deals what that should mean from kind of an annual customer value standpoint?

Leslie Stretch

I think the ASPs have moved around a fair bit as we’ve added products to the mix and we’ve got the volume dimension to the business obviously and the enterprise dimension. Directionally, Q1 over Q4, they were a little better actually, but the story is still anecdotal. We’ve got literally dozens of lead to money bundles out there. We will have more empirical data. But I don’t see that many standalone single deals, single silo deals. In marketing and learning, yes, but in the selling cloud and commissions we’re seeing all the couplings we talked about, CPQ enablement and so on. I think it is kind of resolved in an improvement and value for the customer and I would expect us to still improve our ASPs as a result that we are going to go a couple of quarters updated to go on at the moment?

Chad Bennett - Craig-Hallum

Okay. Last one for me, how much benefit in bookings or billings this quarter did you see from sales hires in the last half of last year?

Leslie Stretch

Yes, that’s a great question. Again anecdotally, the sales people that we brought in from SaaS service providers, people like Chameleon, BigMachines and now (indiscernible) have actually hit the ground right and that’s notable in several of them, of the multiple six-figure deals. So, again, it’s anecdotal, but yes, it’s they are definitely having a contribution and it was a good – it was a great quarter.

Chad Bennett - Craig-Hallum

Okay. Nice job on the quarter and good job on the tough comp on the billing side?

Leslie Stretch

Thank you.

Bob Corey

Thank you.

Operator

Your next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed.

Koji Ikeda - Oppenheimer

Hey guys. This is Koji Ikeda for Brian Schwartz. Congrats on the quarter and thanks for taking my questions. Over the past few months, we have been beginning to hear a lot of – lot more industry buzz surrounding sales force automation and specifically around commissions and CPQ type applications. We were kind of wondering if you are beginning to see any changes in the competitive landscape. Are you beginning to see any new players and the deals that are coming into play? And in your recent customer wins, what type of customer were you displacing or you have mainly in replacing spreadsheets?

Leslie Stretch

Yes, great question. So, we have actually replaced some single siloed competitors in marketing and commissions in particular, where they – all we have to offer was an SMB commission solution, that’s been quite marked actually in the commissions business. And we have been going in with a suite with much more value. I think I wouldn’t name names or anything like that, but that’s been quite significant in certain sectors. And there has been one or two replacements, again, where we have been providing a lot more value. There are new entrants coming into the market. So, I don’t think we want to give their brands airtime on our conference call, but yes, there are, because it’s a hot space and there is money coming into the market. And we saw a couple of companies, just particularly in the enablement space, some in the financial planning commission space making big money raises in the first quarter of this year. So, there is a lot of attention on the space and that’s all very, very good for us. But what we are seeing, we are seeing a remarkable number of customers and perspective customers. You are getting into this idea that they can see much more of their business if they adopt the Lead to Money cloud, the integrated cloud. And they are also getting great value from us. We are doing bundled pricing and we are doing multiple products of phenomenal value, because we think customers are overpaying. They are overpaying the siloed guys.

And then if you look at the data around our conference, it’s double the number of attendees last year, but I can tell you the quality is also fantastic. And that’s just another indicator of the heat around this market for us. So, absolutely, it’s – we are in the right place. We have added sales people as well. So, there is another – and we are attracting a great caliber of sales people. And that’s another data point. We still though are not going to every deal. We still are under-covered, but we are adding salespeople whilst committing for the financial envelope that we laid out to the year and Bob just laid out again in the call today.

Koji Ikeda - Oppenheimer

Great, thanks for that. And a quick question on your deal pipeline, are you guys beginning to see companies come to you, not necessarily for your commissions applications first, but some of your more recent product launches like Litmos or Territory & Quota?

Leslie Stretch

Yes. We are seeing lots of Litmos customers. Territory & Quota as well, we are seeing lots of customers coming in Territory & Quota, both existing commissions customers, we had a quarter in terms of up-sell and cross-sell. And I just gave you some highlighted deals, I am going to go through all the deals obviously, but we had great cross-sell, great up-sell, yes, but Litmos has been on fire and continues to be on fire. And I expect great growth in that mobile learning business, are also selling the authoring tool and we sold I think I gave some examples in the prepared remarks of where we sold the Litmos learning solution. This really comprises the authoring tool, the collaborative authoring tool and the mobile learning environment and we are going to be making some announcements at C3 around content in the learning space as well.

