Textura's (TXTR) CEO Pat Allin on Q2 2014 Results - Earnings Call Transcript

May. 7.14 | About: Textura Corp. (TXTR)

Textura Corporation (NYSE:TXTR)

Q2 2014 Earnings Conference Call

May 7, 2014 5:00 PM ET

Executives

Kevin Doherty - Director, IR, Solebury Communications

Pat Allin - Chairman & CEO

Jillian Sheehan - EVP & CFO

Analysts

Michael Nemeroff - Credit Suisse

Bhavan Suri - William Blair

Brian Schwartz - Oppenheimer

Pete Lowry - JMP Securities

Jeff Houston - Barrington Research

Jamie DeYoung - Goudy Park Capital

Operator

Good afternoon and welcome to Textura Corporation's March Quarter 2014 Conference Call. Today's call is being recorded and we have allocated an hour for prepared remarks and Q&A. At this time, all participants are in a listen-only mode. (Operator Instructions).

At this time, I would like to introduce you to our moderator Kevin Doherty, Director of Investor Relations at Solebury Communications. Please go ahead.

Kevin Doherty

Thank you, operator, and good afternoon everyone. We have posted our earnings release, as well as a supplemental slide deck to the Investor Relations portion of our website at texturacorp.com.

Today's speakers are Pat Allin, Chairman and Chief Executive Officer; and Jillian Sheehan, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call including, but not limited to our financial guidance are forward-looking statements. These statements are subject to the risks and uncertainties described in the Risk Factor section of the company's 10-K filed on November 26, 2013, and other filings with the SEC. Actual results may differ materially from those described during the call.

In addition, all forward-looking statements are made as of today and the company does not undertake any responsibilities to update any forward-looking statements based on these circumstances or revised expectations. Also non-GAAP financial measurers discussed during this call are reconciled to the most directly comparable GAAP measurers in the tables attached to our release.

And with that, I would like to turn the call over to Pat Allin.

Pat Allin

Thank you. Welcome to today's call. I am joined by Jillian Sheehan, Textura's Executive Vice President and Chief Financial Officer. Today we are reporting on the three months ended March 31, 2014.

I will begin today's call with highlights from the quarter, and discuss some important recent events, and then I will turn the call over to Jillian to walk through the financial results and our outlook in more detail. Finally, we will open the call to take your questions.

Well, we had another good quarter of results. Revenue for the March quarter was $13.8 million, which grew 61% year-on-year and 46% on an organic basis. While revenue was within our guidance range, it was at the low-end of our expectations.

There were two headwinds that impacted our business in the quarter. First, severe winter weather conditions across much of the country in the quarter caused a delay in project starts on both our CPM and Submittal Exchange Solution and delayed contracting on projects already on CPM.

And second, the negative reports about Textura at the beginning of the quarter had the impact of delaying CPM sales to prospective clients and delaying implementation of new CPM clients.

While we estimate that the financial impact on the March quarter was likely 1% to 2% of revenue, there will be a further impact of modestly reduced revenue growth in the next two quarters. This is outlined in the guidance in the March results press release. Starting in mid-March and continuing through April, sales and implementations are now back to a normal business pattern.

Adjusted gross margins improved from 78% in the previous quarter to 80% in the March quarter. Adjusted earnings per share was a loss of $0.16, which included a $0.04 loss attributable to the acquisition of LATISTA. The adjusted EPS loss was better than the midpoint of our guidance range by $0.05, with $0.01 of the upside due to better than expected results from LATISTA. We also saw improved leverage in cost of services and technology and development and lower bonus accruals reflecting our lower guidance for 2014.

Construction value added to Textura's activity-based solutions was $19.5 billion for the quarter, which represents a healthy year-on-year growth of 84%. This quarter's growth compares to the 100% plus rates in the prior two quarters, which benefited from the start of some particularly large projects and several large general contractor implementations.

Our balance sheet remained strong with $72.7 million of cash and cash equivalents and no debt at the end of the quarter, which allows us to continue to pursue our operating and investment goal. Despite high investment, we expect to be operating cash flow neutral to slightly positive for calendar year 2014.

