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Demandware, Inc. (NYSE:DWRE)

Q1 2014 Earnings Conference Call

May 6 2014 8:30 AM ET

Executives

Erica Smith - VP, Investor Relations

Tom Ebling - President and Chief Executive Officer

Scott Dussault – EVP and Chief Financial Officer

Analysts

Greg Dunham - Goldman Sachs

Richard Davis - Canaccord

Justin Furby - William Blair

Nandan Amladi - Deutsche Bank

David Wang - Barclays

Terry Tillman - Raymond James

Shawn Milne - Janney Capital Markets

Shyam Patil - Wedbush Securities

Brian Schwartz - Oppenheimer

Alex Zukin - Stephens Inc

Craig Nankervis - First Analysis Securities

Brad Reback - Stifel Nicolaus

Operator

Good day, ladies and gentlemen. And welcome to the Demandware First Quarter Financial Results Conference Call. My name is Kathy, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Erica Smith, Vice President, Investor Relations. Please proceed, ma'am.

Erica Smith

Thank you, Cathy. Good morning. And thank you for joining today's call to discuss our results for the first quarter. Ebling, our CEO will provide some highlights of the first quarter and our operational achievements. And Scott Dussault, our CFO will talk about the financials in more detail. Then we will open it up for questions.

Before we begin, let me remind you that during the call, we will discuss both GAAP and non-GAAP results to supplement investor understanding of the company's financials. A GAAP to non-GAAP reconciliation schedule was provided in the press release we issued this morning and that we posted to our website.

Also, today's discussion contains forward-looking statements such as statements regarding the market acceptance of cloud solutions, the growth of digital commerce, our business strategy, demand for our solutions, growth of our customers' online businesses, the seasonality of our business, our pipeline and our projected financial results.

Forward-looking statements involve risk and uncertainties and our actual results could differ materially from those projected in our forward-looking statements. The company assumes no obligation to update the information provided during today's call. To revise any forward-looking statements or to update the reasons, actual results could differ materially from those anticipated in forward-looking statements.

The risks and uncertainties include risks relating to our ability to attract new customers, the timing of new customer implementations, the extent to which customers grow their revenue and renew their contract for our solution, as well as other risk factors that could adversely effect our results as set forth in our annual report on Form 10-K and other filings with the SEC.

And now I will turn the call over to Tom.

Tom Ebling

Thank you, Erica. 2014 is off to a great start and I am delighted to share our results with you today. The first quarter was one of the best in the company's history highlighted by our strongest quarter ever for new customer acquisition. I couldn't be happier with our momentum particularly with large enterprise accounts who are embracing our omni-channel cloud platform. But new customer acquisition is only one chapter in an incredible story for the first quarter. We also are thrilled with our subscription revenue which grew 58% and reached almost $30 million exceeding the guidance we provided by a considerable margin. Because of our extremely strong customer acquisition and our better than expected growth in Q1, we are increasing our revenue guidance for the full year which Scott will talk about later in the call.

Our out-performance this quarter was once again driven by the tremendous power of our platform, customers leveraging Demandware Commerce to grow their digital operations. In the first quarter our customers continued to outperform and grow faster than the market for e-commerce. In Q1, our comparable customers grew their GMV by nearly 30%. With our unique and differentiated cloud technology, our customers launched sites quickly and merchants controlled their consumer experience with little IT involvement which enables our customers to achieve their digital growth objective. Once on the platform existing customers can continue growing by launching additional sites across channels, brands and geographies. We ended the quarter with 872 live sites up from 820 at yearend and 630 a year ago. In Q1, Hallmark, Sleep Train, Sunbeam and Vitamin World rolled out new sites for new brands in North America. Hurley, Tory Burch and Suitsupply expanded their operations into the Asia Pacific region. Ticket to Heaven, S. Oliver, Godiva and Timberland further broadened the reach of their brand into new European markets while Clarins and Quiksilver launched sites in Russia. On our platform customers can get to market for a new geography or with a new brand in a few weeks, much faster than the traditional on-premise solution.

Launching new brands and going global certainly helps drive customers' growth, but another major growth driver is the convergence of digital and physical retail. Demandware Commerce is empowering customers like L'Oreal, House of Fraser and Adidas to adapt to constantly changing consumer behavior and create seamless brand experiences across channels. For those of you who attended our XChange Customer Conference in April, you heard about Pier 1's omni- channel growth strategy called One Pier 1 and how Demandware is a central component of that strategy. They are focused on delivering the best possible consumer experience regardless of channel. Through the digital channel they are optimizing inventory, increasing the number of SKUs and bringing e-commerce into the store. Pier 1 is executing this strategy and you see the results in their strong growth rates. The Pier 1 case study illustrates that our solution is already delivering on the promises of omni-channel.

To offer these robust omni-channel capabilities to all of our customers, we acquired Mainstreet Commerce in the first quarter. The acquisition of Mainstreet Commerce gives us a significant market advantage as the first combined cloud solution that delivers on the buy anywhere, fulfill anywhere consumer experience. The integration is going extremely well and we are very pleased with our progress combining these two state-of-the art cloud technology platforms.

Another important accomplishment for omni-channel initiative was the general availability of the Digital Store Solution, our first in-store application. After a successful rollout in six stores of the pilot customer, Solstice has plans to implement the Digital Store Solution across the United States. We are very encouraged by the early interest and healthy pipeline of customers interested in expanding Demandware Commerce into their stores.

We also had a strong quarter for initial site launches, ending Q1 with 215 live customers, up from 204 at yearend and 156 a year ago. We were excited to have the first Wolverine brand go live in Sperry Top-Siders. Wolverine has more than a dozen brands and we are looking forward to working with them as they expand their operations under Demandware platform. In addition, O'Neill and WE Fashion, both leading fashion brands in Netherlands took advantage of our cloud platform and launched multiple site across Europe in a single quarter.

