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Callidus Software Inc. (NASDAQ:CALD)

Q3 2010 Earnings Call

October 28, 2010 4:30 pm ET

Executives

Lorna Heynike - SVP, Marketing

Leslie Stretch - President & CEO

Ron Fior - SVP & CFO

Analysts

Ian Kell - Northland Capital Market

Kevin Liu - B. Riley and Company

Ted Ketterer - TK Associates

Gregg Speicher - 451 Group

Gene Weber - Weber Capital Management

Mike Anderson - Wedbush Morgan Securities

Operator

Good day ladies and gentleman and welcome to the Callidus 2010 Third Quarter Results Conference Call. My name is Jeremy and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator instructions)

I would now like to turn the conference over to your host for today, Ms. Lorna Heynike, SVP of Marketing. Please proceed.

Lorna Heynike

Thank you and welcome again to Callidus Software’s third quarter 2010 conference call. With me on the call today is Leslie Stretch, President and CEO, and Ron Fior, Senior Vice President and CFO of Callidus Software. Shortly after the markets closed today, Callidus issued financial results for the third quarter of 2010. The press release is posted on the wire and is available on our website at callidussoftware.com.

We would like to remind you that during the course of this conference call, we will make forward looking statements including predictions and estimates regarding our market opportunity and business strategy, our on-demand bookings and business, estimates of fourth quarter 2010 total revenues, recurring revenues, services revenues, perpetual license revenues, operating expenses, margins and profits, stock based compensation and restructuring charges as well as sales and marketing expectations and strategies, product development and strategic partnership and operating results in the fourth quarter of 2010.

These statements revolve a number of risks and uncertainties. Our actual results may differ materially from any future performance suggested in our forward looking statements. We refer you to the Company’s Form 10K for the year 2009 as well as the Company’s Form 10Qs for the first and second quarter of 2010 on file with the SEC for important risk factors that could cause actual results to differ materially from those contained in any forward looking statements.

We expressly disclaim any obligation to update this forward looking information. On today’s call, Leslie will begin with comments about our overall business and financial results and then Ron will discuss the financials in greater detail. We will conclude with a Q&A session. With that said, let me now turn things over to Leslie.

Leslie Stretch

Thank you, Lorna. Good afternoon everyone. Today I want to talk about five chocolates, firstly our Q3 performance and customer activity, secondly our progress in the services business, thirdly our sales talent lifecycle proposition and our solutions roadmap, fourthly, our outlook for Q4, and lastly I want to share some thoughts on 2011, our growth aspirations and specifically our gross margin expansion plans.

Let us start with a look at Q3 performance and business highlights. In the quarter, we grew total revenue sequentially for the third quarter in a row and we also grew total revenues year-over-year. We achieved year on year growth of 18% in the recurring revenue line and non GAAP operating income of approximately $400,000, meeting our previously stated commitment to be profitable in the second half. Our GAAP operating expenses were down sequentially and year over year, again reflecting our continued discipline in managing costs and our drive to achieve value from all of our resources.

On the customer front, we signed 21 on demand deals in the quarter along with several license deals in emerging markets. Our subsidiary Aztecsoft again performed well in both bookings and revenue in Q3. We signed deals across the globe, in Mexico, in Colombia, in Hong Kong, in Belgium, in Germany, in Canada, the USA and the United Kingdom. We signed deals and delivered services across the broad spectrum of our products, including incentive compensation, objective and quota management, on boarding and channel management.

Our new signings included América Móvil in Mexico, the largest telco in Latin America, Comcel in Colombia, E-Plus in Germany, a mobile telco operator with 19 million subscribers, KPN in Belgium, a leading provider of telephony and internet services, continuing our strength and leader ship in telco. We singed Artificial Life in Hong Kong and VP Healthcare in New York State, Blue Cross of Northeastern Pennsylvania, extending our leadership in insurance again.

In general markets, we signed Bluegreen Corporation a leader in vacation and the land management business. We signed a New Wells Fargo unit for on demand. We signed ADT, the UK’s leading security company, Dubaco, an oil services company and we extended our footprint in Health Net, the Vodafone Group, AAA Michigan who convert on demand, Genentech, ESPN, Fairpoint Securities and Philips Medical amongst others.