Our results and guidance show that we expect to be able to continue to deliver on the strategic and operating plans that we had communicated to the investment community with strong revenue growth and improving growth and adjusted EBITDA margins. That being said, we did not achieve some of the goals we set for ourselves in the quarter. And despite some unusual external circumstances, we are in fact disappointed.

Going forward, we will remain focused on driving growth through a number of initiatives. And our specific plans include, continued focus on a number of high revenue clients in early phases of CPM implementation. These clients will drive future growth. Continued integration of our solutions, which will create new and significantly enhanced value. Our clients confirm that our strategy is unique and needed by the construction industry.

Our cross selling initiative have shown good progress in the last 12 months as our clients in the ENR Top 100 list are now using on average 1.5 of our solutions. Global expansion throughout the UK and Europe, and expansion throughout Asia in the next 12 to 18 months. And finally, we are working with the certain leading financial experts to create a new solution for the construction industry using Textura's platform.

I would also like to highlight some recent developments. We successfully implemented our previously announced price increase for CPM subcontractor usage fees. This become effective on all new projects brought on CPM after February 1. As a reminder, it will take 18 to 24 months to realize the full revenue impact of the price increase. Ultimately, the increase will add an additional 2 basis points to 3 basis points of revenue on subcontracted contract value. The increase contributed approximately 180,000 of cash revenue in the quarter, which gets spread over the estimated life of the contract for GAAP revenue purposes. We expect a modest impact on revenue from the price increase in 2014 with the main impact coming in 2015.

We closed our acquisition of LATISTA in December 2013 and our integration efforts have progressed according to the plan during the quarter. We are encouraged by the receptivity of the marketplace to the company's unique mobile field management solutions. We have identified a number of functional enhancements to the LATISTA solution, which will add value to LATISTA, CPM, and our PQM solutions.

We changed our fiscal year-end from September 30 to December 31. The decision to change the fiscal year-end is intended to improve comparability with industry peers and better relying our reporting and planning cycle with the construction industry.

While, we recognize we have made good progress, the whole organization is very focused on delivering on our promise of continuing high growth, profitability, and cash flow. The guidance we have provided shows that we are confident that we will succeed.

With that, I would like to turn the call over to Jillian to provide more details on our results.

Jillian Sheehan

Thank you, Pat, and good afternoon everyone. During the quarter we delivered year-over-year growth of 51% on revenue of $13.8 million, resulting from the strong growth in both activity driven and organization driven revenue. Our organic revenue growth was 46%.

Our activity driven revenue which is CPM, Submittal Exchange, LATISTA, and Greengrade accounted for 77% of our total revenue, and increase by 57% year-over-year to nearly $10.7 million. The key driver was a 34% year-over-year increase in the number of active construction projects valued at over $120 billion with 1,712 or 38% growth in new projects added during the quarter.

The LATISTA acquisition contributed revenue of $674,000 during the quarter, which was in line with our expectation.

As Pat mentioned, $19.5 billion in construction value was added to our solutions in the quarter, representing another quarter of significant year-over-year growth. The LATISTA solution contributed 94 projects added in the quarter, representing $3.3 billion in construction value. The organic growth rate of construction value added in the quarter was 53%.

In the March quarter, the monetization rate of CPM subcontractor usage fee revenue decreased from an average of 8 basis points of subcontract value to 7 basis points.

A large project, such as those added in the December and September quarters, the initial contracting is on larger; longer lead time contracts, which typically have a much lower effective usage fee rate. Later contracting on March project is at higher usage fee rate. Over the life of these projects, we anticipate that we will monetize at our normal historical average rate. The lower effective rate decreased cash revenue by $325,000 in the quarter.

In addition, we have converted some of our general contractors, CMP clients to a new subscription fee methodology. Certain number of client were implemented over the past two year with a single subscription fee, based on new projects added during the subscription period, combining project fees and monthly fees. Overtime, more of our new clients have requested this approach. We are now offering this to all GC and owner clients.

