Callidus Software's (CALD) CEO Leslie Stretch on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Callidus Software, (CALD)

Callidus Software Inc. (NASDAQ:CALD)

Q2 2014 Earnings Conference Call

July 31, 2014 4:30 pm ET

Executives

Bob L. Corey - SVP and CFO

Leslie Stretch - President and CEO

Analysts

Michael Nemeroff - Credit Suisse

Chad Bennett - Craig-Hallum

Koji Ikeda - Oppenheimer

Alex Zukin - Stephens

Kevin Liu - B. Riley & Co.

Mark - Northland Capital Markets

Richard Baldry - Roth Capital

Operator

Good day ladies and gentlemen, and welcome to the CallidusCloud Q2 Earnings Conference Call. My name is Sue and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Bob Corey, Senior Vice President and Chief Financial Officer. Please proceed, sir.

Bob L. Corey

Thank you so much. Welcome to the CallidusCloud’s second quarter 2014 financial results conference call. We issued our earnings press release a short time ago and furnished the Form 8-K to the SEC. To access the press release, please see the Investor Relations page of our Web-site, calliduscloud.com.

With me today on the call today is Leslie Stretch, President and CEO of CallidusCloud. The primary purpose of today’s call is to discuss our second quarter results. Before we begin, please remember during the course of this call we may make forward-looking statements about the operations and future results of CallidusCloud or otherwise that naturally involve many assumptions, risks and uncertainties. If any of the risks or uncertainties develops or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements.

For a discussion of the risks associated with our forward-looking statements, please refer to the text in the Company's press release issued today and to our periodic reports filed with the Securities and Exchange Commission including our most recent 10-K and 10-Q filings. We disclaim any obligation to update any forward-looking statements.

On today's call, we'll refer to both GAAP and non-GAAP financial measures. Please refer to today's press release for a reconciliation of the non-GAAP to GAAP financial performance and additional disclosures regarding these measures.

Additionally, in conjunction with the release of our earnings report, we have posted on our Web-site at calliduscloud.com under the Investor Relations tab supplemental charts that trend identified performance metrics that we believe will aid in understanding and evaluating our performance over time.

With that said, I will now turn the call over to Leslie.

Leslie Stretch

Thank you, Bob. Good afternoon, everyone. Today I'm going to cover four key topics; firstly, our performance in Q2 2014; secondly, a review of opportunities and business drivers for the remainder of the year; thirdly, I'll update you on our progress in the mobile learning business; and fourthly, I'll provide some color on our outlook for 2014 and beyond. But before I begin, I'd like to thank every one of my colleagues at CallidusCloud for their efforts in our 15th quarter of double-digit revenue growth.

Now, a quick review of our performance in Q2 2014. I was pleased with our sales, service and operational performance in Q2. We had record total revenues and record recurring revenues. We expanded our margins and in particular our recurring revenue margins. We added 111 new customers with notable wins in the sales, marketing and learning businesses. We had our most successful customer event ever, C3, in Las Vegas in May.

We made money and generated cash from operations. We stepped up recurring revenue sequentially by over $1.4 million and we were able to convert the holders of our 2011 convertible bond two years ahead of schedule, and we added a significant amount of cash to the balance sheet from both operations and from the sale and the rationalization of our expanding inventory of trademarks and domain names.

Our services business grew primarily as a result of prior quarter's success in winning large SaaS commissions deals. I expect to see sustained expansion of our services business in the near-term as we continue to add SaaS customers.

Our Lead to Money cloud is a compelling proposition. During the quarter, we signed a record number of multi-product and suite deals. Notable customer wins included, Experian, the leading global information services company and an existing CPQ customer for our Lead to Money suite; Logicalis, an international IT solutions and managed services provider for our Lead to Money suite; Star2Star, a leading provider of unified cloud communications for our Lead to Money suite; Cross Match Technologies, a global provider of biometric identification solutions for our Lead to Money suite; [Legal] (ph), a business consultancy firm in Japan for our Lead to Money suite; ACTIVE Network, a leading provider of online registration and event management software for our Lead to Money suite; Qualtrics, the industry-leading provider of online survey software for Commissions and Litmos Mobile Learning; AppDynamics, a software monitoring and management provider, for Commissions, Sales Selector and Litmos Mobile Learning; Progrexion Marketing, a fast-growing marketing services provider for Commissions; Mobinil, an Egyptian telecommunications leader for Commissions; [Henkel] (ph), a multinational group of manufacturing companies for Marketing Automation; APC, a provider of power protection products and services for Marketing Automation; BSkyB, the broadcasting and communications leader in the U.K. for Marketing Automation; Tata Global, a big data IT consultancy for Marketing Automation, and Airangel, one of the U.K.'s leading providers of guest Internet access again for Marketing Automation.