I want to talk a bit more about new customer acquisition. Coming after such a fantastic 2013, we have high expectations heading into Q1. We exceeded those expectations across all key customer acquisition metrics. Committed average annual subscription contract or ACV, total contract value, number of new customers signed and also traction of large enterprise. We signed five customer contracts with seven figure average commitment values in Q1, the same number of seven digit deals we signed for all of 2013. We are winning customers across geographies and verticals further diversifying our business and proving that Demandware Commerce meets the need of customers regardless in industry. We signed Fender Musical Instruments in the United States, a highly regarded brand that doesn't fit neatly into our traditional verticals. See’s Candies, a United States brand joins Godiva and Diajeo in our food and beverage vertical. And after seeing the success of companies like Beats by Dre, Motorola Mobility and Panasonic, Chitter Chatter in the United Kingdom and two other well know U.S. based consumer electronics companies signed contract with Demandware. To support its rapid growth Serena & Lily, a successful home décor brand is migrating off an ERP centric cloud based solution with limited functionality to join the ranks of industry leaders like Ethan Allan, Butler's and Pier 1. We also continued our success in a more traditional vertical like apparel and footwear and health and beauty. We won Jack Wills and Neal's Yard in Europe and Canada Goose and John Varvatos into the North America.

Lastly, on the new customer front, we opened the door to Abercrombie and Fitch signing a contract with their digital commerce operations in Asia. This is an important win and represents a great future expansion opportunity for Demandware. We continue to prove that our land and expands strategy works. Once a customer goes live and experiences the tremendous benefits of our cloud model, they frequently expand their operations with Demandware. This quarter we signed an early renewal significantly expanding our business to include the United States site for one of our largest customers, a European based brand. We will talk about this important win more when they dot.com site goes live.

In the first quarter, we rolled out three major product releases to all of our customers. Some of the new features included stronger geo location services and more targeted consumer profiling, multi currency support in the single site, new open commerce API as well as enhanced site search. Our transactional cloud based platform again this quarter achieved 99.99% availability, significantly higher than the availability metrics of the 50 largest retailers that are tracked by Gomez.

We had a fantastic first quarter. A best quarter ever for new customer acquisition driven by increased momentum in the market and improved sales force productivity. Our success demonstrates that the largest, most sophisticated retailers recognize that rigid, inflexible on- premise solution are no longer viable. And other cloud commerce application simply falls short in terms of merchandizing functionality and robust scalability. Our vision for a single platform to manage all consumer interactions is only expanding our total addressable market as in line with what our customers are seeking. We have a great opportunity ahead of us and our pipeline for new business is a strong as it is ever been. The investments we are making in sales and marketing and in our technology platform are putting Demandware further ahead of competing solutions and we are confident that they will deliver value to our customers, employees and shareholders.

And now I'll turn the call over to Scott to talk about the financials in more detail.

Scott Dussault

Thank you, Tom. We had another great quarter that exceeded even our own internal expectations. Our total revenue increased by 57% reaching $32.2 million and beating the guidance we gave on the fourth quarter call of between $28.75 million and $29.25 million. Our subscription revenue growth accelerated to 58% and reached $29.9 million in the first quarter which exceeded our previous guidance of $26.75 million to $27.25 million. Our out-performance in Q1 was driven by our customers’ strong growth on our platform. We have intuitive tools that enable customers to easily and quickly expand their digital commerce operation across channels, brands and geographies. Our customers' growth drove the increase in our average annual subscription revenue per customer or ARPU to $532,000 for the trailing four quarters. This is up 9% from $487,000 at the end of the first quarter of 2013 and up sequentially from $515,000. Our customer ARPU has increased sequentially every quarter since we started tracking the metric in the first quarter of 2008. We are particularly proud of this metric as it demonstrates the power of our land and expand strategy and is also best in class for publicly traded cloud companies and reflects the tremendous value that we provide to our customers.

In the first quarter, we recognized subscription revenue beyond the base or overage fees of $6.9 million or 23% of subscription revenue compared to $5.8 million which represent a 31% of subscription revenue in the first quarter of 2013. The biggest contributor to the shift - to the mix shift between base and overage revenue was the early renewal that Tom discussed. We expanded our relationship with one of our largest branded manufacturer customers. The new contract not only consolidates this customer’s minimum commitment for three brands under a single contract but also includes a future rollout out of the company's dot.com site on the Demandware Commerce platform. This early renewal is another proof point of why the cloud is a better model. Even the largest customers who have experienced rapid growth on our platform have been expanding their operations on our cloud platform and not migrating back to old rigid on premise solutions.

We are very pleased with our subscription gross margin which improved to 82% from 79% in the first quarter last year. GMV process over our platform is growing at a very healthy rate and our cloud infrastructure continuous to scale and demonstrate tremendous leverage as the business expands.

Total gross margin for the quarter also showed improvement increasing four percentage points to 72% from 68% in the first quarter of last year, reflecting both our scaling platform and the shift in our revenue mix away from low margin services revenue.

Consistent with our strategy to invest in our sales and marketing and our research and development organization, in the first quarter we increased our non-GAAP operating expenses by 45% to $26 million from $17.9 million a year ago. Our non-GAAP operating expenses exclude stock compensation expense and compensation expense related to contingent payments for the Mainstreet acquisition. As Tom mentioned our investments are really paying dividends. In the first quarter we delivered against all of our three main investment areas, enhancing our omni-channel solution, expanding our global presence and further penetrating large enterprise accounts. In fact, the higher non-GAAP operating expenses were driven by our record bookings which resulted in higher variable compensation cost. So as a reminder we expense the entire commission in the quarter to the new deal that’s signed while the sales rep is paid half at customer signing and half when the cycle is live and starts generating revenue.

