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E2open, Inc. (NASDAQ:EOPN)

Q1 2015 Earnings Conference Call

July 10, 2014 17:00 PM ET

Executives

Greg Kleiner - Investor Relations

Mark Woodward - President, CEO

Peter Maloney - CFO

Analysts

Kash Rangan - BofA Merrill Lynch

Bhavan Suri - William Blair

Brendan Barnicle - Pacific Crest

Richard Davis - Canaccord

Michael Huang - Needham & Company

Mark Schappel - Benchmark Company

Yun Kim - B. Riley

Mark Rosenkranz - Northland Capital Markets

Alex Zukin - Stephens Inc.

Operator

Greetings and welcome to the E2open First Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Mr. Greg Kleiner, Investor Relations for E2open. Thank you, Mr. Kleiner, you may begin.

Greg Kleiner

Thank you. Good afternoon and welcome to E2open’s first quarter fiscal 2015 earnings conference call. Joining me today are Mark Woodward, E2open’s President and CEO; and Peter Maloney, E2open’s Chief Financial Officer.

Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release. Non-GAAP financial measures exclude the impact of stock-based compensation, non-cash income taxes; certain accelerated revenue recognized in connection with the contract amendment, amortization of intangibles, acquisition expenses and the impact of a purchase accounting adjustment to deferred revenue.

At times in our prepared comments or in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results. Please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future on these metrics.

The primary purpose of today's call is to provide you with information regarding our first quarter fiscal 2015 performance in addition to our financial outlook for our second quarter and full fiscal year 2015.

Some of our discussions and responses to your questions may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission. Should any of these risks or uncertainties materialize or should our assumptions as outlined in our earnings release and the documents referred to in that earnings release prove to be incorrect, actual company results could differ materially from these forward-looking statements.

I encourage you to visit our Investor Relations Web site at investor.e2open.com to access our first quarter press release, periodic SEC reports, a webcast replay of today's call or to learn more about E2open.

Finally before I turn the call over to Mark, please be advised that during today's discussion, we may reference certain unreleased services or features not yet currently available. We cannot guarantee the future timing or availability of these services or features and thus recommend that customers who purchase our services make these purchase decisions based on services and features that are currently available.

And with that, let me turn the call over to Mark.

Mark Woodward

Thanks Greg and welcome everyone and thank you for joining us today.

For Q1, we came in at the upper end of our guidance on the top line and above on the bottom line, in particular our subscription and support revenue showed continued strong growth coming in at $16.5 million up 33% year-over-year and at the high end of our guidance.

Before I go to the highlights from the quarter, I want to begin with a discussion of our recent acquisition of Serus Corporation. Let me start with some facts. Founded in late 2000, Serus is a leading provider of cloud-based solutions for outsourced manufacturing and execution. Serus has been primarily focused on the semiconductor industry to-date. We share one client in Intel but they will also add another 20 firms to our customer list including industry leaders like Qualcomm, Nvidia, AMD and Juniper Networks.

This increases the reach of the E2open business network in the semiconductor manufacturing, which not only opens up an opportunity in that large vertical, but also has applications across many other verticals due to the increasing dependence on semiconductor based products and components. They had roughly 60 employees spread across offices in Santa Clara, California two miles away from our San Jose office and also in Bangalore, India.

Both of our companies were founded on the idea that improvements in visibility and speed across the corporations extended partner network can drive significant business value. E2open has traditionally been focused on enabling collaboration and better decision-making by providing enhanced visibility across both demand and supply chains. Serus has been focused on reducing time to production by enabling collaboration between design and manufacturing. We believe that both solutions provide tremendous value and are highly complementary.

Speed to market is a constant problem for corporations around the globe. This is especially prevalent in complex manufacturing involving contract manufacturers, suppliers and design partners across the broad supply chain. The complexity lies not only in managing an ever changing bill of materials, and engineering changeovers across the company’s partner network, but also monitoring the precise manufacturing and testing processes associated with the individual components.