In the March quarter, revenue increased by $500,000, as a result of the subscription arrangement, of which approximately $100,000 was non-recurring.

Organization driven revenue, which is GradeBeam, PlanSwift, Prequalification Management, and BidOrganizer, accounted for the remaining 23% of our total revenue, an increase by 76% year-over-year to $3.1 million. The PlanSwift acquisition closed on January 31, 2013. So we had two months of revenue contribution from PlanSwift in the March quarter last year compared to three months this year.

Going forward, results of our organization driven segment will be fully comparable on a year-over-year basis. The number of organizations grew to more than 14,173 representing year-over-year growth of 103%.

Excluding share-based compensation expense and amortization of intangible assets in both periods, total operating expenses increased by 15% year-over-year to $17.8 million from $11.9 million, which is below our 61% revenue growth rate. We are continuing to see operating leverage in our business model.

We also incurred a full quarter of expenses from LATISTA of $2.4 million on discounted revenue recognized of $674,000 due to acquisition related deferred revenue write-down. As mentioned in prior call, this will continue to impact us as we continue to work through the acquired deferred revenue discount both during 2014 and to a lesser extent into 2015 due to the duration of LATISTA contract.

I will provide our current expectations for the impact of LATISTA later in this call when I review our updated outlook for calendar 2014.

Excluding share-based compensation expense in both periods, our cost of services grew by 56% year-over-year due to increased personnel-related expenses from expanding headcount and the impact from the LATISTA acquisition.

Excluding share-based compensation expense in both periods our sales and marketing grew by 106% year-over-year resulting from the PlanSwift and LATISTA acquisition, as well as from increased headcount for our solutions that are sold by a direct sales force.

Excluding share-based compensation expense in both periods our technology and development expenses grew by 55% year-over-year due to investments we are making to integrate our solution and the impact of the LATISTA acquisition.

Depreciation and amortization expenses increased 70% year-over-year resulting from the amortization of intangible assets acquired from PlanSwift and LATISTA.

Excluding share-based compensation expense in both periods we significantly leveraged our general and administrative expenses, which increased by 14% year-over-year while supporting the strategic initiatives of our organization and the ongoing requirements of being a public company.

Adjusted EBITDA loss increased from $2.6 million in the quarter ended March 31, 2013, to $3.3 million in past quarter, due to primarily a higher level of operating expenses to support our growth and strategic initiatives. On a margin basis, we did experience a significant improvement of 650 basis points to negative 24.2% during the March quarter of 2014 compared to a year ago.

We define adjusted EBITDA as our loss before interest, taxes, depreciation and amortization, share-based compensation, and acquisition-related and other non-recurring expense. We have provided a reconciliation table at the end of the press release.

Adjusted net loss of $4 million during the March quarter compared with a loss of $3.4 million in the prior-year period. While adjusted EPS loss of $0.16 in the March quarter compared to $0.35 last year due to the higher share count from our equity offering.

We define adjusted EPS as our net loss adjusted for share-based compensation expense, amortization expense, acquisition-related and other expenses recognized during the period. We have provided a reconciliation table at the end of the press release.

Turning to the balance sheet, cash and cash equivalents were $72.7 million as of March 31, 2014, compared to $77.1 million at December 31, 2013. This cash balance provides us with the liquidity to continue to invest in the growth of our business.

Our deferred revenue increased by 54% year-over-year to $27.8 million, which includes $1.6 million of acquired deferred revenue from LATISTA. Deferred revenue consists of amounts that have been invoiced, but that have not yet been recognized as revenue as of the end of a reporting period and is generally recognized ratably over the estimated duration of a project or a contractual service period. Deferred revenue also includes contractual amounts that are due but unbilled as of the balance sheet date.

I will now turn to our updated financial outlook for calendar 2014. As Pat mentioned, we have changed our fiscal year from September 30 to December 31. As a result, we have provided guidance for the remaining quarters in 2014 in our press release for full transparency between our prior fiscal years and our current calendar year guidance.

