ClickSoftware Technologies' (CKSW) CEO Moshe BenBassat on Q2 2014 Results - Earnings Call Transcript

ClickSoftware Technologies Ltd. (NASDAQ:CKSW)

Q2 2014 Earnings Conference Call

July 23, 2014 09:00 AM ET

Executives

Moshe BenBassat – Founder and Chief Executive Officer

Shmuel Arvatz – Chief Financial Officer and Executive Vice President

Analysts

Matt Blazei – Lake Street Capital Markets

Michael Latimore – Northland Capital Markets

Hugh Cunningham – Oppenheimer & Co.

Michael Martin – Small Cap Report

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the ClickSoftware Technologies Ltd. Second Quarter 2014 Financial Results Conference Call. All participants are at present in a listen-only mode. Following management’s formal presentation instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded July 23, 2014.

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

Before I turn the call over to Dr. BenBassat, and I’d like to remind you that during the course of this call, the Company will be making express or implied forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 and other U.S. federal securities laws.

These forward-looking statements include, but are not limited to those statements regarding future results of operations, including our outlook for full year 2014 recurring revenues, revenues from support contracts, and revenues, and non-GAAP earnings per share, visibility and into future periods, entry into perpetual contracts, future demand for our products and services and duration and extension of Xora, growth, strategy and opportunities percentile increases in small orders overtime, including timing and increased thorough profitability and market demand.

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

Except as otherwise required by law, ClickSoftware is under no obligation to and expressly disclaims any such obligation to update or alter it’s forwarding-looking statements whether it’s also new information, future events or otherwise.

Dr BenBassat, would you like to begin?

Moshe BenBassat

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

We are very pleased with the results for the second quarter. Revenues grew to a record number of $32.1 million, up 30% from $24.7 million in the second quarter of 2013. On the profit and loss line, we show a loss of $2.2 million, reflecting primarily cost associated with the Xora acquisition. This investment caused a loss in the first and second quarter. The good news is that we expect to return to profitability by the third quarter and increase it in the fourth quarter.

Throughout the year, our professional services team has successfully deployed cloud solutions for our enterprise customers, including for example, GE Healthcare, Konica Minolta, Trilogy and SGS. This lead to an increase in the number of users which led to an increase in the cloud revenues for the second half of the year. Indeed our cloud subscription revenues are growing steadily and now constitute 17% of our total revenues.

We expect to exit 2014 with annual recurring revenues, ARR, annual recurring revenues from cloud subscriptions, in the range of $26 million to $30 million. Together with an estimated $35 million from ongoing annual support contract, we expect to reach a level of more than $60 million in recurring revenues entering 2015.

In our pipeline for future sales, about 42% of the opportunities are for cloud-based solutions and 58% of them are for on-premise perpetual sales. As we noted in earlier calls, and now confirming by other sources, the cloud adoption in Europe is slower than in the United States and we expect to see quite a number of perpetual contract in the next 18 months. This is not necessarily negative, as it help us in generating short-term revenues, while CliclSoftware and the market for enterprise software are shifting to cloud-based solutions.

The fact that both our on-premise product and our cloud product use the same code base, the same software base should not be taken lightly; it’s by design and we invested a lot in it over a number of years. Technologically it’s not simple, but it give us an advantage. Unlike other cloud only vendors, I mean companies that offer only cloud solutions. This enables us to allow companies to start now with an on-premise solution, if they so choose, knowing that in the future they may transfer to a cloud solution with minimal software investment and user retraining.

All in all, our visibility into quarter revenues is now much higher. If you stem up our recurring revenues from cloud and support contracts, and added them to revenues expected from other license commitments and ongoing professional services, you realize it’s more than 80% of the quarter’s revenue are known to us in the first day of the quarter.

The integration of Xora into ClickSoftware is progressing well. As you may recall prior to the acquisition Xora operated thoroughly in the United States and one of the objectives in acquiring Xora was to expand the selling of its product beyond the United States. Indeed, we are already in our way to expand the selling of products – the selling of Xora’s product in a non-U.S. market via new wireless carrier partners.

The Xora certainly operates products for the small, medium sized businesses. Our focus on further penetrating the market of small and medium businesses is also riding a strong general market trend whereby large service providers are collaborating with the network of mid sized and small service providers in a variety of outsourcing and contracting arrangements.