In the quarter we also partnered with the Aberdeen Group on a Callidus specific study, derived from Aberdeen’s sales performance management, getting everyone on the same page reports. Reports find with Callidus customer in particular significantly out performed the best-in-class organizations on key sales effectiveness indices.

Reports fined that Callidus customers achieved 24% higher adoption of processes to replicate superior sales behavior. The Callidus customers achieved 48% shorter sales cycles. The Callidus customers achieved 76% shorter time to productivity than new sales executives. The study is an independent confirmation that not all SPM solutions are equal and confirms the Callidus’ position as the key business partner to help drive more sustainable, repeatable sales growth.

Sales performance management mission is expanding internationally as I said and we are pleased with the levels of activity and what is normally considered acquaint to summer quarter. We relocated both our global and EMEA headquarters during Q3. Both moves had a positive impact on the productivity of our teams, but at the same time reducing cost significantly going forward.

In EMEA our new HQ is shared by none other than Vodafone Corporate HQ Group in the West end of London. We held a very successful EMEA user group meeting in October at our prestigious new venue.

In the quarter we went live with our first self service onboarding insurance customer. We now have 77 insurance customers. All of which are good candidates for the solution. While this is an emerging opportunity, we believe the onboarding and producer management need and insurance alone over time may be as big as the commissions business we have today.

Both onboarding and producer management solutions can be procured and implemented in a modular fashion delivering value with or without the core commission solution alongside. We will begin to take the self service onboarding solutions to market aggressively in Q4. We are also seeing strong interest in our coaching solutions. And expect to bring some new business deals to closure before the end of this year. Lenovo already used the solution for internal and channel sales executives around the world.

Turning to our services business. I was pleased with the progress we made in the quarter. Gross margins went from negative 16% in Q2 to positive 8% in Q3, representing a swing of 24%. Utilization was up and remained high throughout the quarter and our average billing rate also improved. The services group with its broad based service offerings had another solid quarter of bookings which bodes well for the future revenue. At the same time, we believe our services partners also enjoyed good business in the quarter, reflecting rising demand for Callidus solutions.

Now let us take a minute to talk about our solutions roadmap. I feel our core incentive business continues to be as strong as ever. We coined the phrase sales performance management extending the value proposition of incentive management. A roadmap today flushes out the top of mind business issue of managing sales performance and sales effectiveness.

The sales hire in the management of sales talent presents an organization with a unique and large problem set. Our sales hire is more expensive from a direct cost perspective than any other hire. A sales hire is more risky than any other hire. A sales hire represents more opportunity cost than any other hire and the lifetime direct costs of sales hires far outstrip any other roles in a corporation.

This is a central truth that’s becoming well understood by corporate leaders and the search is on for solutions to support the entire sales talent life cycle. Our SAS based onboarding channel management quota management by objectives, incentives, awards, and coaching solutions further be enhanced by our on demand sales selection solutions to be released in the first half of 2011. At the previously mentioned EMEA user group and our annual high technology user group, the expanded solution was well received by existing customers and prospective customers.

Let us look at Q4 outlook. In Q4 we see revenue in the range of $18 million to $19 million, reflecting continued growth in the recurring revenue line and stability in our consulting business. This would represent between 17% and 23% year over year growth. Our non GAAP operating expenses are expected to be between $8.2 million and $9.2 million. I expect some small improvements in the recurring revenue gross margins which Ron will expand on later. I also expect our consulting services business to continue to produce positive gross margins.

Looking further ahead to 2011, our goal is to achieve continued double-digit top line growth and solid profitability. At the same time, I have asked the management team to pay special attention to expanding our gross margins. Specifically we will implement 2011 incentive regime which targets a 10 percentage point improvement in the recurring gross margins in the year. Where and when prudent we intend to expand sales coverage in key regions as operating expense rise.

As I said at the beginning of the call, we signed major business all over the world and we believe we are well positioned to expand our global customer footprint over time. Now, let me hand over to Ron to go through the financials in more detail.

Ron Fior

Thanks Leslie and good afternoon everyone. Achieving non GAAP operating profit of approximately $400,000 represents a significant milestone in our transition to a profitable recurring revenue business. While we had a little more license revenue from emerging markets, we could not have made this happen without the growth in our recurring revenue base and our efforts to significantly reduce our operating cost. Recurring revenues are up 18% and GAAP operating expenses are down 23% from the prior year.