Serus provides us with three new products in manufacturing collaboration. Manufacturing visibility, contract compliance and design for manufacturing. The manufacturing visibility product, their most widely deployed offering provides granular factory transaction visibility across the extended supply chain. This translates into detailed tracking of not only material flows, but the processing steps as well. So think about yields, test results, quality grades et cetera.

The contract compliance application automates the tracking of not only units, but adherence to the process related SLAs associated with the contracts as well. Finally, design for manufacturing product is particularly interesting. This is one of their newer products and the only offering that we are aware of that provides a close loop solution linking design to manufacturing execution. This product sits between PLM systems; contract manufacturers and the supply chain provided in environment to provide directional collaboration for a full spectrum of requirements across bill of materials, process specs and testing protocols.

By linking these previously disjointed functions, this solution helps companies design products and get them into market faster a key struggle for corporations worldwide.

While the manufacturing visibility products market opportunity is more focused in semiconductor industry manufacturing, we believe that both the contract compliance and the design for manufacturing products have broad applicability across a wide range of industries with complex manufacturing, industries like medical devices, aerospace and defense, automotive, industrial equipment and telecommunications. So what does it mean for E2open going forward?

The acquisition enhances our position in the hi-tech vertical with additional functionality and visibility in the semi-conductor manufacturing. It also extends our leadership position in collaborative planning execution more broadly by expanding our reach deeper into product design and production. This will enable an even higher level of responsiveness and speed to market, key drivers of business value in today’s hypercompetitive world.

The reaction from industry analysts, customers and prospects has been quite strong and we are very excited about the potential for our combined offerings. Peter will walk through the financial impact to our business in a moment.

So let me transition back to some highlights from the first quarter. We added three new customers in Q1 and completed several transactions with existing customers. So while our Q1 is typically our smallest booking quarter, we are quite pleased with how we started the year. We are also happy with the number of new logos coming into the pipeline, a good indicator that our message is resonating in the market.

In terms of new deals, we are pleased to announce that a top European mobile operator has selected E2open after an exhaustive evaluation. The company had recently launched a corporate program aimed at optimizing inventory levels in order to minimize both disruptions and obsolescence through their operations across Europe.

When dealing with fast moving consumer goods, it have a very short shelf life, timing the right amount of the right product in the right place at the right time is absolutely critical and can be the difference between success and failure. By adopting a control tower strategy to enable Pan European visibility for orders and inventories, the company believes that the implementation of E2open will more than pay for itself within the first year.

In terms of expansion, we have already signed a new seven figure deal with a large European oil and gas operator we discussed in the last call enabling them to add more capacity to their deployment.

The last deal I want to highlight was with L'Oréal. The original deal that we signed with L'Oréal was a pilot for a rollout in North America, which was extremely successful. Surely thereafter, I was asked to meet with their Head of Global Supply Chain in Paris, which resulted in expansion throughout Europe. More recently L'Oréal made a decision to use E2open on a worldwide basis with the ability to expand across all brands and geographies.

Our previous work with L'Oréal was also recognized during the quarter as one of the 100 great supply chain projects for 2014 by supply and demand chain executive magazine. We are very proud to be such an important partner to this $30 billion beauty care giant as well as Avon, FireStore and Guthy-Renker, with more customers in this vertical market on the way.

During the quarter, we formally announced our strategic alliance with KMPG, so we have been working with them successfully in the field for some time now. We continued to ramp up more people from PWC, KMPG and Accenture with most of these resources now focused primarily on go-to market activities. The pipeline of opportunities that we are now working on with all three integrators continues to grow and we are beginning to attract more attention from other SIs.

Finally, we are very pleased to be named the San Francisco Business Times a best place to work in the Bay Area for 2014. This is a great acknowledgment of both the culture and values we have built over the years at E2open along with the quality of our team members.

So in summary, we got off to a strong start for fiscal 2015, we added a high quality set of people and products to our company through the Serus acquisition. This move will allow us to add value to our customers and significantly expands our market opportunity. We believe that we remain well-positioned for continued growth going forward.