For 2014, we anticipate revenue growth of 56% to 61% for total revenue of $53.6 million to $55.6 million. We expect the revenue contribution from LATISTA in 2014 to be in the range of $3 million to $3.7 million after normal acquisition-related subscription revenue write-down.

Our adjusted EPS guidance expectation is a loss in the range of $0.32 to $0.41. As this range shows increasingly in 2014, we expect to see significant leverage in our cost structure, as operating expenses grow at a slower rate than revenue.

We expect that the impact of LATISTA on adjusted EPS to be a loss of approximately $0.15 to $0.18. As discussed on our last quarterly call, we plan on accelerating our investments in LATISTA to drive high levels of revenue growth and integration with our other solutions.

As you may recall, approximately 95% of our activity driven revenue in the quarter comes from projects added prior to the start of the quarter. As a result of the organic project activity in the March quarter and the impact that we expect it will have on revenue in future quarters, we are reducing our prior fiscal year-end revenue guidance from $57.5 million to $50.5 million to $56.9 million to $57.9 million. The guidance for the September quarter is included in our press release.

For the quarter ended June 30, 2014, we anticipate a revenue growth range of 57% to 60%, resulting in expected revenue of $14.7 million to $15 million. This includes an expected contribution from LATISTA in the range of $600,000 to $800,000.

We anticipate adjusted EPS for the quarter ended June 30, 2014, to be in a range of a loss of $0.12 to $0.14, and the expected impact of LATISTA on adjusted EPS to be a loss of approximately $0.04 to $0.05.

In summary, despite our disappointment with the impact to revenue from the factors we have discussed on this call, we are pleased with the improvements in gross margins and leverage we are seeing in the model.

With that, I'd like to turn it back to Pat for some summary remarks.

Pat Allin

Thanks, Jillian. The team at Textura continues to deliver significant value to our clients and that is reflected in our financial and operating results as our unique solutions continue to gain traction throughout the commercial construction industry. We have a large market opportunity in front of us and we will continue to make the necessary investments to drive growth, while also leveraging our cost structure as our business scales.

With that, I would like to turn the call back to the operator and open up the lines to take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Our first question comes from Michael Nemeroff from Credit Suisse.

Michael Nemeroff - Credit Suisse

Pat just wanted -- in your prepared remarks you talked about a bunch of deals that were delayed. How large were those clients and did any of them change their minds entirely or those deals where potential client still in the pipeline?

Pat Allin

Sure, Michael. We are working on a couple of implementations that are in the very early stages. We are working on interfaces and face other aspects of implementation planning. They represent some of the largest implementations we've done. And while they were delayed, while they make a report, situation was discussed, all of them are proceeding.

I think it's important to note that even though, this -- the reports did have an impact on sales and implementations that we did not lose any clients, we did not lose any perspective clients, we did not to our knowledge lose any employees, board members, advisors etc cetera. And the executive team at Textura has to work really, really hard to make sure all of that played out that way. But I' -- I -- we've come through it in a scenario where it hasn't damaged at all our prospects or our business really going forward.

Michael Nemeroff - Credit Suisse

That's helpful, Pat. Just looking at the construction value added, it -- it is the thing that I think gives us and a lot of investors comfort? Is there a construction value that was added in previous quarters that for whatever reason you now don't expect to happen? Or is your take of all that construction value that was previously reported still pretty much guaranteed to flow through the ADR line at some point in the future?

Pat Allin

Yes. All the construction value added in previous quarters is moving forward to the contracting process in a fairly normal way. Some of the big projects in the March quarter we saw contracting delayed a little bit, particularly in the northeast. But no, there is nothing different in the business patterns. The construction market actually is reasonably strong. And latest statistic show that employment levels are back up to where they were seven years ago that the construction -- commercial construction market has improved 8.6% over last year, it's actually a pretty good market. And so we're not seeing any projects being cancelled or anything like that.

Michael Nemeroff - Credit Suisse

And so from your perspective this is purely just a timing issue?