Koji Ikeda - Oppenheimer

Great, thanks for that. Congrats again on the quarter. I will jump back in the queue.

Leslie Stretch

Thanks.

Bob Corey

Thanks a lot.

Operator

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

Mike Anderson - Credit Suisse

Hi, guys. This is Mike Anderson on behalf of Michael. Nice quarter. First question is with respect to your partners, it sounds like the reseller relationships are starting to drive more and more deals. Just wondering as a percent of total bookings, how has that been trending and where is that on a total bookings basis today as a percent?

Leslie Stretch

So when we think about total bookings, we are thinking about influence aspect as well. So, we’re thinking it’s a great – that’s the way to look at it. We’re thinking about the influence aspect and the resell.

Bob Corey

Okay. So Mike on the reseller partner alliance area right, we’ve been talking about up to 50% of our deals are partner-influenced right and what we’re seeing is that’s continuing to increase over-time up into the 60% range, right. I’m sure you understand it’s a collaborative sales effort, so the alliance partner can identify an opportunity and we can work collaboratively together and we go pitch our on-demand services etcetera. So it’s in that 50% to 60% range and I think (indiscernible) said he would like to see it be 100%. We continue to strengthen our relationship with our alliance partner.

Mike Anderson - Credit Suisse

And then…

Leslie Stretch

(indiscernible) actually in the deal count from last year. It’s great.

Mike Anderson - Credit Suisse

Yes. And then just lastly in terms of direct sales, I know direct distribution definitely ramping pretty quickly. What type of growth rate should we expect for the full year? What are your full year hiring plans and how should we think about the capacity exiting Q4 in general?

Leslie Stretch

The focus is on sales and so we’re roughly 18 sales people, quota-bearing sales people today, but we hope to add between 5 and 10 good quality sales people of quarter for the reminder of the year and now I’ll keep those within our projections, top and bottom-line projections. If there is a reason to change that and ramp it up we will look at as we go, I think we said in our product role as well so that’s roughly the plan. Then we will have – usually we will have some attritions. We would probably be quite happy to be around the 100 mark by the end of the year, but we might get there sooner, if there – our financial envelope allows us to do that.

Mike Anderson - Credit Suisse

Great. And then last one from me, just with respect to the on-demand revenue growth seasonality or for the rest of the year, I think you commented again that you expect to exit the full year at 25% and I think on the last quarter call, you expected it to increase quarter-on-quarter for the rest of the year. Can you just give us any additional color around how to think about that going into Q2?

Leslie Stretch

I think you’ve got that perfectly, we expect to exit at 25%, we expect Q2 obviously to be better because we lose the headwind of a product customer, launch customers situation, but I think we’re aware off. And so there is the mechanical thing that goes on there anyway. But we have got good momentum in the business. So, Q2 improves and then I think we exit the year at 25%, it’s going to be good.

Bob Corey

Yeah, Mike, it’s Bob. On the ramp there, we’re going to have the percentage ramp will benefit Q2 going forward just because we no longer have the prior customer headwind from Q1 of last year.

Mike Anderson - Credit Suisse

Right and just to clarify, I think on the last call you said it was going to be below maybe that 25% exit for the full year target in Q2, but that it would increase subsequently from there, right?

Bob Corey

Yeah, that’s right.

Mike Anderson - Credit Suisse

Okay, thanks guys. Take care.

Bob Corey

Thanks.

Leslie Stretch

Thanks.

Operator

Your next question comes from the line of Richard Baldry, Roth Capital Partners. Please proceed.

Richard Baldry – Roth Capital Partners

Thanks. Given how fast the sales group is sort of growing, could you walk us through the structure of how you have it set up and broken whether you see any changes in that as it scales either in terms of having people do more vertical specialization, maybe split by the size of the target customers, any changes that could be coming that we should be watching for or really just steady state as it is?