With that, let me turn the call over to Peter for more details on our financials.

Peter Maloney

Thanks Mark. Before reviewing our P&L for the first fiscal quarter, please note our non-GAAP results exclude the effects of the Blackberry contract amendment that took place during the second quarter of fiscal 2013 and the impact of a purchase accounting adjustment to deferred revenue from the ICON acquisition that closed in the second quarter of fiscal 2014.

For the first quarter, non-GAAP total revenue was $19.6 million, at the upper end of our guidance of $19 million to $19.8 million and compared to $16.1 million for Q1 of last year. Similar to recent periods this was driven by continued strong results from our subscriptions and support business offset by the implementation of our professional services partner strategy.

Non-GAAP subscription and support revenue was $16.5 million for the quarter at the high-end of our guidance, this was up 33% year-over-year and comparable to Q4. As discussed in our last earnings call, early conversion of certain customer pilots during the fourth quarter affected the sequential comparison.

Non-GAAP professional services and other revenue was $3.2 million reflecting a continued implementation of our partner strategy.

Non-GAAP gross margin for the quarter was 67%. This is up from 61% for Q1 of last year and comparable to Q4. Our subscriptions and support gross margin was 82% for the quarter, up from 80% for the prior year and comparable to Q4.

Non-GAAP operating loss was $4.1 million for the quarter ahead of our guidance of a loss of $4.8 million to $4.4 million. This compares to a similar amount for Q1 of last year and $3.6 million for Q4.

Non-GAAP EPS was negative $0.14 compared to our guidance of negative $0.16 to $0.15. This compares to negative $0.15 for Q1 of last year and negative $0.13 for Q4.

Adjusted EBITDA for the quarter was a loss of $3.6 million ahead of our guidance of loss of $4.2 million to $3.8 million. This is flat year-over-year and compares to a loss of $3 million for Q4.

Our total deferred revenue balance at the end of the quarter was $40.1 million. Both cash flow from operations and free cash flow were negative $2.3 million for the quarter. We ended the quarter with $61.9 million of cash and investments down from $65.6 million at the end of last quarter.

Please note that the Serus acquisition closed early in Q2 and did not affect our cash balances at the end of last quarter.

Before I move on to guidance, I will discuss the financial impact from the Serus acquisition. Serus was acquired for $18.5 million in consideration at closing, which consisted of $14.5 million of cash and $4 million of common stock or approximately 240,000 shares.

Up to an additional $7.5 million in cash can be earned contingent on the achievement of revenue related milestones during the 12-month period after the deal closed. The acquisition was completed in early June and we will include almost a full quarter of revenue from Serus in Q2.

Serus reported approximately $4 million of total revenue for calendar 2013 and was not profitable. The revenue mix was roughly 2/3rd subscription and 1/3rd professional services. While they were a SaaS based business, their accounting was a bit different than ours. They were using an old method of accounting in which the subscription and professional services for recognized ratably as one unit of accounting over the length of the contract don’t forward under our accounting, the waterfall of professional services revenue previously delivered by Serus will not be included in our revenue stream.

Our future professional services revenue associated with Serus implementations will be recognized as delivered to the customer. We are expecting Serus to add $700,000 in revenue to Q2 and $2.5 million for the full year both of which will consist largely of subscription revenue due to the factors I just mentioned.

From an operating profitability point of view, Serus is expected to lose approximately $2 million for the full year, but exit the year at a breakeven pace. We expect full year new and upsell subscription and support booking from Serus to range from $2 million to 43 million.

The guidance I will provide now includes these items for both Q2 and the full year. We are providing guidance on Q2 for the first time and updating fiscal year guidance as follows all of which is non-GAAP.

For the second quarter of fiscal 2015, we expect revenue of $20.2 million to $21 million. As you consider this revenue guidance, please recall that the Blackberry contract revision we discussed on our last call impact subscription revenue by roughly $800,000 for the period.