We grew billings by 27% over Q3 of 2009. Billings are calculated as the change in deferred revenue plus recurring revenue. We also began to see the impact of the changes in leadership in our services business. Services margins were positive for the first time in a year, coming in at 8% compared to 6% in the same quarter last year.

Now I’ll walk through our Q3 results in more detail. Unless I mentioned otherwise the comparative percent increases or decreases or as compared to the same period of the prior year. Let us look at total revenue. Total third quarter revenues were 18.5 million up 6% from the prior year primarily due to an 18% increase in recurring revenues over the same period. License revenues were also up by $766,000 due to an increase in license sales in Asia-Pacific and Latin America. The third quarter decline in services revenues as compared to the prior year was mostly as expected.

On a sequential basis, total revenue increased from 17.1 million to 18.5 million or approximately 8%. By geography, 87% of third quarter revenue is generated in North America. This compares to 90% in the third quarter of 2009. Revenues continue to be diversified by vertical which break down as follows: Insurance 31%, high technology manufacturing and Pharma 32%, telecommunications 13%, banking 17%, and retail and distribution 7%. All of these are roughly comparable to the Q2 levels.

Now looking at recurring revenue, recurring revenues represented 72% of our total revenues in the third quarter, down from 77% in the second quarter reflecting the increase in sales in Asia-Pacific and Latin America which were on a perpetual license basis. We expect recurring revenues to run at or above the 75% of revenues through the balance of 2010. Recurring revenues for the quarter were 13.2 million up 18% due to the growth in our ondemand subscription revenue and our term license revenues which together were up 38% compared to the same period last year.

On a sequential basis, recurring revenue were essentially flat as the increase in ondemand revenues was offset by lower maintenance revenues primarily due to convergence from perpetual license to ondemand. Renewals in both ondemand and maintenance remain strong around the 90% level, however, as expected Nortel after running for almost two years under bankruptcy has ended the use of our ondemand services. Recurring revenue gross margin for the third quarter was 50% up slightly from 49% in the prior year period and down from 54% in the prior quarter.

When comparing to the prior quarter, it should be noted that over two points of Q2’s margin related to a one-time conversion benefit in the recurring revenue. The balance of the decrease in margin from the prior quarter reflects the increased use of third party contractors in response to the expansion of our business operation services during the quarter. These services are more people intensive and as a result generate lower margin. As Leslie mentioned, however, we are focused on expanding our recurring revenue margin, a significant part of management’s 2011 incentive goals will be targeted towards driving a 10 basis point increase in recurring margins.

Services business. Services revenues for the quarter were 3.6 million down 33% from the same period last year and up 3% from Q2. The decrease in services revenue from prior year was mostly as expected as we transitioned to the predominantly ondemand implementations which are shorter and less expensive. While services revenue were only up slightly up from the second quarter, services margin improved sequentially from a negative 16% to a positive 8%.

Under our new executive leadership we have begun to see increased utilization and an increase in our average billing rate. We were also successful in maintaining customer acceptance on a significant project with non standard acceptance terms, which drove revenue and also contributed to the improved margin. While we expect further improvement in our services margin, we do not expect services revenue to return to the level it was under our old perpetual license business model.

Perpetual license business. Perpetual license revenues were 1.6 million in the quarter up 766,000 from the prior year period, primarily as a result of strong business in the emerging markets of Asia-Pacific and Latin America as well as the recognition of approximately $300,000 related to deals booked in prior quarters.

As we have mentioned in previous quarters, certain customers in emerging markets continue to prefer perpetual licenses. As a result, we except future perpetual license business to fluctuate based on our success in penetrating these emerging markets. Overall gross margin, our overall gross margin for Q3 was 46% up from 37% in the prior year and 40% in Q2. The increase from Q2 reflects the improvement in our services margin and the higher license revenues.

Operating expenses. We continue to manage operating expenses aggressively. In Q3, overall operating expenses were 10 million down 23% from the prior year and 5% from Q2. On a non-GAAP basis, excluding the impact of restructuring charges totaling $450,000, stock based compensation expense of 1.1 million and amortization of acquired intangible assets of $157,000, operating expenses were 8.3 million consistent with Q2 levels and a decrease of approximately 1.9 million from the prior year quarter on the same basis.