So, beyond opening products to optimize the operations of individual service providers of all sides in all verticals, our products now also streamline and support the interactions between players in such service marketplace network. This is another area where the synergy with Xora comes into play. These days we are already working on accounts whereby a large service provider is using our classic enterprise products while it’s contractors will be using Xora’s products as they are both integrated.

This combination create a unique offering which is unmatched in our space. So, the primary message for today’s call is as follows; we have build a company that is addressing bigger and bigger market share of the service sector, and we are extending its leadership in all aspects.

Our solution today garner the needs of service companies of all sizes in all verticals in the cloud on-premise, so office users or mobile users. We are well focused in what we do and simultaneously we operate in harmony with industry leaders such as SAP, IBM, Salesforce and NetSuite to compliment their solutions and create win-win offerings for our joint customers.

With Salesforce.com, for example, we had a tremendous start having just reached $1 million in cloud revenue booking, one of the fastest starts in Salesforce.com Partner Ecosystem history. It is just one example to illustrate this point and the speed with which we are coming up with new innovations.

About a month ago we introduced ShiftExpert, a new Salesforce1 mobile app on the App Exchange platform that optimizes the planning, management and execution of employees’ work shifts and timesheets. It is based on our classic ClickRoster products for large companies. With ShiftExpert we are introducing a new cloud concept called ‘Optimization as a Service’ as an affordable option for small and mid-size companies to benefit from our powerful optimization algorithms. It is based on a cloud to cloud integration, where a ClickSoftware cloud boasts a massive optimization engine, which is available on demand to a company of any size using ShiftExpert on Salesforce.com cloud and which is to optimize its shift management.

Let me conclude this story of ShiftExpert with another short comment that illustrates how we leverage quickly new technologies to offer higher efficiencies and business ready to our customers.

We are probably one of the first companies to integrate Salesforce variable API in ShiftExpert with features that enable workers to use Samsung Gear 2 smartwatch to clock-in and clock-out their day on their wearable watch, as well as count the number of steps they walk during their shift. We’re getting a lot of attention for ShiftExpert from a variety of industry verticals. Prospect size range is from tens to hundreds of users.

The leadership awards we are winning may serve as an additional testimony that our position in the market relative to the competition is getting stronger. Here are two examples. In this month, IDC MarketScape report of 2014 on Worldwide Utilities Mobile Field Force Management ClickSoftware ranks as the number one and is in the only name in the leader section.

This is especially important since utilities, I mean, electricity, gas water and the like are a major component of this service sector and the most complex one. Another impressive award that we received was for the SHOUT collaboration app where we won the App Throwdown competition at the IBM Impact 2014 event in Las Vegas.

With that, let me move on to mention several specific wins of the second quarter and then transfer the call to our CFO. ClickSoftware’s domination in oil & gas field services is further demonstrated by winning Chesapeake Energy Corporation, a producer of natural gas in the United States. An additional win in oil & gas industry is impact from Australia, a worldwide oil & gas exploration and production company involved in numerous projects across the globe.

Motorola Solutions that serves both enterprise and government customers purchased a number of ClickSoftware products, including apps from our ClickAppStore for health and safety, collaboration, navigation, time and attendance. Compact Power Services is a contractor for many large retailers in the United States such as Home Depot, Lowe's and Wal-Mart. They provide services for installation and maintenance for in-store equipment and will use our product for appointment booking, resource allocation and scheduling.

Click continued its expansion in the Italian market with the selection by Ariston, a global player in heating products, setting and serving its products in many different countries.

Finally, Tremco’s roofing and building maintenance division is an example of an existing company using our classic Click product that added some scheduling and timesheet apps from our ClickAppStore. An example of the repeat orders from happy customers include the following Ledcor and Talus Corporation, [GSK] (ph), KPN in Holland and Trilogy in AMG.

With that, I will pass the call on to Shmuel.

Shmuel Arvatz

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

During the second quarter we continued to execute well. We are happy with the top line growth and the level of cloud revenue. The integration with Xora continues according to our plan towards achieving the synergies between the companies and strengthening our positioning in mobile application for the small and medium market.

Revenue for the second quarter were $32.1 million, up 30% year-over-year and up 13% sequentially. Revenues from cloud subscription increased substantially from $338,000 in the second quarter of 2013 to $5.4 million this year. Cloud subscription sales now represents 17% of total revenues, the amount includes $4.4 million from Xora.