Operating loss is expected to be $6.1 million to $5.4 million leading to a non-GAAP EPS loss of $0.20 to $0.18 based on the diluted share count of $31.5 million. Adjusted EBITDA is expected to be a loss of $5.5 million to $4.8 million.

For the full fiscal year 2015, we expect new and upsell subscriptions and support bookings of $91.5 million to $96.5 million or growth of approximately 29% to 36%. We expect revenue of $89 million to $91.5 million; please recall that the Blackberry revision impacts our full year subscription results by roughly $2.5 million. Operating loss is expected to be $16.2 million to $15.2 million leading to a non-GAAP EPS loss of $0.54 to $0.51 based on a diluted share count of 31.3 million.

We also expect adjusted EBITDA to be a loss of $14 million to $13 million; finally, our free cash flow is expected to be negative $12 million to $11 million. Taking a step back, if you consider the guidance we provided in the last call, our expectations for the year excluding Serus are essentially unchanged. Our updated guidance now includes Serus, which added approximately $2.5 million to total revenue impacted our non-GAAP operating profitability by $2 million and added $2 million to $3 million to our bookings expectations.

In summary, we are pleased with our results and the continued progress we are making with our growth initiatives. We are also excited about the anticipated contribution from both the people and products added through the Serus acquisition.

And now, we will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Kash Rangan of Merrill Lynch. Please go ahead.

Kash Rangan - BofA Merrill Lynch

Mark, I think this quarter proves that hi-tech and beauty can in fact grow with each other. So congrats on that. I had to say that.

Mark Woodward

Thanks. Appreciate it.

Kash Rangan - BofA Merrill Lynch

Can you – just maybe give us an update on, I know that you don’t comment on bookings target and how you are making progress as the year unfolds but just quantitatively speaking, should we look at the three new customers was just a slow seasonal start for the year, but the backlog of potential business looks actually quite good.

And also secondly, if you could talk about the repeat business which you emphasized on the call. Who are the customers that are doing repeat orders with you guys and for what kind of modules?

And third and final, I couldn’t help but also ask you about the product change management, it seems like product change management it’s a SaaS-based service harkens back to the very successful Agile business. Are we to think about your new market opportunity in the same way that we all thought about Agile’s market opportunity back there? Thank you.

Mark Woodward

So that’s all you want to know? So let me talk about backlog and new customer addition, I should say booking new customer additions. As I said in the prepared remarks we were pleased with the performance of Q1, I think three-ish customers in the first quarter is about what we would expect. We usually see a slower start. I would say that based on what we see in the pipelines, I do expect to start seeing an acceleration in new customer additions in the next couple of quarters.

And that’s just based on the couple of things, one is, ICON deal is now coming all the way through the pipeline. If you remember, when we acquired ICON they had no sales people, their entire sales pipeline was driven by SAP and we end of life to the product the SAP sold. So we started basically from zero, post that acquisition and now we see a number of those deals coming through.

So we are really quite pleased with that and I expect for us to have a strong year when it comes to new customer additions for the full year.

In terms of upsells, really kind of what we are selling has not changed that much in terms of the products that we sell and the solutions that we are solving for people. So a lot of it’s around with a brand new customer things around inventory visibility and managing inventories better, reducing, expedite and things like that, that involves all of our network products that involves numerous of our applications.

And then as we see our customers mature, they typically start by implementing the supplier network first, getting all the data in and then they start with the applications where they have the most pain such as inventory order management. And then they may move to more demand forecasting, so better understand what the demand is.

And now with ICON, sometimes they will see – use the planning response functionality we have as the first thing they buy with network underneath it such as what Microsoft did. And I think we will see some more deals like that coming in as well. So the upsells really have not changed much except for the addition now of our, what we call E2PR or E2 Planning & Response which was the former ICON products.