To provide a bit more detail on the Q1, 2014 new customer acquisition, we signed more new customer contracts than in any other quarter in our history. Our total ACV for our new bookings was more than 50% higher than our next largest quarter. We signed five customers that committed to a seven digit ACV and our average ACV was approximately $500,000 per customer. Not only did we overachieved our expectation on a number of new customer contracts and total ACV, but we also demonstrated significant progress in signing larger, well established brands and retailers.

Another driver of the increased expenses is obviously headcount. At March 31, 2014, we had 438 employees, a 34% increase from 326 a year ago. We increased sales and marketing headcount 25% year-over-year to 164 employees at the end of the first quarter 2014 from 131 in March 31, 2013. Sales related headcount increased 37% to 126 at the end of the first quarter from 92 at the end of Q1, 2013. We provided detailed information regarding GAAP and non-GAAP operating loss, net loss and net loss per share for the first quarter in the press release we issued this morning and that is posted to our website.

As a reminder, if there is any additional question regarding our net loss in the quarter we can cover those in the Q&A section of the call. Before moving on to guidance I want to talk to a bit about our cash flow from operation, as a result of the acquisition of Mainstreet Commerce, we increased our prepaid expenses and other assets by approximately $7 million which resulted in cash used in operation, operating activities of $6.2 million. As most of you know the majority of our customers are build monthly or quarterly, so the overages we experienced from a strong holiday season in the fourth quarter are billed in arrears in the first quarter of any given year. As a result we typically see positive cash flow from operating activities in the first quarter. Excluding the increase in prepaid expenses related to the Mainstreet acquisition, we would have generated $775,000 in cash from operating activities in Q1.

So moving on guidance. Forwarding looking guidance as Erica outlined falls under the Safe Harbor provision. The non-GAAP metrics I will discuss exclude stock based compensation as well as competition expense related to contingent consideration for the Mainstreet acquisition.

For the second quarter of 2014, we expect total revenue to be in the range of $33.5 million to $34 million, or 45% increase as a midpoint of range. We expect subscription revenue to be in the range of $35.75 million to $31.25 million, or 49% growth in subscription revenue at the midpoint. We expect our GAAP net loss for the second quarter to be approximately $11.7 million to $12.2 million, or $0.34 to $0.35 per share. And our non-GAAP net loss to be in the range of $4.1 million to $4.6 million or $0.12 to $0.13 per share. As a reminder, we hosted our Xchange Customer Conference in early April. This is our biggest and most important marketing event of the year and in the second quarter we expect to see an increase in marketing expense which is reflected in our net loss guidance for the quarter. We anticipate our weighted average basic and full year outstanding to be approximately 34.8 million shares in the second quarter. We are increasing our total revenue guidance for the full year from our previous range of $143 million to $144 million to a new range of $147.5 million to $148.5 million, representing an increase in total revenue of 43% at the midpoint of the range. We are also increasing our subscription revenue guidance from our previous range of $134.5 million to $135.5 million to a new range of $138.5 million to $139.5 million or 45% subscription revenue growth at the midpoint of a range. We are raising our full year revenue guidance for two primary reasons. First, our record new bookings quarter and second our significant out-performance in revenue growth in the first quarter. As a reminder, customer implementation on average take about six months which means many of the customers that we acquired in the first quarter will be up and running and generating revenue in time for the important fourth quarter holiday season. We expect our GAAP net loss for 2014 to be approximately $29 million to $30 million or $0.83 to $0.86 per share and we are reducing our range for our non-GAAP net loss from our previous range of $1.8 million to $2.8 million to be in a new range of $1.5 million to $2.5 million or $0.04 to $0.07 per share. We plan to leverage our increased revenue guidance to invest in our business yet we still expect to improve our non-GAAP net loss for the year. Our changing GAAP earnings guidance incorporates our non-GAAP change as well as an increase in stock based compensation for 2014. The primary drivers of our increased stock based compensation expense include the equity refresh grants of restricted stock and options to existing employees, equity grants to new employees including grants to our new employees from Mainstreet Commerce in accelerated expense related to my transition agreement. It is important to note that the equity grants in the first quarter was done at near all time high stock price which increase the non cash stock compensation expense we are forecasting for the year. We anticipate our weighted average basic and fully diluted share outstanding to be approximately 35.1 million shares in 2014.

And with that I'll turn the call back over to Tom.

Tom Ebling

Thank you, Scott. Before I open the call for a Q&A, I want to take this opportunity to thank Scott for his tremendous contribution to Demandware. He has been an extremely valuable member of the executive team and has worked tirelessly since joining the company in 2008. When Scott came to the Demandware, we had fewer than 25 customers and about $7.5 million in annual revenue. Scott played a very important role in building the infrastructure, processes and the right team necessary to scale for growth. And over the last six years we have grown to more than 200 customers, 400 employees and $100 million in revenue. Scott was also instrumental during all of our capital raises including two rounds of private funding, our IPO and our equity offering late last year. Today, we have a strong balance sheet that will help us capitalize on the significant opportunity ahead. His leadership will certainly be missed.

Now I would like to open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Please standby for your first question which comes from the line of Greg Dunham of Goldman Sachs.

Greg Dunham - Goldman Sachs

Yes, thanks for taking my question. First off I just want to clarify one thing. Did I hear correctly that ACV was more than 50% higher than the next best quarter ever? Is that what I heard?

Tom Ebling

Yes.

Greg Dunham - Goldman Sachs

Okay, and then I guess digging in a little bit you mentioned the five customers [inaudible] contract which was equivalent to ‘13 but some of the names you highlighted really speaks to verticals beyond the core brand and retailers that you historically seen, you mentioned like consumer electronic company, See's Candies and few others. Can you talk about how that’s shifted over time and when you look at your pipeline today, is it broader from a vertical perspective than it was last year two year ago or is that a trend that you see going forward? Thanks.