On the mobile learning front, Litmos continues to enjoy rapid growth. In fact, Litmos revenue more than doubled compared to the same quarter last year and Q2 bookings in Litmos grew 26% over Q1. At the same time, we saw improvement in Litmos ASPs, average selling prices. We also launched our new learning content offerings at C3 which are already producing customer contract. The content offering includes 1,000 online training courses focused primarily on management and selling across a variety of industries.

Some notable customer wins for our Litmos Mobile Learning solution included; VMware, a leading cloud and virtualization software company for Litmos; Dropbox, the file sharing provider for Litmos; Standard & Poor's, a multinational financial information provider for Litmos Mobile Learning and Litmos course authoring; and Black Turtle, an outsource contract center services provider for Litmos Mobile Learning and Litmos Mobile Content.

Now let me give a brief review of business drivers as we look forward. Let me talk about the sales pipeline and marketing activities. In May, we hosted our annual user conference C3 as I mentioned. This is our largest user event to date and nearly double the size of last year's conference with over 70 breakout sessions covering all aspects of sales, marketing and learning. Our partner ecosystem was out in force. Leading systems integrators such as Accenture, Deloitte and Wipro, all sponsored the event, as well as a growing channel of independent software vendors including Salesforce.com. C3 has already yielded strong returns on our increased investments with closed business and more than double the pipeline of sales opportunities as compared to last year's event.

Also during Q2, we sponsored key industry events including SAP Insider CRM 2014, NetSuite's SuiteWorld, the Gartner 360 Summit, Sirius Decisions Summit 2014, Forrester Forum for Marketing Leaders in EMEA, and the Salesforce 1 world tour in Atlanta, Boston, Chicago and London, and DocuSign Momentum in the U.K.

At the end of Q2, our Web-site had a nearly 70% increase in visitors as compared to the first half of 2013, which is a factor in the increased pipeline. Our sales development team identified over 60% more sales opportunities in the first half of the year versus the same period last year. This growth is apparent across the portfolio of products from Marketing Automation through to Configure-Price-Quote and Commissions.

Let me update you on our channel ecosystem. Our channel business performed well in Q2 with 83 contracts coming through the resellers and alliance partner ecosystem, more than double that of last year. Our global network expanded further with new partners and resellers added across Latin America, EMEA, North America, including an agreement with Appirio, a leading global cloud services company.

Let me now update you on our sales force expansion. We expect to continue to increase our productive sales capacity during Q3 and Q4. We are targeting 100 quota bearing sales executives by the end of this year and I'll remind you that the successful expansion of productive sales capacity also depends on the addition of skilled technical sales engineers and the availability of high-quality and preferably SaaS oriented sales executive talent.

Let me talk about international expansion. We now have sales and service investments in Asia Pacific to pan Latin America and EMEA. We believe India will show steady enhanced appetite for Lead to Money cloud solutions in the coming quarters and years. But we have also seen promising signs in APAC and Latin America. Just this month we held our inaugural APAC C3 Conference following the opening of our new Japan HQ in Tokyo. We were joined by customer speakers from Panin Dai-Ichi Life, a leading Indonesian insurance provider; Telstra Global, a leading telecommunications and information services company; and AIG, the world's largest insurance organization. The event provided a great opportunity for networking with current and future customers and I'm excited by the opportunities ahead.

Now, let me talk about a new product as a business driver. At C3, we unveiled our Contract Lifecycle Management Solution integrated with DocuSign electronic signature. We gave a preview of the powerful visualizations offered by Thunderbridge and revealed our latest mobile and user interface innovations. We demonstrated how to move to quota contract all from a mobile device, crushing the last mile of the sales cycle. In our forthcoming winter release later this year we'll be adding revenue management functionality to address the shortcomings of the manual renewals processes that companies currently deal with.

As many of you know, in 2017 U.S. GAAP will be mandating that all public companies adopt important revenue recognition changes related to the incentives and commission process. We're enhancing key functionality in our flagship Commissions solution that will enable companies to better manage the incentives and commissions process with this in mind. This is an important opportunity for the commissions business and we expect to be first to market to meet these expanded requirements.