And the last thing you asked me about was really the product that we acquired from Serus called design for manufacturing. It’s a fascinating product, it’s really - think of it has the recipe that an OEM hands a contract manufacturer for basically what is the process that takes place to build and test products and that functionality basically doesn’t exist today. It really starts where PLM products leave off and it takes it through the actual execution of the manufacturing of that product.

The only solution we see in the market today is really internal IT, we don’t see another vended product that does what this does and we think there is a pretty significant market opportunity for this. And I’ll also say that our opinion on that functionality and what we can do with it has only gone up post acquisition since we have gotten to learn it – learn what we can do even better. So we are quite happy with that.

Operator

Thank you. The next question is from Matt Pfau of William Blair. Please go ahead.

Bhavan Suri - William Blair

Hey, guys. Can you hear me, it’s Bhavan.

Mark Woodward

Hey, Bhavan.

Bhavan Suri - William Blair

Hey, guys. So just following up a little bit on Kash’s question, you obviously had a nice ICON-scm or E2open Planning & Response win in the last quarter in the Q4. How was that product progressing sort of vis-à-vis expectations, in the current period you talked about some deals coming up in the pipeline, just a little more color that would be helpful?

Mark Woodward

I don’t have in front of me Bhavan the specific customers we sold for that for ICON in Q1. But, as I did say that we see in terms of the pipeline that where we - deals we see coming this year, we see some nice contribution from it. It certainly not the only thing we are upselling but it’s coming from the past few quarters where we haven’t seen much. We had a few wins like Microsoft; we’ve had a few others. I expect to see an increased number of those wins primarily because we have taken a number of deals from start to now going through the finish line. And we will give you some more examples of that this next quarter.

But I really – unfortunately on top of my head, I don’t have any great examples from Q1 but we are happy with the pull through we are seeing from those products now going through the rest of the year.

Bhavan Suri - William Blair

And then if you were to look at ASPs for that product, your average initial deal say 750k and it’s a network plus the various applications plus plumbing underneath. When you look at the ICON-scm deal, could you give us some idea sort of how that looks as compared to that initial ASP, if they were buying just the ICON-scm with the network versus just buying ICON as an app getting the upsell?

Mark Woodward

Yes. In ICON deal, someone is buying just the E2PR product, which now we call it in the network. The average deal is – it’s going to be a bit smaller than 750, if they are just buying E2PR all by itself it’s probably going to be in the $300,000 to $400,000 range for ARR, so triple that in terms of the booking.

So I think they started off as a little smaller because that should tell the products are priced in that space. And also, with E2PR product, we actually have six different modules, if someone were to acquire all of them that would be over $1 million. And they are typically starting with just a subset of what the full functionality is.

So I think we will see upsell, it will see E2PR deal that would grow to $1 million for just planning but on average the first deal is a bit smaller than 750.

Bhavan Suri - William Blair

That’s helpful. Then I will squeeze one more quick one in on SIs. Obviously, the last quarter – Q4 you had a great deal with sort of the oil and gas expansion and that was a sizeable customer vis-à-vis your typical self.

Just an update on how the SI are processing, how many folks are trained and sort of – are they going versus your expectations, they are tracking in line or better versus when we are talking about say six months ago.

Mark Woodward

Yes. So we are probably approaching in terms of total people trained across all different disciplines, I mean it’s probably approaching 200 people with a lot of the focus now as I said in the call more on go-to market activity. So we are tracking – we have a couple of people dedicated to just managing partner relations for tracking business in the field; we have got a separate kind of spreadsheet or system we use to track each of the different integrators. And we have multiple opportunities across multiple verticals with all three of the integrators that we currently have relationships with.

I would expect to see more business coming through this year for sure. And I’m happy with the traction we are seeing. And it really hasn’t changed much in terms of Accenture is very strong for us in Europe. We are starting to do engage here in North America. We see KMPG ramp up dramatically and there is a lot going on with them and as well as PWC. So I’m pleased with what we are seeing with all three of them. We continue to use them in customer deployments. But more and more we are seeing good activity. I will be happy when we are talking about more wins, but in terms of activity, I’m happy with the activity level, the number of opportunities that we see them engaging us in. And there are definitely places where as we hope they are bringing us in where we would never have been there without them.