Tom Ebling

Thank you, Greg. Well, I'd say the pipeline is from a vertical perspective, there is probably few more that are outside our traditional focused verticals and that's why we were seeing some of the success. We are not really consciously targeting those but I think the dynamic that we are seeing is as we build more and more credibility in each market and become - sort of viewed as a safer and safer choice that certainly plays out within the given verticals where we have success by our movement to larger customers who looked to the customers slightly smaller than themselves as good references, right. But I think it also plays out -- and the more and more customers we have of a given size, at that size we can move into other verticals where there is opportunities where they see the Demandware platform being a great choice for them and where they feel they are comfortable based on the number of customers and then breadth of types of customers we have across their size range. So we are seeing sort of more activity like that but I wouldn't say it is dramatic. And we are not yet really focused on that because we think there is a still huge unpenetrated opportunity in the verticals that we generally focus on.

Greg Dunham - Goldman Sachs

Okay, and one quick follow up if I may. The deferred revenue line was a little bit later than our model line, I know it's not great and leading indicator but Scott anything going on there or how should we thinking about modeling that deferred going forward?

Scott Dussault

Yes, not really, Greg, again it's just not a good metric for us when you think about the first quarter being strong as it was from a customer acquisition quarter but again for our business we are not invoicing customer on contract signature, we invoice them more on launch so it is - deferred revenue is really about billing customers for the next quarter in advance as opposed to billing customers that we are signing in any given quarter.

Operator

Thank you. The next question comes from Richard Davis of Canaccord.

Richard Davis - Canaccord

Thanks. So I guess first off, Scott, I want you to remind me to downgrade all of my stock next time you announced you are leaving because I think you time the top at least temporarily.

Scott Dussault

I will make a note of it.

Richard Davis - Canaccord

Yes, pleas do. So question, you kind of touched on this but business and your wins are quite strong if not accelerating. Can you -- is there anything that we should be aware of - are you -- how are you presenting these go lives from being a chokepoint, I know you talked about kind of trying to front load and stuff like that but is there any talk through that just to make sure we can feel comfortable on that? And then the follow up question would be on these large deals, is there any change at all in the dynamics or the pricing? Are you seeing any desire for fixed pricing or if you could elaborate on that that would be great. Thanks.

Tom Ebling

Thanks, Richard. We are not experiencing any kind of constraint on our ability to implement the customers we’ve signed. Even though we were selling more we did anticipate that I mean largely, I mean certainly it was a great quarter, but we anticipated that it would be a higher quarter and we plan for that, we have been building our partner ecosystem for long time. We get a lot of visibility due to the length of the sales cycle into the likelihood that customers are going to call us in a particular quarter. So and we are still doing more than 90% of our implementation with partners. So we have not experienced that as a constraint, I think as I said on another occasion that it’s a theoretical constraint if all of a sudden we sold three times as much in a quarter as we ever planned, maybe it would be a constraint but that's pretty unlikely to happen, usually we are within our narrow arrangement that and one that we can see coming six to nine months ahead of time due to the length of the sales cycle. So that's not really a constraint on our ability, on our go live plans at this point with - either with respect to the customer that we are already implementing on January 1 or with respect to the customers we signed this past quarter.

In terms of the second question in terms of pricing, there was sort I think two elements to that. So one in terms of the actual GMV rates we realized from the new contracts, we look at that very carefully and there has been no trend - negative trend in anyway, in the quarter it was actually very positive, I am not sure I would attribute that to increasing trend because it’s a little bit wild small number in any particular quarter but we are certainly not seeing any kind of compression of that or reduction of that compared to our historical marks.

The other aspect of the question is do we have any customers asking for fixed pricing or other kinds of pricing models? And certainly what we certainly don't have customers asking for that. Let me clarify, customers who come for renewal are really happy with the aligned model and the shared success model we have and have never asked for another model. Now with prospective customers depending on where you are in the sales cycle sometimes people will talk about other models and to date we get them over to shared success model, we certainly think that's in their interest as well as our in terms of a long-term partnership.

Operator

Thank you for question. The next question comes from Raimo Lenschow of Barclays. Please go ahead, sir. The next question comes from Justin Furby of William Blair.

Justin Furby - William Blair

Hi, guys, can you hear me? Okay, great. Hey, guys. Question for you, I love your latest assessment of where we are in terms of retailers' appetite for a cloud platform. I guess if you look at your deals today, it would be helpful to break it up between mid market and enterprise, what sort of percentage of opportunities out there you feel like would viably consider cloud e-commerce and what did that look like 18 months ago? And then looking forward how do you think that's displayed out over the next couple of years? Lot of questions in one, sorry.

Tom Ebling

Okay. Let me see if I can cover them all. So I don't -- I think this is one of the situations that if one looks at quarter by quarter one doesn't see dramatic changes. I think to use your term, to distinguish the mid market from the largest of enterprises that we sell to, at the mid market and certainly in a geography like the U.S. or even the UK where Demandware is pretty established and has a lot of customer success track record number of years and lots of customers, I think in the mid market the cloud is perfectly accepted, in fact, often preferred as the choice, as the initial choice as customer enter a buying cycle. And I think that once again not changing too dramatically quarter-to-quarter by certainly much more preferred than it was a year or two years ago, so the demand is certainly strong there.

Now in each geography, it's [inaudible] geography but that's another variable that enters into equation so there is other geographies where in the mid market the cloud is not as accepted, maybe in general because in that geography the cloud isn't accepted and also because Demandware doesn't have as much of track record or history there and most prospective customers look to customers in their own geography for reference points, right.

Now with respect to the large enterprises, they are sort of in a steady progression which is almost impossible to measure on a quarter-to-quarter basis but certainly on year-to-year basis we see the percentage of larger enterprises that will consider a cloud platform and give it serious consideration to be increasing. And the number of CIOs are open to it increasing and in fact we see some large enterprise CIOs start with the preference for the cloud which we never would have seen a year or two ago. So I think it is a general trend in terms of mid market and in established geographies it is almost 100% in terms of being very open to or even preferring a cloud platform. In terms of large accounts I don't know that I have a percentage but it’s certainly a strong trend in this direction, in the right direction.