Restructuring charges: Unlike previous quarters, restructuring charges of $450,000 did not relate to people, but were primarily facilities related. Stock based compensation by line item is disclosed as a footnote in the income statement included in our press release.

Employees. Our total head count at September 30th excluding contractors was 261 employees, down 9 from the end of June.

Balance sheet and cash flow. We finished the quarter with 27.8 million in cash and investments. This is a decrease of 1.9 million from the prior quarter. The combination of new billings and slightly lower collections helped to increase our receivables balance by nearly 2.4 million from the prior quarter. Timing is everything as we received over $1 million two days after quarter end. This increase in accounts receivable combined with capital expenditures of approximately $900,000, that’s excluding a leasehold improvement were the primary reasons cash decreased from the prior quarter.

Day sales outstanding for the quarter were 78 days down 2 days from Q2. Excluding the impact of changes in our deferred revenues, DSO would have been 74 days. Total deferred revenue including both short and long-term decreased by $460,000 to 28.8 million. This decrease is primarily related to the timing of maintenance renewals for our legacy on premises business.

Total capital expenditures were approximately 1.9 million in the quarter. This includes approximately 1 million of leasehold improvements that were reimbursed by tenant allowances in the lease of our new headquarters. On September 30th, we continued to hold approximately $800,000 in par value auction rate securities secured by student loans. We will continue to carry these auction rate securities until we are able to sell them. They are classified as long-term due to the lack of liquidity.

Now let’s turn to Q4. I want to remind you of the safe harbor language provided at the beginning of the call. Further it should be noted that we plan to update any guidance only during our quarterly conference calls. As we have indicated, we are focusing all our energies on recurring revenues streams.

At the same time, we continued to expect to realize some perpetual license revenues on a quarterly basis primarily from Latin America and Asia-Pacific. For Q4, we are expecting total revenues to be between 18 million and 19 million. This would represent an increase of approximately 17% on the low end of the range and 23% on the high end of the range compared to the fourth quarter of 2009.

Total revenue is made up of recurring revenues and services and other revenues. Operating expenses are expected to be between 9.9 million and 10.9 million and include approximately 1.7 million of stock based compensation. Therefore, on a non-GAAP basis, this would translate into a range of 8.2 million to 9.2 million down from the fourth quarter 2009, but up slightly on a sequential basis primarily due to increased legal fees and higher audit costs tied to year end.

We remain committed to sustaining operating profitability on a non-GAAP basis in the fourth quarter. We continue to execute on a number of our key operating objectives that are critical to this effort. While we expect to incur some additional operating costs in Q4 related to our annual audit and legal fees, the benefits of our lower premises costs should help moderate any increase in our operating costs. We expect to start to see the benefits of our ondemand margin improvement plans through improved margins in Q4.

We expect our services business to continue to produce positive gross margin and build upon the progress made in the third quarter. We have over $500,000 of quarterly recurring revenue expected to come online in Q4 as projects sold earlier in the year go live and trigger the start of revenue recognition. This amount decreased from the 750K we reported in Q2 as the timing of the completion of one of the projects led by one of our partners was delayed until Q1 of 2011.

During this quarter we will be attending the AEA Classic Conference November 9th in San Diego and the Needham Growth Conference in January in New York. We hope to see you at one of these conferences.

I would now like to open the Q&A session. Operator will you please prompt for questions?

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Chad Bennett from Northland Capital Market. Please proceed.

Ian Kell - Northland Capital Market

This is actually Ian sitting in for Chad today. Thanks for taking the call. Can you give us some color on the license side at 1.6 million, I know you said it is going to fluctuate, but we have been looking at it about 0.5 million a quarter going forward, is that an incorrect way to think about or should we - are we going to be thinking more on a million a quarter, just some in put there.

Leslie Stretch

Yea, if you look at the guidance for Q4 and the color around it, we’re talking about growing recurring revenues in the services businesses, but we had an opportunity with two deals in particular, competitive deals one in Latin America and one in Hong Kong where the customers there are just harping on their enterprise cost customers that wanted a specific solution. And so we took those deals, but you shouldn’t think about as that kind of number going forward.