Pat Allin

Yes, it's a timing issue. We're disappointed. We set goals for ourselves and despite -- our job is despite whatever things come along to achieve those goals and we are kind of at the low-end of what we really expected. But the reality is, it's delayed, but it hasn't had any real impact on the long-term prospects of the business.

Michael Nemeroff - Credit Suisse

That's helpful. And then, how much of that construction value that you added in this quarter was -- were projects that are outside of North America, is that a meaningful number yet? And are customers dragging into other geographies yet?

Jillian Sheehan

Michael, I still -- in terms of number of projects this is small percentage and construction value would be a small percentage too. We're seeing increase in the prospects and the sales frontal in Australia but it's still early stages yet in terms of a material contribution outside of North America.

Michael Nemeroff - Credit Suisse

Thanks, Jillian. Just lastly for me, Pat, has there been any impact to the development activities at LATISTA, as a result of the so to say a due political instability in that region?

Pat Allin

No. It's important to note that all of the software is actually resident here in North America. The development team continues to work on functionality. There is simply been no disruption whatsoever with our operations in Moscow. In fact, we just want a fairly major project in the quarter. It's the FIFA World Cup will be held in Moscow and we are doing the work, LATISTA is doing the work on the stadium. It's about a $500 million project.

Michael Nemeroff - Credit Suisse

And just one more, if I may. Lastly, so the projects that where the weather was a delay, is there an opportunity for those or do you see so far this quarter that there is sort of a catch-up or projects are accelerating a little bit faster than expected in the next quarters or did they just push out in terms of their timing?

Pat Allin

Yes. So the first quarter, the quarter ended March was really kind of a peculiar, very slow in January, very, very slow in February, starting --

Michael Nemeroff - Credit Suisse

As far as that -- as far as construction activity?

Pat Allin

Yes. In terms of contracting, in terms of projects coming on to system etc cetera. Starting mid-March we had our two best weeks in our history across almost all of our solutions and we've had a so far a pretty good April. So I would -- there may be some catch-up that will take place here that would be my expectation, implementations that were delayed are simply not likely to get caught up because they ultimately would fully implement. Just so many opportunities that's so big that it's just not possible take a couple of months out of the schedule going forward. Having said that we'll still fully implement.

Operator

Thank you. Our next question comes from Bhavan Suri from William Blair.

Bhavan Suri - William Blair

Just to follow-up on the prior question here, if I look at the weather related impact in the period and assume that that happened mostly in January and February when the weather was challenging, I guess I'm a little surprised by sort of the slightly lowered numbers for the combined June and September given that those things should sort of pickup and reflow into revenue over the next few months. So Jillian may be help us understand that a little bit in how that flows into the P&L and why we might not see it?

Jillian Sheehan

So in terms of the weather related, as Pat mentioned, we did see a pickup back in sort of end of March and into April. But the guidance was more around delayed sales and implementation that kept about on the call where if that gets delayed or pushed its more difficult for a catch-up the take place, and it almost pushes everything out with the project coming on system and the revenue. So it's more a result of that, Bhavan, and weather related.

Bhavan Suri - William Blair

And so let me drill into that for a second and just help me understand. So then I guess isn't what we're going to see for revenue over the next few quarters based on the activity that was added to the system 12 months ago or 9 months ago, and so the delayed implementations would have a impact on to the activity added to the system but not what we're going to recognize over the next couple of quarters. So help me sort of walk through that too.

Pat Allin

Well we've always said, Bhavan, that we go into the quarter with 95% of the revenue coming from projects already on system but there are still 5% taking place within the quarter. And when you -- projects that were not brought on in the March quarter that impacts revenue the next couple of quarters because the contracting is delayed, et cetera. And it's a small impact but what we've guided is a pretty small impact. But --

Bhavan Suri - William Blair

Just wanted to get a clarification on.

Pat Allin

It's hard to get caught up. We're already into a quarter. 95% of the revenue we shift on projects already on system. That which was not brought on system, isn't going to help the quarter so. But within about six months we'll be tracking pretty normally.

Bhavan Suri - William Blair

No, no, that's helpful. And then could you provide an update sort of the mid-market offering and sort of how that's going given you've seen mid-market commercial construction also pickup and just sort of how that's gaining traction?