Justin Furby - William Blair

Okay, that's helpful. And then kind of following up on the question on the renewal and pricing, can you just give a little bit a sense around -- sounds like customers like model and they are not looking for new -- new fixed fees but what are the pricing conversation in terms of rate that you are having? And can you give us a reminder for what this year look like in terms of renewal activity versus the overall base of customers?

Tom Ebling

I don't know, I'll let Scott comment on the second one but I am not sure you get much color on that but with respect to the way the -- the renewal discussion for most commonly someone is now doing far above their minimum commitment and their perspective is if I commit to something like what I am doing now will you give me a better percentage, right. And they will ask for a percentage much better than what we are going to them. That's the nature of the beast. But what we have and had happened is people say I don't like the shared success, in fact one of the things customers like best because it really totally aligned their interest with us right so that renewal discussion is often around how do I trade off a level of commitment I am going to make, duration of the renewal contract and whatever kind of rate I can get out of Demandware, that's usually how the discussion shapes up.

Scott Dussault

Justin, on the comment on question on contracts up renewal this year, it is consistent with last year. I think we mentioned before that the ACV and the number of contracts are up for renewal this year is from a perspective of ACV end customers is abut the same it was last year. There is no significant outline or anything like that in this year's number.

Justin Furby - William Blair

Okay, great. And then last one Thomas if I may on the recent hire for Tim at CFO. Can you talk a little bit about what drew you to him? And whether you think he'll be an agent of change in Demandware? Or more carrying the torch that Scott passes down?

Tom Ebling

Well, I think certainly we want to carry the torch to use your term in terms of the way that Scott done a great job. We had a fantastic team so we want to keep all that going. I think anytime we add a new exec to the team and we saw this happen last year with some of the -- those with the world wide sale exec we hired and lead marketing exec and services exec, anytime you bring a new exec you want some agent of change aspect, you want to capitalize a new experiences and new perspective. We don't want to get too ingrained in our thinking. So I am hoping he bring some different perspective and different thoughts to what we are doing. But we are certainly not looking too totally turnover the apple cart, things are going relatively well. I think one of the areas that Tim brings that's his strength that will help us is international, he has got a lot of international experience and that's one of his key calls in terms of joining the Demandware is to tap into that and bring to us, I think that will be helpful too because as you know that's a key strategic thrust for us.

Justin Furby - William Blair

Great, thanks guys and Scott congrats on future endeavor, you are a good man.

Scott Dussault

Thanks, Justin.

Operator

Thank you. The next question comes from Nandan Amladi. Please go ahead

Nandan Amladi - Deutsche Bank

Hi, good morning, thanks for taking my question. So first question, Tom, just overall the Xchange Conference was obviously very big event for you. How productive was it in generating new leads relative to your past?

Tom Ebling

Not be -- not to play some metrics and just to make sure I am answering right question. Generally we use it with respect to prospective customer is accelerating lead that we already have. I am not sort of generating new lead but people we have already initiative some conversation with, who invited at the conference and the proof in terms of how much acceleration we get out of the invitees will come over sort of the next six months in terms of the duration of their sales cycle. We know from last year that the vast majority of the folks who attended became customers, and we knew -- and what we also know is that we had much larger prospective customers' attendees this year than we had before. So in that sense we are very encouraged and the feedback from those prospective customers and from our sales reps who engage with those customers was all very positive. In fact, I was at a large prospective customer in last week that attended the conference and their feedback from the team was great and it really seemed to accelerate the sales cycle. So we think it's going to be having the same positive impact, a greater degree because of a greater number of attendees that we have last year.

Nandan Amladi - Deutsche Bank

Okay, thanks. A quick follow up if I may. Where is your focus for sales capacity growth this year and in terms of verticals, geography you mentioned the new CFO has international experience?

Tom Ebling

Yes, so we are -- we are still hiring sales people in North America. So we are -- so may be the simplest way to answer this is and I mean to break the geographies into three parts. So we got some geography where customers have long duration particularly in the United States, the United Kingdom and Germany. And we are doing some sales hiring in all those geographies to increase our penetration there and our coverage improve -- our coverage there. Then we got some geographies where we have been at it long enough to have a couple of customers who successfully implemented but not multiple year customer history so places like France and both the Northern Europe and places like that. And those places we are also doing some expansion. And then the third place, the third thing is Asia where we just began our expansion last year. And we are doing some more expansion this year. We are also looking to begin with Japan although there won't be a lot of hiring there this year but it is something we are planning and starting in the right way this year. So that sort of the area in percentage terms where the increase is in sales capacity will be the highest. But that's also of small number.

Operator

Thank you for your question. The next question comes from Raimo Lenschow of Barclays

David Wang - Barclays

Hey, guys, it is David Wang for Raimo. On competition, could you talk about if you're seeing more from Magento, or maybe even NetSuite? Or are you seeing more pushback from IBM or Oracle, as you move more up-market and win these larger customers?

Tom Ebling

Yes, David, well, I would say the simple headline is there are competitive environment has not changed much from last quarter. And they are still the -- the competitors we see most frequently are IBM and Oracle and SAP and for the largest account IBM and then for this sort of the next segment Oracle and SAP. We do see Magento too; they are probably the fourth most creeping competitor which they have been for a while so it is not a dramatic change. We see them more of lower end of our prospective customer base. And what was the other one you asked about?

David Wang - Barclays

NetSuite

Tom Ebling

Oh yes, no, we don't -- we haven't seen them much in terms of competitive so no real change there.

David Wang - Barclays

All right, sure and may be one for Scott. Could you just perhaps talk about the CapEx run rate going forward given the high Q1 level? And all the talk about in special expansion and so on?