Our book-to-revenue ratio for the second quarter was below 1. As a result, our short-term backlog including deferred revenues as of the end of the quarter was $41.3 million, down $6 million from the end of the first quarter. We continue to see a trend with new customers, particularly for engagement in the cloud where new customers will sign subscriptions for a small portion of the work flows and then following the initial implementation rent up deployment over time. As a result, new bookings may not always reflect the full potential of an order which will impact our book-to-revenue in the future quarters as well.

The geographical breakdown of revenues is as follows: $19.5 million from the Americas or 61% of revenue, $10.2 million from EMEA or 32% of revenues, and $2.4 million from Asia Pacific or 8% of revenue.

Gross profit in the second quarter was $19 million, representing a gross margin of 59%. This compares to $13.6 million or 55% in the same quarter last year. The improvement in gross margin was primarily the result of higher license and cloud subscription revenues as a percentage of total revenues and better profitability from consulting activities.

Operating expenses for the quarter were $19.9 million, up 24% year-over-year. The increase was primarily a result of Xora acquisition and expenses associated with Xora activities. As of the end of the quarter, we had 724 employees, an increase of eight employees from the end of the first quarter.

Operating loss for the quarter was $900,000 or 3% of revenues, compared with an operating loss of $2.4 million or 10% of revenues in the same quarter last year. Currency impact on our operating result was about $150,000 negative this quarter. Currency calculations are made in constant currencies as prevailed in the second quarter of 2013.

Net loss for the quarter was $1 million or $0.03 per diluted share, compared to net loss of $2.3 million or $0.07 per diluted share in the same quarter last year.

Turning to the balance sheet, our cash reserves, which is comprised of cash, cash equivalents and investments at the end of the second quarter totaled $44.8 million, down from $58 million from the beginning of the year. The reduction in cash reserve was primarily a result of Xora acquisition. During the second quarter, we used $3.7 million in cash flow from operating activities. Our operating cash flow was negatively impacted by the liabilities that we assume through the Xora acquisition, which were paid in the second quarter.

In terms of guidance, we are raising our full year revenue guidance to $128 million to $133 million. However, following Q1 results we now expect non-GAPP fully diluted earnings per share to be between $0.01 to $0.08, which is lower than the guidance range we provided in the prior quarter. The reduction in the quarters is primarily a result of currency impact and higher payroll cost compared to our previous guidance estimate. Nevertheless, we plan to return to profitability in the third quarter and estimate a non-GAAP EPS range of $0.07 to $0.14 for the second half of the year.

In summary, we executed well in the second quarter and remain focused on our long-term growth strategy. Demand for service optimization and mobility tools continues to grow and we are well positioned to achieve our annual financial target in 2014.

I would now like to turn the call back to Moshe for closing statements.

Moshe BenBassat

Thank you, Shmuel. To conclude this part of today’s call, let me summarize that this was a very positive quarter for ClickSoftware, both in terms of the financial results of the quarter, as well as the progress with saving activities for the next quarters. There’s a high volume of deals we are working on with a very good mix in the various categories. Cloud versus on-premise, large, medium, small size, mix up industry verticals and others are good balance between the territories. We feel very positive for the second half of 2014.

With that, let us proceed to the question-and-answer. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we’ll begin the question-and-answer session. (Operator Instructions) The first question is from Matt Blazei of Lake Street Capital Markets. Please go ahead.

Matt Blazei – Lake Street Capital Markets

Good morning, Moshe and Shmuel. Hi, nice quarter, so I appreciate that. My question had to do with the client’s win that you’ve been announced here in the last month, which seemed to be very, very different, I like you to talk about them a little bit more in terms of structure impact sales channel et cetera. When would be the Network Rail contract that you’re announcing, other one would be the KinCare deal, I think in Australia through Salesforce – through the Salesforce channel? Can you talk about those in a little bit more detail?

Moshe BenBassat

Sure, Network Rail is an example of a company from the transportation industry where ship scheduling is a very critical problem, the employees are not necessarily like still repair technicians of the cable company that goes from job to job, but rather people who come to a full eight hour shift and then who work the next – the second night shift or morning shift and the like.

So, Network Rail is a very large organization in the UK and they will be using primarily our ClickRoster product to manage the shifts and everything associated with it. It’s interesting though that almost in every rail or train organization you also have the people who maintain the network and the training center like and these are good candidates for the classic ClickSchedule of the classic scheduling of field force.