Leslie Stretch

That’s great question so, we started this quarter, Q2. We completed our usual review rounds with the sales management team. The way we are structured in North America is that we have verticals in the Telco, insurance space, high-tech manufacturing and also healthcare insurance. We have specialism there as may be aware and so they are structured and dedicated in those verticals. We have a general business sweeper segment if you like in the U.S. as well. It’s a midmarket enterprise on an excellent business unit. On that structure we put it place at the start of this year. Around the world, we don’t have the resources to afford that specialism yet to-date and we’ve got footprints in APAC, in EMEA and in Latin America but there are relatively small but getting bigger. We don’t have that expertise, but we have the expertise here that we can layer off. So, the North America is very much a vertical focus. I think the shift that we are putting in place is installed base focus. So, some of the people that we bring on will be dedicated 100% installed base perhaps and that’s because we see an increasing improvement in the cross-sell and up-sell client with our customer base. So that will be the most significant change and that we probably do need to ramp up resources in the channel because the channel has been extremely effective.

On that prior question, it’s actually almost three times the number of transactions through the channel than they were a year ago. And then the influence transactions of the channel and our partners are getting – putting demands on us, they are putting hotter demands on us. We are going to have some nice new announcements around the channel partners at C3, which I think you will like and so we’ve got to look at that as well. So, that’s the sales organization. Bob and I conduct quarterly detailed reviews and then Monday weekly reviews. But the quarterly weekly reviews are about how do we direction this, how do we tune it to the market conditions that we’re seeing.

Richard Baldry – Roth Capital Partners

And with a lot of the sales capacity coming online, could you also talk about your headroom in the professional services side to ramp either with existing staff to support that increased number of deployments you will likely be seeing. If you feel that is solid as it is entering the year or if you really have to continue to scale that aggressively through the year too, thanks.

Leslie Stretch

Yeah, well, as you see the professional services business is increasing as you’d expect with the business – the SaaS business increasing, so that is moving up as I think we predicted earlier in the year. Our goal there is we still do a lot less implementation than our partners. Our goal there is to have a flexible pool of people on a contract basis as well as our hiring, full-time hiring funds to cope with that. I think we’ve got that more or less worked out for the rest of the year. We did expect our business to be strong for the rest of the year. And I think what it covered through our resources, our partners, and any short-term contract resources that we take on we’ve got. I think pretty good management and execution around managing that flexible work force. But our partner community is getting hotter and hotter I kind of alluded to that and talk about that more at C3 and as because obviously there are more transactions going on in more deals and more implantations to undertake, but I think we are covered.

Richard Baldry – Roth Capital Partners

Yeah, okay.

Bob Corey

I said in Q1 – in Q4, in the Q1 announcement for Q4, we commented that we exited last year with the highest contracted backlog we ever had had in professional services.

Richard Baldry – Roth Capital Partners

Okay, thanks guys.

Operator

Your next question comes from the line of Scott Berg, Northland Capital Markets. Please proceed.

Scott Berg – Northland Capital Markets

Hey, Leslie and Bob, congrats on another well-executed quarter.

Leslie Stretch

Thank you.

Scott Berg – Northland Capital Markets

A couple of quick ones here, Leslie, I didn’t catch the number of partner deals in the quarter, was it 80 up from 30, just to clarify.

Leslie Stretch

That was 88 up from 30 a year ago.

Scott Berg – Northland Capital Markets

And then what can you tell us about the deals that you are seeing from those channel partners in terms of products they are selling and I guess more from a trend perspective is how is that different say than what partners were selling a year ago at that third of the rate that it is being sold today?

Bob Corey

Yeah, great, there is – Litmos mobile learning is pretty high in the mix, marketing automation is high in the mix. So the commissions deals and the multiproduct commissions-based deals that are multiproduct are in the mix really everything in the mix, we had overall ACV from the channel was up obviously as well, but we had some notable large transactions we well. We had Telco in Asia-Pacific and a Telco in EMEA where our – one of our CRM partners was instrumental in the deal. It was (indiscernible) V Force deals and there are a lot of other smaller IS V Force deals, but it is right across the spectrum of products.