Finally turning to our outlook, as a result of the drivers I've just reviewed, I believe we will continue to show strong SaaS revenue performance in the second half. Correspondingly, we're bringing up our guidance and continuing with our profitable growth strategy. I'll now hand over to Bob for a more detailed review of the financials.

Bob L. Corey

Thanks, Leslie, and good afternoon everyone. Before I begin my detailed comments on Q2, I'd like to thank each and every employee for their hard work that has contributed to our success in Q2. I'd like to remind everyone again that the financial figures I discuss today are non-GAAP unless I state the measure is a GAAP number. All revenue numbers I discuss are GAAP.

During our second quarter, I'm very pleased to report that we continued to build on the momentum established over the last few quarters and strengthened the balance sheet with an increased cash balance and we converted all remaining convertible notes. As a result, we exited the quarter with nearly $42 million in cash and investments with zero convertible debt.

Total Q2 revenue increased to $32.5 million, an increase of 25% year-over-year and a record SaaS revenue of $19.6 million increased 24%. During the quarter, we signed 109 net new subscription customers. As there were no multi-year billings during Q2, our calculated SaaS billings growth was 9% for the quarter. This does not represent the momentum in our business. Excluding multiyear billings, our calculated billings growth rate for Q2 this year is about 34%.

I've identified on past calls the metrics we believe are essential to evaluating our operating performance. To remind you, they are SaaS revenue growth, expansion of SaaS deferred revenue on the balance sheet, positive cash flow from operations, customer retention rates and continued expansion of our productive sales capacity.

Reviewing each of these briefly, record SaaS revenue for Q2 increased 24% year-over-year. SaaS deferred revenue was a record $48.7 million and has increased 43% year-over-year. Cash flow from operations was positive for the fifth consecutive quarter with cash and investments increasing to nearly $42 million. We have expanded our productive sales capacity by about 50% year-over-year. Our non-GAAP earnings per share was $0.02 positive per share and we continued to invest in productive sales capacity, marketing personnel and programs.

Okay, let's move on to some specific results for Q2. Unless I mention otherwise at, the percentages increase or decrease are as compared to the same period of the prior year. Looking at our recurring revenue business, total recurring revenue for the quarter was $23.7 million, a 21% increase from last year and up sequentially by over $1.4 million. SaaS revenue, which totaled $19.6 million, increased 24% compared to $15.7 million for the same period last year.

During the quarter, we closed 12 deals with non-cancelable multiyear terms with total contract value of about $2.7 million. Overages were not material during the quarter. Maintenance revenue of $4.1 million was as expected and we anticipate consistent maintenance revenue over the next several quarters.

During the quarter, the mix of contracts with annual terms came in at 73% as compared to 78% in Q1. The slight decrease in the mix is the result of an increase in our learning cloud deals which typically have a higher mix of contracts with other than annual payment terms. Lastly, our enterprise customer retention rate continued to be 90% plus based upon the number of contracts.

Our recurring revenue gross margin increased or expanded to 72%, up 1% sequentially and 4 percentage points from the 68% reported in Q2 last year. We anticipate continued gross margin expansion this fiscal year and we are targeting 75% gross margin in Q4.

Let's turn to professional services and licenses revenue. Services and license revenue for the quarter were $8.8 million, an increase of $2.5 million or 40% growth from the prior year. Professional service revenue was $7.6 million in Q2, an increase of 45% over last year reflecting increased implementation services resulting from the momentum in our SaaS business and recent license deals.

Separately, we closed four on-premise license deals in the quarter reporting $1.2 million in total license revenues. This increased slightly from the $1.1 million in license revenue last year. We do continue and anticipate to continue to close a small number of on-premise license contracts in future quarters based upon customer needs.

Services and license revenue gross margin was 39%, a 10 percentage point improvement from the 29% reported in Q2 last year. This increase reflects improved gross margin contribution from the professional services group coming in at 31% for the quarter along with delivering the on-premise license deals. The improved gross margin is primarily based on continued efficiencies in our professional services organization due to better utilization. We anticipate the gross margin on professional services to trend between 20% to 25% in upcoming quarters.

Commenting on operating expenses, our total operating expenses were $19 million for the quarter, an increase of 28% from last year. The increase reflects a 50% expansion in our productive sales capacity, increased commission expense commensurate with higher revenue and increase in R&D personnel and higher marketing spend.

Sales and marketing expense was $10.8 million or 33% of revenue compared to last year when the percentage of revenue was 27%. The increase in last year primarily reflects additional costs associated with expansion of our sales force, increased investment in marketing and headcount and programs and increased channel deals.