KinCare is also in a very unique vertical, they deliver home care primarily a workforce of part time healthcare professionals, and which are being send to visit people in their houses, delivering from simple services to more complex medical treatments. This space in general, I believe will be growing in the next year or so, in fact we already have another client in the United States (indiscernible).

Matt Blazei – Lake Street Capital Markets

The recognition of the revenues in the Network Rail, should we see that mostly in the September quarter?

Shmuel Arvatz

Quite frankly, I prefer not to talk about recognition of individual ones and again it’s always very complicated and once we start going into the details of this, it’s – you can nearly give a very accurate legal answers to the question.

Matt Blazei – Lake Street Capital Markets

Is the KinCare deal part of the million dollar sort of backlog number you announced for the Salesforce channel?

Shmuel Arvatz

Yes, KinCare is one of the clients that we do together with the Salesforce.com.

Matt Blazei – Lake Street Capital Markets

I see. Okay. Is it a cloud?

Moshe BenBassat

Yes, of course it’s a cloud company. It’s a cloud sale.

Matt Blazei – Lake Street Capital Markets

Correct, all right. Thank you very much.

Moshe BenBassat

Thank you a lot.

Operator

The next question is from Mike Latimore of Northland Capital. Please go ahead.

Michael Latimore – Northland Capital Markets

Great, quite a – I mean nice quarter. Just curious on the – you’ve talked about some wireless operator opportunities for Xora. Can you talk a little bit more about that? I assume there may be Tier 1 operators in second? Have you actually signed a distribution agreement with them yet or is that still in the process?

Moshe BenBassat

We were selected by a major wireless carrier, and we are now in the process of contracting and writing the contract down fairly advanced stages already. And in parallel we are working with the technical teams on adapting the solutions to the needs of this non-U.S. territory.

Generally speaking, as I mentioned on our last call, ClickSoftware has more than 50 carrier telecommunication companies around the globe and in principle, each one of them is a good candidate in its own territory to be a reseller selling mobile apps to small and midsized businesses by telecommunication carriers is now in great demand, and we surely hope to continue and work with additional of the clients that we have already known as clients to make them now also our partners selling in their own territories mobile apps for the small and medium businesses.

Michael Latimore – Northland Capital Markets

Okay, great. And then in terms of your software-as-a-service revenue outlook for the year, are you still expecting the same mix of Xora versus ClickCloud itself?

Moshe BenBassat

This question by the way is already, does not have a pure answer because we are starting to mix and match actually leveraging our sales into the enterprise market to also sell Xora product and vice versa. But generally speaking, we gave the guidance that overall, okay, we expect to have – how much – is it $18 million?

Shmuel Arvatz

$18 million to $21 million.

Moshe BenBassat

Yes. So 2014 our estimate now is in the ballpark of…

Shmuel Arvatz

We gave it. Yes. It was $18 million to $21 million for the year.

Moshe BenBassat

Yes, in 2014, right.

Shmuel Arvatz

2014. This is the overall cloud of subscription that we estimate within our guidance.

Michael Latimore – Northland Capital Markets

Okay. And just last question. In terms of the non-Xora cloud or software-as-a-service business, do you have any commentary on how those bookings grew year-over-year, the number of the deals in that category?

Moshe BenBassat

Yes. As I mentioned several times, these are large companies. I mean, each one of them could show in the – once we get to a steady stage, which may take any one of them six to 12 months, each one of them can generate hundreds of thousands of dollars per year, million dollars per year. There are also customers like this.

By nature though it takes time to roll them out, mainly to integrate our solution with their back-office systems, working the cloud and start rollout, owning out the users. For some of them, well, all these, as I mentioned and reported, we all did get a good job and they are now adding more and more users every week. For others, we are still in the process of deployment. But once the deployment is completed then the cloud revenues start adding very rapidly.

As we mentioned, all in all we expect to exit 2014 with very nice number of cloud revenues. Well, it’s, I guess, we mentioned $26 million to $30 million ARR meaning if you take the monthly cloud revenues that we plan to have on December, 2014 and multiply it by 12, this is how you calculate the ARR, we expect this number to be $26 million to $30 million in 2014.