Ian Kell - Northland Capital Market

Okay. And then ondemand bookings in the quarter, was that up sequentially?

Leslie Stretch

Yes.

Ian Kell - Northland Capital Market

Yes it was. Okay. Sorry, if I miss that. All right, and then as well, as we look at the services business, should we expect sort of a kind of a steady state revenue story here with expanding gross margins or are we going to get both of those growing areas going forward?

Leslie Stretch

For now we will take steady states, expanding margins. There will be a little bit of growth through 2011. We see lots of partner implementations and that is important to us having a strong partner ecosystem, most of the implementations actually are done by the third parties. A little bit of growth and expanding margins.

Ian Kell - Northland Capital Market

Okay, great. And my last one just can you give us an update on your partner business through sales force, kind of how that is trending and if you get anything meaningful out of that?

Leslie Stretch

Yes, we still. I mean off the deals that we signed maybe as much as third of that was public sales force customers. We are going to be releasing an integration story with sales force soon, so that continues to be a good contributor to our business.

Operator

Our next question comes form Kevin Liu from B. Riley and Company. Please proceed.

Kevin Liu - B. Riley and Company

Hey, good afternoon guys. Just starting with the perpetual side, also, one thing I wanted to clarify. In the press release it said you had some ratable recognition there, so just wanted to check if it's just stuff that came in on the balance sheet that you were referring to or if indeed you are recognizing some term licenses there for the foreseeable future?

Ron Fior

No the term licenses don’t get recognized there. This was totally related to deals that were closed earlier in the year that we were unable to recognize until this point in time.

Kevin Liu - B. Riley and Company

Okay, so most of that should have already flowed through onto the P&L? There's not much left in the deferred revenue?

Ron Fior

It is a little bit more that will flow through in Q4.

Kevin Liu - B. Riley and Company

Okay, all right. And then in terms of the gross margin target for the recurring piece next year, there is a 10 point increase you're targeting. I'm assuming that's just the rate exiting Q4 of next year?

Leslie Stretch

Yes.

Ron Fior

That would be a good accomplishment.

Leslie Stretch

Yes, we will give you colors as we go through.

Okay. And, also, Ron, you were making some comment about what impacted it this quarter. I heard something to the effect of a conversion, but didn't quite catch everything. If you wouldn't mind getting into that again?

Ron Fior

I am not sure margins, gross margins in the recurring revenue business change in the future.

Leslie Stretch

There was a time of change between Q3 and Q2.

Kevin Liu - B. Riley and Company

Yes, I thought I heard you say there was some sort of customer conversion that impacted that or some beneficial

Ron Fior

That’s correct. In Q2 and we talked about this last quarter, there was about $300,000 in the recurring revenue line that related to one-time conversion fees. And so if you took that out of last quarter, you have been sitting around 12.9, and then you would have seen a nice increase this quarter.

Kevin Liu - B. Riley and Company

Okay. And then just as you look towards fiscal '11 and you're targeting double-digit growth, obviously, and continuing to see traction on ondemand, what's the thinking around investments on the sales and marketing side, in particular, in order to get some of that growth?

Leslie Stretch

Yes, our growth projections at the moment are based on continued, fair to middling economy, we think things are a bit better, in particular economies around the world, fair to middling based on our business and based on pretty much the quota bearing inventory that we have today.

However, there is an expansion opportunity, what I am alluding to in the script is that we see that opportunity fairly clearly in certain markets and we are going to look at selective hiring. We had good results in our emerging markets; we had good results in EMEA.

We see opportunity there unlike others in our space and we see an expansion opportunity, we see demand for the broader solutions. We are going to selectively continue to hire top sales talent. We are going to be prudent of course and keep the bottom line commitments that we made.

Operator

Our next question comes from Ted Ketterer, TK Associates. Please proceed.

Ted Ketterer - TK Associates

You're doing really good work as far as what I can see. Leslie, could you, and this is probably because I'm getting too old -- but could you go into what is on-boarding because you're talking, and if I heard you correctly, you said you thought there was as much or even bigger growth potential than in sales performance management?