Pat Allin

You're talking about the CPM midmarket offering. It's become apparent to us that there is some additional functionality that we really need to build around the payment methodology. And so what we're running into is when you get into the mid-market the financial institutions will not (inaudible) of a size that they really can't process ACHs in the same way we do with our larger GCs. So we're going to have to create a somewhat different payment structure. We know what to do but it's going to require relative functionality which will delay our pursuit of that segment for probably about the next six months.

Bhavan Suri - William Blair

And then as you look at the cross-sell activity, obviously it's been quite healthy, when you look at the offerings one of the things we've touched in the past is the missing functionality for the end of the bid process and then subcontractors' feedback. Any thoughts on sort of developing some functionality there and adding to the platform?

Pat Allin

We are working on it as we speak. That is one of our major initiatives over the next 12 months.

Operator

Thank you. Our next question comes from Brian Schwartz from Oppenheimer.

Brian Schwartz - Oppenheimer

Thanks for my questions here this morning or this afternoon, I apologize. Pat or Jillian can you talk about appetites for M&A near-term. I think in the press release you talked about showing improving profitability trends moving forward, and I'm curious if that guidance takes into considering M&A?

Pat Allin

Yes, we are I wouldn't expect us to be doing any acquisitions for the next year, may be longer. We continue to look at various opportunities both in North America and Europe. We're just not seeing anything that we feel we need to add to our functionality or skill sets. So as I said earlier, I just think on the last quarterly call we're sort of in a digestion phase that's really where we are. Lot of work to be done to integrate the solutions that you require to this point. And I don't think the organization needs any distractions through -- with another acquisition. So the likelihood is very, very low that we would do anything in the next 12 months.

Brian Schwartz - Oppenheimer

Okay. And then, Pat, you gave us a new metric here on the cross-selling opportunity I think you said of your Top 100 ENR customers are now using 1.5 products. Wondering if you can give us a comparable on what that metric looks like a year ago and then may be any update that you can give us on how many of the Top 100 ENR are currently here of Textura?

Pat Allin

Yes, we so I don't have a comparable number for 12-months ago, but I will tell you that it's dramatically higher than it was 12-months ago and I guess some of that is a little bit anecdotal but we've made such great progress, particularly with our larger clients that is been pretty dramatic. But that's not a number that I've got in front of me. Jillian, do you want to?

Jillian Sheehan

Yes, so the Top 100 ENR clients, again Brian it's that 62 of the top 100 are using one of our solutions and again, as we've said in the past, if it's a CPM solution that they're using. It doesn't necessarily mean that they are fully implemented today. So it's -- if that answers your question.

Brian Schwartz - Oppenheimer

Yes, it does. Thank you, Jillian. I actually had two model questions here for you. The first one is just on the gross margin line; it's real nice to see that above 80% here. Is that a good trend line that we should think about for the gross margins as we model out the rest of this fiscal year?

Jillian Sheehan

Yes, I think, Brian that you'll continue to see some improvements in the gross margin line. There will be as much leverage in that line as the non-total operating expenses. But we will continue to see some improvement incrementally during the year.

Brian Schwartz - Oppenheimer

Thank you. And then last question for me and I'll pass it on. I noticed in the presentation slides that you put up today, you put up a target operating model out there. And I'm just wondering what type of timeframe you're thinking about when you think about reaching that target model? Thanks for taking my questions.

Jillian Sheehan

Sure, Brian. To that target model that we put as part of the earnings slide is a target model that we shown in the past. And we did put the revenue levels to achieve that model this time around and given the growth rates that we said, we feel that we can sustain that 50% year-over-year growth over the next several years. You can do the math to get to those timeframes based on our current model. And that is a run rate level that we are forecasting currently 2016, early 2017.

Operator

Thank you. Our next question comes from Patrick Walravens from JMP Securities.

Pete Lowry - JMP Securities

Sorry, it's Pete Lowry in for Pat. In terms of, I guess, following up on that top 100 question, in terms of new business in the quarter or construction value added, can you sort of talk about how many -- how much of that came from new large GCs versus expansions with existing GCs?