Bhavan Suri - William Blair

Yes. Awesome. Thanks guys. Thanks for taking my questions.

Mark Woodward

All right, Bhavan.

Operator

Thank you. The next question is from Brendan Barnicle of Pacific Crest. Please go ahead.

Brendan Barnicle - Pacific Crest

Thanks so much guys. Just following up on Bhavan’s question. You guys made some nice progress with SIs. Do you have any additional SIs that you think you might open up this year any new partners?

Mark Woodward

Yes. I had mentioned, I haven’t mentioned anything specifically by name yet, so I probably won’t do that yet. But I will say we have been approached by a couple of other integrators who have come to us because they have seen what we are doing with Accenture and KPMG. At one case, we had a partner who moved from one to another and is now engaging us in his new firm. So that’s actually interesting because they are pulling us into the opportunities. So as we formalize or actually make similar progress with some of these guys this very early obviously will be happy to update you.

Brendan Barnicle - Pacific Crest

Terrific. And then, kind of like if I heard it right, the big oil and gas contract from last quarter upped again or added to their contract this quarter. Can you give us any more color on the kind of rapid move to adding?

Mark Woodward

Well, it’s just part of the deployment. The deployment is going well and the way that we structured that contract it was a negotiation I remember well, 11:30 one night in a restaurant Dusseldorf, where the customer was trying to get us to include unlimited number of trading partners in their contract which we would not do. And so they bought a minimum and now they already have basically needed to come back and buy number more. And I think it’s early in that process, I think we will see this happen over and over again with that particular customer because I know what the size of deployment can be. And as I said, we have already kind of exceeded the number of trading partners that were in the initial ideal.

Brendan Barnicle - Pacific Crest

Great. Then lastly, anything new on the competitive landscape?

Mark Woodward

Not really. I mentioned I think a bit the last quarter and in some one-on-one meetings that what we are seeing is companies that are into the market who are copying our messaging, so at sometimes at the high end of the funnel, we will see some players maybe more often than we used to again not because they have changed their offering just because they changed their messaging. And I think they get flushed out pretty quickly. So in terms of real kind of when it gets down to the people we are competing against, really not much changed.

Brendan Barnicle - Pacific Crest

And then I guess just correlated to that anything different in the pricing front?

Mark Woodward

No. Really nothing different on pricing, no.

Brendan Barnicle - Pacific Crest

Terrific. Thanks guys.

Mark Woodward

Yes.

Operator

Thank you. The next question is from Richard Davis of Canaccord. Please go ahead.

Richard Davis - Canaccord

Thanks. A lot of my questions were asked by the multipart questions before, but with regard to the – you are landing some kind of nice interesting larger deals, should that at some point translate into a faster move down the – up the revenue line or down the loss line in terms of bringing free cash flow profitability kind of on a sustainable basis, forward it all or due guys still kind of see that happening kind of in calendar 2015 back half at this point?

Peter Maloney

I would say on the revenue ramp, it really doesn’t make a difference, but definitely on the profitability side. And what we have been seeing is as we get farther along with some of the bigger customers that clearly incremental business is better larger margin. Now, we are still in the investment mode of trying to grow the business and maintain a good subscription growth rate.

When we look at our goals for next year, one of our goals is to get to the point by the end of the year that we are cash flow positive. And clearly, as we have larger customers that contribute higher gross margins that will help.

Richard Davis - Canaccord

Great. Thanks.

Operator

Thank you. The next question comes from Michael Huang of Needham & Company. Please go ahead.

Michael Huang - Needham & Company

Thanks very much. Hey, guys just a few questions for you. First of all, I apologize if I missed this. So in terms of the new customer wins, did you mention how of these were influenced by the SI channel and could you share with us maybe kind of which verticals are in or which geography?