Research and development expense was $4.5 million for the quarter, an increase of 16% over Q2 last year and represented 14% of Q2 revenue compared to 15% of revenue in the prior year. We expect R&D expense to remain around the 12% to 14% of total revenue in the near-term.

G&A expense was $3.7 million, a decrease of 4% over Q2 last year and represented 11% of revenue in the second quarter compared to 15% of revenue in Q2 of last year.

During the quarter, we continued to evaluate our global footprint and took some cost-saving measures and restructuring efforts to focus resources on investment areas. The restructuring charge recognized was around $400,000 representing cost associated with consolidation or elimination of facilities and is excluded from non-GAAP operating income.

Our non-GAAP operating income for the quarter was a positive $1.4 million compared to an operating income of about $400,000 last year. The non-GAAP EBITDA for the quarter was $3.1 million, improved by $1.2 million from $1.9 million in the same period last year. Our non-GAAP net income for the quarter was $1 million or $0.02 per fully diluted share compared to the prior year quarter loss of $900,000 or $0.02 loss per share. Non-GAAP net income or loss per share is calculated based on 49.6 million diluted weighted average shares outstanding.

Okay, turning to the balance sheet, cash and investments increased to a smidge under $42 million at quarter end. This was an increase of $7.6 million from the prior quarter reflecting continued positive cash flow from operations of $1 million and proceeds from the sales of intangible assets. Cash flow from operations declined from Q1 primarily due to an increase in our accounts receivable balances associated with the timing of billings, and separately payments related to C3 expenses. With the successful conversion of all outstanding convertible notes during Q2, we have increased our net cash position from a negative $32 million last year to just under $39 million positive net cash at the end of Q2.

Days sales outstanding or DSOs increased from 77 days in the prior quarter to 82 days at the end of Q2 due to the timing of billings later in the quarter. Total deferred revenue including both short and long-term increased sequentially by $700,000 to $60.2 million. SaaS deferred revenue was $48.7 million, an increase of $1.5 million sequentially, with the balance relating to maintenance and services contracts. SaaS deferred revenue balance has increased by 43% year-over-year. Our total number of employees remained consistent at about 647 employees worldwide.

Okay, now I'd like to move on to our forward-looking financial outlook. I want to remind you of the Safe Harbor language provided at the beginning of the call. As previously noted, our goal is to remain slightly positive on income and cash flow while we continue to invest in expanding our productive sales capacity and marketing operations to stimulate SaaS revenue growth.

For Q3, we're anticipating total revenue to be between $33 million and $34 million, representing an increase of approximately 8% to 11% compared to third quarter last year. Remember license revenue in the third quarter last year included two seven-figure license deals for about $2.9 million.

Our non-GAAP operating income for Q3 is expected to be between $2 million and $2.5 million. The non-GAAP expense for Q3 is projected to include cost associated with additional headcount, primarily in sales and professional services. We are guiding non-GAAP fully diluted earnings of $0.03 to $0.05 per share. We reiterate our projections that cash flow from operations for the upcoming quarter and remainder of the year will be cash flow positive.

Turning to guidance for the full year, we are narrowing the range of our earlier revenue guidance by raising the lower end of the previous guidance to $129 million and maintaining the higher end at $132.5 million. This represents 15% to 18% total revenue growth over last year. We are projecting SaaS revenue growth at 25%.

We maintain our earlier outlook for non-GAAP operating income at $7 million to $9 million for the year and our guidance for the non-GAAP fully diluted earnings remains unchanged at $0.12 to $0.16 per share. We anticipate to continue generating positive cash flow from operations and positive cash flow for the full-year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Nemeroff of Credit Suisse. Please go ahead.

Michael Nemeroff - Credit Suisse

Nice job on the quarter. Just, Leslie, on the Lead to Money bundle that you said has been sold a couple of times, just how many products are you talking about and what kind of a pricing uplift are you seeing from selling the full bundle versus some of the individual products?

Leslie Stretch

So the bundle is between five and seven products roughly and I think it's too early and too small a sample to talk about price. We're getting more obviously but it's too early a sample to get – I don't want to get you too excited about that until we have more data. And I think the other thing is it's a real differentiator in the single [credit] [ph] campaigns against the competitors. So I was pleased with that start. I didn't expect as many of that and let's see how it progresses.

Michael Nemeroff - Credit Suisse

Then on the partnership, the new partnership with Appirio, obviously they work with some of the largest SaaS vendors in the world, are you expecting to work with Appirio on just strictly large deals or is this going to be a mix of deals that you're going to work with them on?