Jillian Sheehan

The way that we track that, Pete is we call on base clients or implementing clients versus new sales, which would have been sort of in the past 12 months. About 60% of CPMs, 60% of the total construction value added came from our base or implementing GCs not that was sort of new sales.

Operator

Our next question is from Jeff Houston from Barrington Research.

Jeff Houston - Barrington Research

Thanks for taking my questions. Just wanted to clarify the impact of the weather and the short report on guidance. I think you said in revenue guidance for next quarter it affected 1 to 2 percentage points of growth or maybe that was for this quarter. But could you talk about what it was for the quarter, for quarter of guidance and then for full calendar year '14 too?

Pat Allin

For the 1% to 2%, which is several hundred thousand dollars in revenue on the one -- on our imported revenue for the quarter, really is a combination of weather and delayed sales and delayed implementations as we address some of the concerns that were and some of the negative reports. Bhavan is right, the weather issue goes away pretty quickly and as the project delay brought up in the current quarter the impact of project being delayed a couple of months is isn't overly significant. So really the impact in the current quarter and the next quarter has to do with delayed sales and delayed implementation.

And the point we are making is the when you're expected to be bringing up a large number of projects with new clients and in the March quarter, you bring them up from the quarter you start to amortize, then you bring up more projects the next etc you start to amortize. When those implementations don't go forward until the current quarter the impact the lower but somewhat lower for this quarter and next quarter. And again it's in the 5% or so range. And then by the time we get out into the fourth quarter we would've expected these plans to be fully implemented, they will be fully implemented by that timeframe and we're sort of back on a normal track. When things don't happen in a quarter it's a very predictable visible revenue stream, but that doesn’t mean when something doesn’t happen in a quarter has implications for at least the next two quarters and that's really why we adjusted our guidance because in the delayed sales and delayed implementation. Does that help?

Jeff Houston - Barrington Research

Yes, for sure. Switching gears a bit, could you update us on what the deal size mix was in the quarter and then maybe how the pipeline is looking now that since the March and April quarters are more back to normal?

Jillian Sheehan

Yes. so in terms of projects brought on system we definitely saw in this quarter again here was a strong rate weight towards the mid size projects, which we would say are $2.5 million to $50 million and lower than expected for the large projects. So sort of that $50 million to $100 million range. We didn't see as many as the billion-dollar size project on system as we did in the December and September quarter. So the average project size was lower than it has been in the past two quarters.

Jeff Houston - Barrington Research

And then going so far into the calendar second quarter is that are they improving now to a more normalized mix of size?

Jillian Sheehan

I would say that the March quarter was still a little bit -- it was kind of back to our normal size because we did see larger in the September and December quarter but as Pat mentioned during the call the end of March April activity really says it's back to normal business level.

Pat Allin

Yes, so the volume of projects is up, the mix is a little bit more what we would have expected. And I would guess just looking at and talking to our clients, this is going to be a good year. I think the economists are expecting 5%, 6% growth in commercial construction throughout '14. Based on what we're seeing and hearing from our clients as we have our subscription discussions about the upcoming next six months, I think that's validated by what we're both seeing in hearing. I think things are back to what I would call normal.

Operator

(Operator Instructions).

Our next question comes from Jamie DeYoung from Goudy Park Capital

Jamie DeYoung - Goudy Park Capital

Hi Pat and Jill, thank you for taking my call. The improvement in the operating leverage was a pleasant surprise this quarter. Just looking out longer-term the operating model that you provided the presentation would suggest that exiting 2016 you'd be doing to about $75 million to $80 million in free cash flow. Is that kind of directionally right even though its $3 a share free cash flow plus cash on the balance sheet?

Pat Allin

Jamie, my legal counsel who's sitting here is shaking his head choking. You got the growth rate and revenue that we can achieve and you have the target margins and my guess you're pretty good at math, so I'm not going to argue with your result.