Scott Dussault

I mean the CapEx in Q1 almost consistent what we typically do in first half of the year where we make most of our investments and our infrastructure regardless of geographies. It is got nothing to do with international expansion or not in the first half of the year. So to include both software and hardware purchases for our pods as we expand. As we sit here now in May we already know the majority of the customers have good views into the GMV we expect to see at the peak holiday season and we plan for that during the first half of the year so the first quarter reflects a lot of, we still expect our CapEx to be consistent what we said in the past to be between 5% and 10% of revenues for the full year.

Operator

The next question comes from Terry Tillman of Raymond James.

Terry Tillman - Raymond James

Hey, good morning. Thanks for taking my questions. I was in a dropped off so I apologize if these are redundant and I also don't have anything as witty to say as Richard, but Scott, congrats and good luck with whatever your future endeavor is.

Scott Dussault

Thanks, Terry.

Terry Tillman - Raymond James

So first question is just on sales force productivity and again may be it was asked but I think you talked about improved or increase sales force productivity, I guess is there anything changing or refined about how you onboard this sales reps or you tracking sales reps maybe with greater experience or anything that's going on there should read into that sales force productivity improvement and is anything changed in terms of how quick they are to ramp or productivity?

Tom Ebling

Yes, I think -- so let me first talk about what I think is driving increase productivity and then sort of answer some of your questions , I think what's driving the increased sales productivity mostly is sort of reflection of what we talked about earlier with the other question from Justin about cloud acceptability. So we've got more and more prospects that are looking at cloud as these are their first choice for very acceptable choice that they are willing to consider on equal basis with other choices, right. And I think that makes the job of selling more won that where we can be successful more often. So I think that ultimately and the successful customers we have and the increasing number of references, so that's probably the, the most important driver for increasing sales at productivity. Now to come back to your specific question, I think certainly what we strive for and I believe what we have attained is consistently incremental improvement in terms of how we onboard sales reps making the time until they can close their first deal, little bit shorter but not dramatically I mean the long sales cycle so we are not taking the time to close the first deal from nine months to three months or anything like that. And also looking at our making our hiring ratio is better, making sure that the people we hire give a higher hit rate in terms of their success at Demandware. So I think we are doing steady improvement in those things, by some of the professionalism we brought to on boarding process, in our training process, in our hiring processes, but I think those are sort of a secondary contributor to sales productivity in a given quarter or a given timeframe.

Terry Tillman - Raymond James

Okay. And on this concept of e-commerce driving global trade -- across-border trade -- with a lot of your great U.S. brands you have, and keep adding to that you guys get close with your customers. They become partners. And as you collaborate with these customers/partners, and understand where they're going to go with their plans, where do you think -- what inning do you think we're in terms of some of your big U.S. brands, in terms of their international expansion? What inning, from a baseball analogy?

Tom Ebling

Well, I am an avid baseball fan. Given our long baseball game's take --

Terry Tillman - Raymond James

But you are in Boston though.

Tom Ebling

It is great place to be, isn't? I would say it varies and the reason I am pausing is it there are so much customers accustom, I mean some customers are in the seventh or eight inning and I think other customers are literally in first inning, if I somehow average that across, I suppose we are in third fourth inning something like that. I mean there is much; there is a lot of expansion yet to occur particularly in terms of number of countries and number of customers. Now revenue is different subject, and a lot of that depends on the brand and how well recognized it is outside the U.S. and other factors that are unique to its particular customer.

Terry Tillman - Raymond James

Okay and I guess again this may be asked but Scott last quarter you were kind enough to even provide a little bit of view in the 2015 on the subscription revenue 45% to 50% growth just based on customer acquisition strength last year. But given it was so strong in the first quarter and some of this customer definitely going to ramp before end of the year in a solid way, any change for that 45% to 50% common carried for next year? Thanks.

Scott Dussault

Yes, thanks, Terry. No, I mean I think we provided that high level of view into 2015 on the last fourth quarter call and we said that we expected that revenue we grow in 2015, 45% to 50% over the guidance we provided on that call and those expectations have not changed. As we get further into the year and see these customers launched in contingency the revenue growth we will certainly have better and more precise visibility into that they will provide later on.

Operator

Thank you. The next question comes from Shawn Milne of Janney Capital Markets.

Shawn Milne - Janney Capital Markets

Thanks and good morning and congrats on a very strong quarter. Just want to follow up on the couple of things. And you mentioned -- it was Tory Burch moving into Asia, and then your win with Abercrombie. In terms of capacity in Asia, I was wondering if you could talk a little bit about -- the Accenture deal is helping with that. Or what's helping you from systems integration?

Tom Ebling

In terms of capacity in Asia, so there are two aspects. I think you are asking not about sort of the data center capacity but the capacity of the sort of Accenture and implementation partners and things like that. I think that's certainly not a limiting factor at this point. I think Accenture is good in helping partnership, it helped us with a number of brands, it is also a bunch of brands that have gone into-- and that they have done it by other means with other partners and many of the partners are making investments to be capable of supporting customers because they got a customer relationship and the customers wants to go there and often the customers' first choice is to use the existing partner they have. So I don't know the exact number but I bet we got three four different partners it would probably help various customers get into China and a number of other partners who are eager to do so. So there is sort of no short-term limitation there in terms of the customers' ability to go after that from that perspective.

Shawn Milne - Janney Capital Markets

Okay and Scott just housekeeping, was there any real revenue contribution from Mainstreet in the subscription revenue, or is that all organic upside?

Scott Dussault

It is all organic side, I mean I think it is consistent what we talked about last quarter about we expected which is somewhere between 1% and 2% total revenue has been contributed from Mainstreet, we expect that for the year and I think that's what probably came in for the quarter as well.