Leslie Stretch

Sure, thanks. Thanks for that question. Actually it’s a good question. Today is a vertical play in insurance. We went live in the quarter with our first onboarding customer and that was Wellcare we went live. It is a self-service tool that allows an insurance agent to move from carrier to carrier and get himself credential, licensing credential unappointed, so on insurance companies’ products. For example, if you are selling for Allstate, and you want to go, and you moved to different region or whatever reason you want to go and sell additionally or otherwise Atlas products or Wellcare’s products or Kaiser’s products.

The idea is to go to a self-service portal and produce and get your backgrounding information produced, get an online real-time check with a national insurance producers register and get yourself appointed quickly. And we can do that process in 30 minutes.

The manual process takes days; in fact actually it takes weeks and in some occasions even months. It’s a long process. And that is a long time to market for the insurance carrier and insurance agent. It’s aimed at selling the solution to insurance carriers to enable them to bring their sales forces on faster and contract with them faster.

We contract with them online faster. It’s probably more information than you wanted. But, that is the current shape of that product. It is actually though a general product for onboarding sales entities, channel entities, and so on. Self-service, SAS products, very powerful return on investment. It cuts down administrative heads at the carrier side, insurance customer side, cuts the people shuffling with paper, speeds up time to market for the carrier and is a must better experience for the insurance agent.

Ted Ketterer - TK Associates

Now you got me thinking. How many boarding incidences are there in North America every year?

Leslie Stretch

Let me give you one example, one customer. We have - of one company. One main, large company, large insurer in the life and P&C, and the property and casualty business. That customer last year without the self-service onboarding solution brought on 12,000 agents in the course of the year.

In the first four months of 2011, they brought on 12,000 agents. That is just one company. We have customers who have active agent populations of 100,000 plus in the producer management side and the commission side. They are looking at in some cases 5, 10, as much as 15% churn.

There is another piece to this and that the tool also deals with the renewal of an agent’s licensing credential. Existing, whilst you might have churn say 10% or 20% in your agent population, there is a big onboarding situation going on. If you issue a new product, there is a big onboarding situation going on. But, the existing agents themselves have to use the tool to renew. It’s aimed at large populations and its self-service and a very prudent provision.

Operator

Our next question comes from Gregg Speicher from 451 Group. Please proceed.

Gregg Speicher - 451 Group

Hey, guys. I would just like to ask about the Nortel. How much on-demand revenues are coming off, and how much is coming out of the deferred revenue on Nortel?

Ron Fior

Yes, so Gregg, it’s approximately 300,000 on a quarterly basis and that’s built in to our forecast going forward and it’s also built in to the retention rates that we talked about of 90%.

Gregg Speicher - 451 Group

Also how much of that is in the deferred revenue?

Ron Fior

There is not deferred revenue. There is not.

Gregg Speicher - 451 Group

Okay. Okay. Are any verticals still remaining very, very challenging or geographies, or would you say it's fair to middling everywhere? Are there some particular very tough places these days?

Leslie Stretch

There is real interesting pockets in Europe and Europe has been challenging and that has improved a little. That in the emerging markets; it is really very exciting now. We have a footprint, good footprint in Asia-Pacific. We’ve hired there and we’ve hired in Singapore and Hong Kong and we are hiring in Australasia.

We have a good opportunity set there. North America continues to be good for us and we have signed theses banner telcos now down in Latin America, with those two telcos we have got four of the largest telcos in Latin America and we have got two of the largest telcos in the world.

The product opportunity is different in different markets. We got good product momentum and in those markets, we’ve got good momentum and opportunity as well. It’s the economy, the economy is still fair to middling, but despite that our growth projections for next year is conservative. It’s based on kind of steady state. If we get catalysts externally from the economy, things will change, if the new products take off then things will change again.

Gregg Speicher - 451 Group

Okay, last question. Do you think, are we ready to say that the service revenue has sort of bottomed here? Can we up our service revenue estimates or will it still bounce around a little bit?

Ron Fior

It’s more. It’s flat to may be a little bit up. I mean I would not go crazy at this stage, but we continue to see a continued improvement in margin though which is (inaudible) really critical for this.

Leslie Stretch

No, no. It’s got the power, yeah. It is the quality of the revenue. And also our partners, we’ve got a really great team of consulting experts here. We are seeing a good momentum in the Callidus partner business, I do not refuse on your checks, but we are seeing that happening as well.

Operator

Our next question comes from Gene Weber from Weber Capital Management. Please proceed.