Jamie DeYoung - Goudy Park Capital

Great, appreciate it. Secondly, can you just talk for a moment about what's different about what's different about your business model compared to other SaaS companies that allows Textura to achieve a much higher level of operating leverage and other SaaS companies at the same level revenue?

Pat Allin

I think a lot of that revolves around our sales and marketing costs. The thing that really makes our model so different and largely I'm talking about CPM, which is 60% of our business, is that our sales and marketing costs are relatively small because even though we have 100,000 users on CPM we're only really selling to 300 general contractors and owners at this point; those are our clients. They require their project participants to use our technology, so there really is no sales cost associated with most of the users on CPM. And because of the way we go about selling we don't have any ongoing sales cost. So we do it through our client services organization, it's a very highly technical consultative. Still we do pay them bonuses, but we don't have our commission structure that has commissions in the year of sales and then carrying on to the next year or two. So our sales and marketing costs are always going to be substantially lower so we can drive higher revenue growth with a much less of a cost structure around sales and marketing.

Our technology costs are always going to be a little bit higher because I think what we do is a little bit more complex but on balance the incremental margin on our CPM business is incredibly high and that's going to drive some very, very high profitability in our overall business.

Jamie DeYoung - Goudy Park Capital

That's helpful. So you think longer term you can get to kind of 15% to 20% sales and marketing as a percentage of revenue versus these other SaaS models that we see at 40% to 50% for very long periods of time.

Pat Allin

Yes, I think Jillian's target was sort of 17% to 20%, for something like CPM it would be significantly less than that. So longer-term possibility is as we move to our platform it's likely that the sales model we're using for CPM is going to become more of the dominant sales model. So there may be opportunities longer-term as we go to more of a platform sales for us to replicate that kind of cost structure more broadly across the company. So yes, there's real opportunity there. And we're not like others where 45% 50% just going to be on sales and marketing, that's just isn't necessary in our business.

Jamie DeYoung - Goudy Park Capital

That's really helpful, Pat, I appreciate it. One last question here is I noticed that management and directors continue to be in a black out period preventing insiders from buying stock up. Since there doesn’t appear to be any imminent acquisitions on the horizon what other possible things would be preventing that at this time?

Pat Allin

So insiders are locked up for basically two reasons. One, we're in a quiet period around the quarter end in announcing results. Once you get out of that so for the last six or seven weeks we've been in a quiet period. You might normally expect to within a day or two of this announcement we'd be in a period where we go and buy shares if we wanted to. That's not going to be the case.

So the second reason that you would be not able to do that is if the insiders have material information that's not available for the capital markets. And that is our circumstance right now at Textura. So it seems unlikely that the insiders will be able to go into the market and acquires shares in the foreseeable future until certain events have been announced and the information is available within the capital markets. If you go back and listen to my script really closely you'll sort of get a sense of what that might be.

Jamie DeYoung - Goudy Park Capital

Yes, I think reading between the lines you mentioned something earlier which would be a great thing; you've got a top 20 GCs that are getting close to implementation. So I hope that's the case, appreciate your time here and keep up the good work.

Operator

Thank you. At this time we have no further questions. I will turn the call back over to Pat Allin for closing comments.

Pat Allin

Thank you. Jillian and I would like to thank everyone for participating in today's call and for your interest in Textura. Our future is bright and we think we can sustain high growth, increasing margins, and cash flow each quarter. We have provided you with guidance for three quarters, which is a little bit unusual. But we think in those three quarters you can see that we have -- we believe we can achieve the high growth, the increasing margins, and cash flow, will be cash flow neutral, slightly positive for this year and obviously cash flow positive next year.

You know it all boils down to clients and our fixed solutions continue to be validated in the marketplace as we bring on new clients and as you can see from our numbers we are deepening our engagement with our existing client base. Not, little bit disappointed with the quarter, no excuses, we probably should have done better despite all the distractions we probably should have executed a little bit better. But we're just more determined now to continue on the path of demonstrating that we really do have a superior business model here and just a superior business.

So we look forward to talking to you next quarter. Thank you very much.

Operator

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

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