Scott Berg – Northland Capital Markets

It sounds like you are getting pretty solid partner contribution internationally as well as domestically. How do you look at the channel opportunity from an international basis? Is that where you would probably direct some of these resources you talked about needing or do you think it’s kind of split more with the domestic channel opportunity as well?

Bob Corey

It’s kind of split, but actually we did add channel resources and really strong channel leadership, veteran channel leadership in UK and the start of Q1 and an ex-colleague of mine from Oracle days, an outstanding individual. It’s already paying off. But there is a lot of heat around the market and the opportunity in EMEA at the moment I just have been out to London and visited with customers and the team there and I see the channel proportions there are going to accelerate, APAC we also have great channel business. We had one of our largest SaaS deals in the quarter where we partnered with a key CRM partner.

Scott Berg – Northland Capital Markets

Alright, great. And of course I’ll just ask my last question. Let’s talk about seven-figure deals just really quickly. The last two to four quarters have seen an acceleration of larger seven-figure deals at least you’re seeing them more consistently. Can you talk about that market right now relative to maybe what you’re seeing in the current pipelines over the next say two to four quarters?

Leslie Stretch

Yes. It deals with same in Q2. It feels like we have similar opportunity. It’s – we’ve also had a lot of – I particularly like straightforward six figure deals, low six figure deals as you know. But it’s roughly the same opportunity, the pipelines are a bit richer, but I think we have the same opportunity in Q2 as we had in Q1.

Scott Berg – Northland Capital Markets

That’s all I have. I’ll jump from the queue. Congrats again. Thanks guys.

Leslie Stretch

Thanks.

Operator

Your next question comes from the line of Kevin Liu with B. Riley. Please proceed.

Kevin Liu - B. Riley

Hi, good afternoon guys. Can you talk a little bit about what the mix of volume focused sales reps, it looks like today versus the enterprise group. And as you kind of add the 5 to 10 over the course of the year, where would you expect most of those adds to happen?

Bob Corey

Yes, hi, Kevin, it’s Bob, hi. Yes traditionally we’ve been about a two-thirds for the enterprise, one-third for the volume business sales reps, right. And we’re continuing to add somewhat in that relationship as we go forward, right. That’s what we see is coming through throughout the rest of the year.

Kevin Liu - B. Riley

Okay, great. And then just I wanted to touch on the linearity of bookings within the quarter, obviously you guys had talked about two big deals coming in early. But if you look at just kind of the base business outside of these deals and then maybe even looking at it from enterprise versus volume. I am curious as to whether that momentum continue to pickup over the course of the quarter and then what you’re anticipating here as we get into your big Annual User Conference and come out of that?

Bob Corey

Sure, yes. As you know the bounce was around from quarter-to-quarter. If you recall we said Q3 was the record quarter from a linearity standpoint last year where it’s almost the bookings were third, third, and third and it’s phenomenal. We generally tend to plan internally 20%, 30% to 50% from a linearity standpoint. We don’t know as we speak that etcetera but it bounces around but that’s kind of how we try and model it for our own internal uses.

Kevin Liu - B. Riley

And then just lastly Leslie you expressed some optimism around the opportunity in EMEA. I’m wondering if you could put some context around what it is either you’re hearing or seeing within the pipeline that gives you confidence it’s going to trend in a pretty good opportunity for you?

Leslie Stretch

Tactically what happened in Q1 is that we have several transactions at very large enterprises on the blogs for sometime within the forecast and pipeline for many quarters and they execute this. So I think that made us feel and they’re different about the mood there as I’ve had for seven days with the team listing, customers and partners. Another just totally of the world statistic rents in London are going through the route, office rents and office space in London is going through the route and thinking it as extremely quickly is just a more buoyant move that with a number of companies.

Just generally a more buoyant move, I mean Europe has an understanding that the industry, the cloud part of the industry is going to really make a big push in Europe and there is a lot of appetite for people to understand and adopt being at this small implementation of the cloud to adopt the cloud and we did very well in cloud in EMEA relative to prior quarters.