Shawn Milne - Janney Capital Markets

Okay, thanks and then just lastly, I know you sort of moving out of pilot with digital store solution you talked about a little kind of early demand. Tom, how would you see that playing out in terms of impacting GMV or numbers in the next couple of years and is this something more we should expect demand really hit in the next few quarters or just a couple of years out? Thanks.

Tom Ebling

So the digital sort of store solution itself what it does today is it helps customers capture sort of -- it prevent loss sale on the store so the consumer shows up and they are looking for a size or color that is not in the store, it helps the store associate capture that sale and send it to their home. And now there is plans to go beyond that, we talked that our customers comments about a one platform vision and much more aggressive plan over time, but putting that longer-term plan to decide to answer your question and just talking about the digital store solution itself, from customers, some of customers are done things like that prior to Demandware launching that application, they done their own the Demandware API which is a great thing about the Demandware platform, they all present kind of capability so any kind of metrics we got thus far from those customers because they are the ones who done it. And it is talk about relatively modest increases to e-commerce sales from having that type of application in the single digit percentage. If digital store solution just did what I did today then I would expect over a couple a year plan period when lots of customers rolled it out that you would be talking about relatively modest increase in GMV captured, all along those types of lines.

Operator

Thank you. Your next question comes from Shyam Patil of Wedbush.

Shyam Patil - Wedbush Securities

Hi, guys, great quarter. Just couple of questions. On the renewal front, you guys done a great job renewing your client, when you typically renew, how does the subscription growth rate trend versus for a new customer and are you bringing up all these channel in this conversation and are you able to kind of build into the contract? Just what has been the feedback on that front?

Tom Ebling

Yes, so we don't -- we do look at -- when you say subscription growth I am assuming it is revenue to demand were generating total right and we certainly looked at that with various course and various duration of customers, we don't see any kind of significant correlation there. And for instance we don't see it to be the case that in the first three years they grow really fast and then in years four through six they start slowing down a lot, we haven't seen that in the data. So there is not dramatic, there is no kind of significant change in Demandware revenue growth that occurs as result of renewal point. With respect to omni-channel, yes, that's an important part of discussion in many renewal situations, but a lot of it depends on the customer and how they are thinking about their overall omni-channel strategy. So in some cases the renewal contract will include some provisions for them rolling out, if there so rolling out other kind of products they might come up with in the future, but those are things where we don't get payments for those per se customers just sort of asks for turns that which they could as they go forward, but that's probably the minority situation to this point, most of renewals are pretty straight forward.

Shyam Patil - Wedbush Securities

great, and then on APAC, it seems like you guys are seeing some pretty good momentum there, can you may be provide a sense of the size of the deals there and over time how large do you think the deal sizes can get for you guys?

Tom Ebling

Yes, well I think we are probably not going to disclose a lot of details specifically because there is still a little bit of lot of small numbers but I don't think we expect and we are not anticipating within this point near term planning arise in large deal impact because for most of our customers the way they are thinking about this, they got a lot of revenues from -- let say European consumers and they want to go out to the Chinese consumers when they take a 10 year view they think that the Chinese market is a tremendously attractive, but they don't plan on huge revenues in the Chinese consumer in the first couple of years in that endeavor. So that implies that they are not going to pay a lot of incremental fees to go after the Chinese consumer, it's strategic long-term endeavor and that's why we are in with them to do that.

Operator

Thank you. Your next question comes from Brian Schwartz of Oppenheimer.

Brian Schwartz - Oppenheimer

Yes, hi, thank you for taking my questions today. Tom, I want to ask you another kind of derivative of cloud run question that you talked about here this morning. When you look at your regional, your larger, regional or divisional customers, are you seeing any shift among the central IT departments of those customers becoming more interested in champion Demandware as they think about their global cloud strategies versus the recent past?

Tom Ebling

Yes, I mean I think we are seeing that. I mean that with -- and this is very early in the sales cycle but a really large retailer worldwide CIO who probably never would have considered the cloud even certainly not a year ago, probably not six months ago. But he is planning a late 2014 starting process to go after a number of countries in Asia and Latin America, he is not going after yet and he is specifically interested in getting to know us better so that we could be an active part of that process and we are seeing that type of thing occur even in the largest company like we talked about Abercrombie and Fitch that's as an example right where they probably wouldn't have contemplated that type of thing in a year's past. But we are now at the point where for many of them that's either something very proactively pursue or they want re-approach them about it; they are very open to it.

Brian Schwartz - Oppenheimer

Thank you and one follow up, Tom or Scott here, thank you for the updated subscription revenue guidance. I just want to ask your opinion whether you feel that your growth which is tremendous right now, is there anyway being constrained by the ability to step up the sales and services and support organization. Thanks.

Tom Ebling

In terms of services and support, I don't think that's a constraint. We very consciously plan that to be and build that to be in line with our sales capacity. I mean ultimately if we can snap our fingers and have double the number of qualified sales reps that we have today who are totally experienced in selling Demandware and totally competed we would sell more in so sense there is constrain in terms of adding new customers. But we certainly want to do that in a right way and that's sort of why we are growing that sale force the way we are growing it is we want to find the right people, we want to make sure we train them properly, we want to make sure that they sell in a such way that we build this long-term partnership with customers not selling such a way where they just trying to get the contract and that's all it is about. So, yes, I mean if we could do that more rapidly that would lead to higher growth but I think we are sort of making the right trade off between growing the business and maintaining extremely high levels of customers' satisfaction and renewals.

Operator

Thank you. The next question comes from Alex Zukin of Stephens Inc.

Alex Zukin - Stephens Inc

Hey, guys, congratulation on another solid quarter. And two quick ones for me. The more seven figure customer signing in the quarter than in the whole of last year, seems like that particularly strong statistics. I am just wondering can you talk about what drove that in particular and some of your larger partners like Accenture starting to drive some of these your larger deals, just what any commentary around that.