However, we’re saying the cloud revenues we’re now signing will contribute $26 million to $30 million in 2015. And of course the number in 2015 will hopefully be higher because we are going to continue to sign in 2015. But that’s exactly the whole idea of the geometric growth that you have in cloud revenues.

Michael Latimore – Northland Capital Markets

Okay. Okay, thank you.

Moshe BenBassat

Thank you.

Operator

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

Hugh Cunningham – Oppenheimer & Co.

Hi. Thanks for taking my question. I’ve a couple of quick questions. First, are you guys being- well, how are you being impacted by the elevated level of military activity in Gaza?

Moshe BenBassat

Quite frankly as a company there’s very marginal impact. Some of our local employees may be called for military service, but so far we did not. There were no impact, business is working as usual and so far it’s normal.

Hugh Cunningham – Oppenheimer & Co.

Okay. And then in terms of the competitive environment, are you seeing anything change, anything different?

Moshe BenBassat

As I say, we’re growing stronger and stronger as evident by the win rate, by the growth, by the awards we are winning. I think that as the years go by, it’s getting, I mean the barriers for new competition is getting to be tougher and tougher. And from time to time when we loose a deal sometimes a year or later the customer say, well, now I understand how complex it is, let me switch. So, the competitive landscape in my opinion and my feeling is kind of getting more clarity as far as where is the strength and weaknesses of each vendor.

Hugh Cunningham – Oppenheimer & Co.

Okay. So you’re not seeing any irrational pricing as a result of sort of your strength?

Moshe BenBassat

Sometimes we do, but quite frankly, customers have learned to recognize that you made by something for a lower-cost, but if the business benefits in terms of minimum travel, maximum jobs per day and the like is not delivering what you need you may as well pay a few more dollars and get much higher business value.

Hugh Cunningham – Oppenheimer & Co.

Sure. And just last question is sort of I know it’s kind of early. So you probably don’t have a handle on this yet, but are you sort of distorting the pattern yet for your cloud customers, so when just use the cloud products we saw deal sizes shrink, and you mentioned earlier on this call the tendency for initial purchase of a smaller size for maybe for one division of your customer and then your customer sort of rolls that out to other divisions or to the entire enterprise. Are you able yet to sort of discern a pattern or sort of expectations as you penetrate a customer?

Moshe BenBassat

It’s really a function. The main parameter is how quick the deployment will be completed and second, how quick the rollout will be executed by the client. Deployment in a large enterprise customer typically ranges from several months to go anywhere from like three to four months to like nine months on average. And then the deployment is completed and the rollout starts. So a customer with 1,000 or 2,000 users will take in probably like nine to 12 months to really start getting substantial amount of rollout.

Hugh Cunningham – Oppenheimer & Co.

Okay. Thank you very much for taking my question.

Moshe BenBassat

If I may just, I’d like to emphasize that in our case we’re no longer talking about long future because we started a number of them, quite a number of months ago and a number of them already reached, I would say, maturity as far as completing the deployment and they’re now getting into the rollout. In fact some of them are already placing this big orders that you mention as they continue with the rollout.

Hugh Cunningham – Oppenheimer & Co.

You will expect this sort of same pattern with your brand-new customers, right?

Moshe BenBassat

Correct, correct. And the estimate that we gave for the ARR numbers and the like are based on a very carefully screen say bell by which would try the best we can to estimate the rollout speed of the existing customers and the acquisition of new customers and the like. We monitor this number very carefully.

Hugh Cunningham – Oppenheimer & Co.

Okay. Thank you very much, Moshe.

Moshe BenBassat

Sure, you are welcome.

Operator

The next question is from Michael Martin of the Small Cap Report. Please go ahead.

Michael Martin – Small Cap Report

Good morning and congratulations. Just one question, I missed it. Did you give out the figure for the total deferred revenue in backlog.

Shmuel Arvatz

Yes. It’s a $41 million – it’s above $41 million.

Michael Martin – Small Cap Report

Thank you.

Shmuel Arvatz

$41.3 million.

Michael Martin – Small Cap Report

Thanks.

Shmuel Arvatz

You are welcome.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Dr. BenBassat, to go ahead of his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S please dial 1888-782-4291, in Israel please dial 03-925-5901 and internationally please dial 972-3925-5901.

Dr. BenBassat, would you like to make your concluding statement?

Moshe BenBassat

Yes, thank you. So thank you all for attending the call today. And I look forward to seeing you in future calls. Have a great day.

Operator

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

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