Kevin Liu - B. Riley

Great. Thanks again.

Leslie Stretch

Thank you.

Bob Corey

Thanks, Kevin.

Operator

(Operator Instructions) And your next question comes from the line of Alex Zukin with Stephens. Please proceed.

Alex Zukin - Stephens

Hey guys, congratulations on a solid quarter.

Leslie Stretch

Thank you.

Bob Corey

Thanks, Alex.

Alex Zukin - Stephens

I was wondering Leslie, can you talk about any strength or weakness that surprised you in a particular verticals in the quarter?

Leslie Stretch

Yes. We did across the spectrum, we did – I think we mentioned several Telco deals pretty strong cloud deals, very nice, we did several insurers, cloud deals I mentioned one of them. We did a large on premises deal in Japan as well because we’re still navigating the cloud on-premise is what we do in Japan it’s kind of our first large customer. And so yes insurance was strong, Telco was strong. The manufacturing in high-tech and I think I rattled off a real spectrum of different industries there. Manufacturing in high-tech in the midmarket was good for us particularly in Commissions which was interesting. So that’s the kind of complexion that we saw.

Alex Zukin - Stephens

Alright. That’s helpful. And another question our techs are picking up very strong activity for CPQ and I was just wondering are you seeing more kind of multi-product deals of CPQ or are you actually starting to see customers engage you initially for CPQ first and just comment on the general activity with CPQ?

Leslie Stretch

We’re really engaged in a number of our campaigns right now that are purely CPQ. We’ve executed several deals in Q1 that were purely CPQ and we did a number of deals last year that were purely CPQ. What we probably did as many deals last year that were CPQ and Commissions. So the real key here though is the connection between CPQ, Commissions and Sales Enablement and the connection between CPQ and marketing I believe there is a real connection and integration job to be done between these different silos.

And I think when we – I said on the call that we’ll be unveiling the contract lifecycle management solution Version 1 at C3, Version 2 is going to be revenue management, pool spectrum revenue management and we’ll talk about rather C3 will announce, rather C3 formally, but people want contract management and CPQ. And they hold a lot of surprising number of people want to understand the link between incentives and CPQ.

Alex Zukin - Stephens

Understood. And then Bob maybe you can comment about just retention rates in the quarter. Are you seeing as you do more of the large deals, are you seeing retention rates go up kind of stay steady, what any kind of clarity there?

Bob Corey

Yes, I would clarify on a contracts basis what we typically report on is kind of steady Eddie, right. We haven’t seen much of a swing in it at all, but we do think that the multiple product sales will make the stickiness even better, right. So that’s where our calculated numbers came out for the quarter.

Alex Zukin - Stephens

Got it. And then just directionally as we think about services and license revenue for next quarter. Should we assume kind of the same pattern of historical sequential growth or just any help around that?

Bob Corey

Yes, sure, yes. Well you know the professional services stuff would grow proportionately to the SaaS revenue growth, right, because they’re helping as the SaaS business grows, right. On the license stuff I joined the company May a year ago and I came out with what I think we’re going to do a $0.5 million to $1 million a quarter. And ever since I came up about it’s been more than $1 million every quarter, right. And so that reflection is very lumpy, it’s hard to predict and so we might be thinking more of a trend to $1 million a quarter as we look at it now. But again it’s hard to predict and the minute I say $1 million I commented $0.5 million. So it’s – that’s kind of our thinking as of today.

Alex Zukin - Stephens

And maintenance revenue should be roughly flat to up?

Bob Corey

That’s correct, yes. Flat to marginally up over the year or so.

Alex Zukin - Stephens

Got it. Thank you guys.

Bob Corey

(Cheers).

Operator

We have no further questions at this time. I’ll now turn the call over to Leslie Stretch, CEO for closing remarks.

Leslie Stretch - President and Chief Executive Officer

Thank you very much for joining this afternoon. I look forward to seeing many of you at C3 and then we’ll talk to you again in the next call.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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