Mark Woodward

Yes. So the wins we had and the new customer was in Q1 none of them where SI deals. Those were deals that we have been working on for some period of time and there were no SI influence deals. In terms of – but see, I think one in the CPG space and two of in the hi-tech space for Q1.

Michael Huang - Needham & Company

Okay. Got you. And then in terms of Serus, did you have – I know that you provided kind of the 2013 revenue run rate, but do you have the kind of the range of ACV contract value, I think what ultimately – are some of these customers paying like on the high end and maybe also in the low end?

Mark Woodward

They had a couple of large customers; the majority of them are down more in the kind of $300,000 to $500,000 range. So a little bit on average their initial deals are a little bit smaller than ours today. But I think we can actually grow those a bit. I mean the company was very cash flow challenged then we do things that structured their deals just get deals done faster. So I think we have a little more pricing power than they did in fact we realized some pricing that will be effective in the next couple of months. We are going to be increasing the price of all the products.

Michael Huang - Needham & Company

Got you. Okay and so in terms of kind of how you see the cross-sell opportunity unfold through the nearer term, I mean is it more kind of for you to open products into the Serus space or is it vice versa?

Mark Woodward

It’s both actually so, we think it is they are contract compliance product and the design for manufacturing products into some of our customers and it’s definitely the E2open network, they didn’t have a network at all. The only – their customers would access the application logging directly into the application, so putting the Serus products on top of our network and then our E2PR product on top of all of that. So its ability to cross-sell into both installed bases.

Michael Huang - Needham & Company

Got you. Okay. And then last question, just so when I look at the subscription bookings kind of guys for the year, there is a descent range from the lower end to the high end. I mean, I was wondering in your view what’s the biggest wildcard here. I mean is that, is it primarily kind of the new logo activities upsell, I mean is it icon, maybe you could just kind of help us understand what’s driving kind of at the lower end and high end? Thanks.

Mark Woodward

Yes. I think it’s driven by new deal activities. Then it’s also as we have said before, we have talked about much in the last couple of quarters. But when we get pilots then convert into a deal often times that kind of next deal they do can be quite large. So successful conversion of pilots into big multi-year deals and then acceleration of new customer adds, I would say.

Michael Huang - Needham & Company

Great. Thanks guys appreciate it.

Mark Woodward

Yes.

Operator

Thank you. The next question comes from Mark Schappel of Benchmark. Please go ahead.

Mark Schappel - Benchmark

Hi, good evening. Most of my questions have been answered. But, just one question for you Mark. I believe earlier I think was last quarter you thought that your professional services business would be flat up say 4% or 5% this year. And I was wondering if you still hold to them?

Mark Woodward

Yes.

Mark Schappel - Benchmark

Okay. Great thanks.

Mark Woodward

I mean we just continued to see some of the lumpiness we do. We are in the middle of a couple of fairly large deployments that RevRec can get hung up until we get through to sort milestones. But I think through the year, we do – that is our expectation still.

Mark Schappel - Benchmark

Thank you.

Operator

Thank you. The next question is from Mark Rosenkranz of Northland Capital Markets. Please go ahead.

Mark Rosenkranz - Northland Capital Markets

Hi, guys. This is Mark Rosenkranz for Scott Berg. Just one quick question, one the Serus products, how will that be integrated, will that be a rewrite of the product, will that be able to plug into the existing open platform?

Mark Woodward

No. We will absolutely take the products as they are and we have been doing a lot of work, we have been talking about work we have been doing to make our products more easily integratable by their applications as well as SIs and other third party products. So we are taking advantage of that technology just to integrate our own acquisitions as well. So we will take these products as they are and basically if you will plug them into our network.

Mark Rosenkranz - Northland Capital Markets

Fantastic. Thanks a lot guys. Congrats on a good quarter.

Mark Woodward

Yes. Thank you.

Operator

Thank you. The next question is from Yun Kim of B. Riley. Please go ahead.