Tom Ebling

Yes, I would say-- I think it is certainly not partners driving deals part of sale. So I think the partners work we done over the years is certainly paid off in partners being a more positive influence. Sapien is a great partner; they work with us closely in number of large deals. We've also ink some new partnerships that help us with large enterprises. So I think the partnerships are helpful, I think it is sort of the continuation of the trend of we have talked about earlier cloud being more and more acceptable large enterprises, when we said we closed five seven figure deals last year I mean closed five seven figures deals in the first quarter this year, right. But I think we had two in the company's history before that. But these -- the people signing these seven figure deals now the five people signing in Q1 of 2014 can look at much larger number of customers of the same size as they are who are already customers than the two who signed before 2013, right. So it becomes more and more comfortable, it is less of an early adopter type thing in the first seven figure deals, and I think that's really what's going on.

Alex Zukin - Stephens Inc

Understood, that's helpful, then just a quick follow up. If I look at your average and middle subscription growth for the first quarter year-over-year, it is 76% which is I think the strongest growth you have seen to date and you continue to have very strong ARPU growth. So I am just wondering how are you thinking about that for the year and when 76% type growth, when should we see that type of number start to moderate? I mean how long do you kind of keep growing your minimum that way?

Tom Ebling

Yes, so are you referring to the grown in base subscription?

Alex Zukin - Stephens Inc

Yes.

Tom Ebling

Yes, I think you really just need to focus on total growth and the reason for that is we did have in a quarter -- the reason why we had such a big shift between base and over is really driven by the early renewal, so we had this one customer that get an early renewal and put three brands under one contract so consolidated everything in it, significantly increase the base portion of their subscription within the quarter and that pretty much drove the increase in the base. And there is certainly -- we had a dozen or so customers launched in the quarter which out of the 26 implementation. So that was more driven, the base increase is more driven, the shift from base over is more driven by just one customer that renewed and therefore put a significant amount of their revenue and base as opposed over -- do you really need to look at the total revenue which is still strong at 57%, but I think it is a little misleading just to look at base subscription at 76% and try to conclude anything.

Operator

Your line is now live Craig.

Craig Nankervis - First Analysis Securities

Thank you, good morning. The new large customers you are signing wonder if you could talk about your implementation dynamics a little bit, Tom. What are you noticing most? I assume your implementation partner options are slightly narrower when you are implementing these larger customers perhaps they have order management, they have -- they do fulfillment themselves, can you just walk us through what are you seeing in terms of the profile when you are implementing these larger new clients?

Tom Ebling

And by larger Craig, you are talking about the five seven figure deals to go on

Craig Nankervis - First Analysis Securities

Correct

Tom Ebling

Okay. So because we also have really large customers through the small deals to get started and that's a different question, okay. While in terms of the larger deal, yes, I mean so it is true that for the largest deals where customers are signing up to that size commitment and therefore anticipating that significant chunk of their business, they tend to look to a subset of our partners. We have been building that subset quite significantly over the last couple of year so once again that's not an immediate constrain on our ability to sell because there are a number of choices there, but certainly it is not all the kinds of partners we have that our smaller customers might choose from. And then in terms of -- in terms of things like order management and fulfillment, the answer to that really depends on what they are doing, if they are going to the brand new geographies sometimes they don't have those things. And they are looking for help from a partner, from us in terms of navigating that. If they are taking a major existing geography and moving into Demandware then generally you are correct, they already have an order management or fulfillment types of options.

Craig Nankervis - First Analysis Securities

Okay, so no new challenges, so there is nothing noteworthy, it is a mix of dynamics as I guess is what I am hearing?

Tom Ebling

Yes.

Craig Nankervis - First Analysis Securities

And is there any color with Mainstreet through April even probably Q1 was late but may be into April in terms of brining them into your existing base or is it just too early to be talking about that?

Tom Ebling

Well, yes, it is too early from a number of perspectives. One is not really focused on bringing to the end of base as the number one priority. Number one priority is we focused on new prospective sales and those are six to nine months sales cycle, Q1 is too early to talk about that. But we have seen positive impact in terms of getting us into important sales that we wouldn't have been allowed into before. There is a couple of significant size sales going on now that are still in the early stage so if you ask me at the end of Q2, I would probably won't answer because it is early stages, but there are customers who clearly wanted order management from same vendor and one of them had a fulfill anywhere type of goal and we would have been clearly excluded from, in fact one of them had already started before the Mainstreet acquisition, we were excluded. And we got back in because of the Mainstreet acquisition. So we are seeing some positive results as the result of the acquisition. But it is kind of too early to have any quantifiable.

Operator

Thank you. The next question comes from Brad Reback of Stifel.

Brad Reback - Stifel Nicolaus

Hey, guys, how are you? On the -- just one quick question as it relate to guidance, Scott. Given the massive signing you had in 1Q, the implications would be somewhat of a deceleration in the subscription growth in the back half of the year from what you guided to for the first half and reported. Are there any items that we should think about it or is it just a level of conservatism playing into the forecast? Thanks.

Scott Dussault

Yes, but no it is latter. And it is no different than anything that we have done in the last eight or nine quarters in terms of how we provide our forecast and guidance. Again, if you think about 2014, the first quarter and really up until and around now is really giving the impact that we can have on the year in terms of customer acquisition, in terms of increasing our revenue in that given years, so the revenue growth that we are going to see in the second half of the year Q2 and Q3 and to a large of Q4 is going to be driven by customer performance. And that customer performance was again fantastic in Q1, but we are not necessarily going to plan that or forecast that in our guidance for the second half of the year as a course of conservative business. So yeah it is primarily a result of just being more conservative and how we expect our customers to grow for the next three quarters.

Operator

At this time, we have no further questions. This concludes Demandware's first quarter financial results call. Have a good day.

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Source: Demandware's (DWRE) CEO Tom Ebling on Q1 2014 Results - Earnings Call Transcript
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