Gene Weber - Weber Capital Management

Hi, Leslie and Ron. Congratulations on making the objective that you put there. Just a couple quick questions, and Ron, I apologize. You went through some of the numbers pretty fast, and I just wanted to verify a couple of them. You said that billings were up how much year over year?

Ron Fior

27 percent.

Gene Weber - Weber Capital Management

Okay. And that’s all billings or was that on demand?

Ron Fior

That is looking at the change and deferred and adding in the recurring revenue billings. That is only the recurring revenue number.

Gene Weber - Weber Capital Management

Okay.

Ron Fior

It does not include services or license.

Gene Weber - Weber Capital Management

Okay, yes. That is right. As you've reported it before most of the time. And then I heard this right. You said in terms of what your tentative objective for improved recurring revenue gross margin during 2011, you said 10 basis points.

Ron Fior

Correct.

Gene Weber - Weber Capital Management

Do you mean 10 percentage points or 10 bases points?

Ron Fior

Sorry 10 percentage points.

Leslie Stretch

10 percentage points.

Gene Weber - Weber Capital Management

Right okay. Okay.

Ron Fior

That is a good point.

Leslie Stretch

Good catch.

Gene Weber - Weber Capital Management

Okay. And then the last thing is, and I assume this is your facilities expenses around the G&A line. What kind of decrease was there this year versus last year in your facilities charges, roughly?

Leslie Stretch

The savings will actually only start in Q4 actually and they are almost 300,000 a quarter.

Operator

Our next question comes from Ted Ketterer - TK Associates. Please proceed.

Ted Ketterer - TK Associates

Thanks, guys. I apologize for all that background. Just coming back to boarding for one quick. In your Q4 and goals for 2011, do you have any boarding revenues in those numbers?

Leslie Stretch

Mostly making, literally no assumption about new products. We’re focused - if we got, we knew its tough and it is the core business, those are the goals we want to make.

Ted Ketterer - TK Associates

Okay. One last question on boarding. Does the industry have some norm or average price or average cost for boarding?

Leslie Stretch

Not really, but there are proxies. If you think of the background check business where an employer pays something like 20 to 25 bucks for a simple background check. The onboarding process has a number of those things in it. It has a background check; it also has a tool from the national insurance produces register.

It then has putting together of the information in order to appoint and contract with the agents. It has quite a bit more value than that and the industry charges, the background check industry charges per check, so it does not charge prior payee per month or any of those conventions. What I can tell you is we believe it is a good revenue and margin opportunity for us akin to our core products.

Operator

Our next question comes from Michael Nemeroff from Wedbush. Please proceed.

Mike Anderson - Wedbush Morgan Securities

Hi guys. This is Mike Anderson for Mike Nemeroff today. Just wanted to get a little bit more color if possible and maybe you did say this before. Can you just quantify a little bit more the maintenance on-demand transition that you were seeing this quarter?

Ron Fior

The split, for your information on maintenance and ondemand, the recurring revenue business accounted for 8.4 million of the 13.2 million and the balance was in maintenance.

Mike Anderson - Wedbush Morgan Securities

Okay. And just to follow up on that, how many customers in your pipeline are looking, you still think are looking to go on demand? And if that happens, does that hinder your subscription growth in the near term if there's a lot of those transactions that are going to happen?

Leslie Stretch

Because of the conversion aspect?

Mike Anderson - Wedbush Morgan Securities

Yes.

Leslie Stretch

There is a small part of the pipeline we are focused on new business signings; it is a small part of the pipeline.

Mike Anderson - Wedbush Morgan Securities

One last question. What was the, just give us an idea maintenance for your overall rate if possible?

Ron Fior

The maintenance continues to be 90% or above.

Mike Anderson - Wedbush Morgan Securities

Okay, so you did, you said it before. Okay, great.

Ron Fior

Yes. Maintenance and ondemand, those, all parts of that are running very close or around the 90% level.

Mike Anderson - Wedbush Morgan Securities

Great. That is the dollar amount?

Ron Fior

Dollars and customers either way.

Operator

There are no more questions at this time.

Ron Fior

Okay.

Lorna Heynike

Okay, thanks. I would like to thank you for joining us on our call today and we look forward to speaking with you again in the next quarter. Thank you.

Ron Fior

Bye.

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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