Yun Kim - B. Riley

Thank you. Hi, Mark, in terms of booking for new and upsell guidance for the year, what are you expecting in terms of the mix between the two, are you expecting more offsell whether to new customer add to get to your bookings guidance. And also, is it fair to expect system integrator channel driving some key new customer bookings in second half of the year or is that more of a fiscal 2016 event?

Mark Woodward

What we have seen, it hasn’t changed too much it depends on the quarter that probably 50% to 60% of our business comes from upsell and the installed base. And 40% to 50% comes from new customers that fluctuates a bit. But, probably 60 and its always 40 new is about what it has been. I think there is a potential to see that shift a bit just because of the new customer activity that we see in the pipeline this year. I can see that maybe trending up a bit more on the new customer side than we have seen in the past.

In terms of SIs, I think we could see some – it’s hard to tell when these close, because we are not in control of the sales cycle. I would hope to see potentially something happen in the second quarter, but we are not planning on that. And it’s pretty consistent what we have been saying for the last five or four, six months, which is kind of second half of this year as we start to expect to see more contributions from the SIs. Then we got surprised early by a nice deal in Q4, but I think back of the year as we expect to see the majority of that contribution.

Yun Kim - B. Riley

Okay, great. And then just housecleaning from last year from the icon-scm acquisition, what is the status in terms of converting some of those customers to the subscription model?

Mark Woodward

We continue to do that. I would expect that by – I don’t know what the exact timeframe is. This fiscal year, we would have the majority of them converted over. Sometimes depending on the customer, we are not able to resell them the product and so initially you want to see a change in revenue, but over time once we get on subscription, we plan to ramp up pricing where we can. But, I think that we should get the majority of those converted over this year. Revenue is going to behave the same though because they are already on maintenance which is recognized ratably as will the subscription license.

Yun Kim - B. Riley

Okay, great. And then quick question for Peter. Is there anyways for you to quantify that the deferred revenue balance impact some of the Serus acquisition?

Peter Maloney

From the Serus acquisition?

Yun Kim - B. Riley

Yes.

Peter Maloney

We are not disclosing that now I can tell you that a portion of the 2.5 million, right that we are going to be recognizing was part of the program.

Yun Kim - B. Riley

Okay. That should be good. Thank you.

Peter Maloney

Okay.

Mark Woodward

Thank you.

Operator

Thank you. And the next question is from Alex Zukin of Stephens. Please go ahead.

Alex Zukin - Stephens Inc.

Hey guys most of my questions has been asked but just two quick ones. Mark any changing your thinking around having a target around 20% of the deals for the year to be partner-generated with coming from the back half?

Mark Woodward

Yes, that was next year. That was our expectations for next year not this year. So I really had made no projection this year. What I said was, we are going to use this year then kind of learn the cadence of how – see what the pipeline is, how long it takes to close deals. And then we see if we can make a projection of what percentage of our business we think would be next year.

Alex Zukin - Stephens Inc.

Got it. That’s helpful. Where there any customer losses in the quarter, I had the 106 number go to 108, but you talked about adding three customers, is that just RIM?

Mark Woodward

Exactly.

Peter Maloney

That’s right.

Mark Woodward

Yes.

Peter Maloney

Yes.

Alex Zukin - Stephens Inc.

Got it. And then finally, are you guys on pace kind of talk about your sales hiring capacity?

Mark Woodward

Yes. We are very happy. We are on plan where we want to be.

Alex Zukin - Stephens Inc.

Okay, great. Thank you guys.

Peter Maloney

Thank you.

Operator

Thank you. That is all the time we have for questions. I would like to turn the floor back over to management for any closing remarks.

Mark Woodward

All right. Thank you. Thanks everyone for attending our call. This coming quarter we have got quite a few conferences we are doing. So we are not going to be doing any investor marketing particularly Citi’s, we will be at Needham, Pacific Crest and Canaccord conferences, so we may see you there later this quarter. Thanks.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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