Leslie Stretch

I think that's a great question. I think part of the strategy there is that we see them as a very agile organization that's an expert in cloud and they can take on projects of all sizes. So I expect small, medium and large but the sweet spot is getting things done quickly in that sort of six-figure versus seven figure range, but their capability does extend across the range of our products. We see some CPQ in the pipeline, some Commissions and we expect a fleet of fast implementations. So I hope I answered your question.

Michael Nemeroff - Credit Suisse

That's great, helpful. And then to Bob, just looking at the on-demand billings, obviously a little bit lower than what we were looking for but you called out the fact that you didn't have any multiyear agreements in there. I guess that begs the question of can you help us frame the magnitude of the drop-off from the multiyear agreements that happened sequentially in the quarter and maybe just help us out what that long term on-demand billings number or deferred has trended like over the last couple of quarters?

Bob L. Corey

I think in the last five quarters or so, each quarter has had some factor of multiple year billings, and there can be two or three different deals or maybe one large deal for multiple year payments, right. So it could range into a couple of million dollars a quarter. So as we've been saying over the last two or three conference calls is, this is a calculated number that's subject to a lot of variability and we don't think it's representative of what you should look at solely for short-term SaaS revenue growth. So we are trying to highlight one of the factors that we think are important to evaluate our performance.

So as you know, Michael, mostly your billings come up when a customer wants to get into a multiple year term and they're doing it to try and get maybe better pricing et cetera, and so in the yin and yang of the negotiations paying upfront gets put on the table. So they are kind of negotiated as mature through the negotiation process.

Michael Nemeroff - Credit Suisse

So assuming that the 9% on-demand billings performance in the quarter is not representative and obviously given your reiteration of the 25% on-demand revenue growth for the year is helpful, how should we think about the billings, let's say if we don't have the on-demand billings to look at because it gets affected by this multiyear drop-off from time to time, how should we be thinking about or how should we be monitoring the growth in that on-demand revenue from a contract bookings standpoint?

Bob L. Corey

We don't give guidance on billings for all the reasons I mentioned and what we really think you have to look at if you're trying to model the business is what our [billings] [ph] on the SaaS revenue growth is going to be. So as you know we're 25% for this year and we are committed to that, that's our target for the year, and the multiyear billings will come and go quarter over quarter.

Leslie Stretch

I think the other thing to add to that is that we did have a conscious view of not discounting for cash, we didn't need the cash, but we did I think 12 irrevocable multiyear deals that were build annually. And so kind of the sales force is geared more around – we love commitment, we want multiyear commitment. So the multiyear cash in upfront and one-off things is not really our bag. But again I'm sure we will have customer situations in the future where they come along and say, we want a three or five-year deal, we want to dispose the cash now, what's the deal, and we will look at that.

Michael Nemeroff - Credit Suisse

Do you know what the metric is on current on-demand deferred billings growth rate?

Leslie Stretch

You mean the annual – I think we called out the annual in the prepared remarks.

Bob L. Corey

That's right, we do. Annually what we do is we talk about what is the growth in ACV year-over-year. And so last year in our Q4 conference call, we said that ACV growth for 2013 was 29% year-over-year. So we don't report that quarterly but we do report that on an annual basis.

Leslie Stretch

So we did give an annual figure in the prepared remarks for annual billings. We gave it 34%.

Bob L. Corey

You're talking about quarter-over-quarter, right?

Michael Nemeroff - Credit Suisse

Yeah.

Bob L. Corey

So we said adjusted for the multiyear billings, I take them out of last year and look at the difference to the growth this year versus last year was 34%.

Operator

Your next question comes from Chad Bennett, Craig-Hallum. Your line is open. Please go ahead.

Chad Bennett - Craig-Hallum

I guess a couple of questions on the sales growth, I guess where is quota carrying headcount today?

Leslie Stretch

I think we said in the prepared remarks that we are going to target 100 by the end of the year and we are approximately 80-ish right now.

Chad Bennett - Craig-Hallum

Okay. And I think you made the comment that you're up 50% roughly I think year-over-year. Is there a way to think about how much of that incremental production is productive, for lack of a better term, and at a somewhat reasonable run rate from a quota standpoint versus what is still kind of in early ramp mode or ramp mode at this point?

Leslie Stretch

So I think on the volume business if you remember there are three pieces to this, the volume business, there is the enterprise business and then there's the productivity ramp. Volume business is fast but obviously more smaller deals. So in the volume business we did fewer deals but better terms, we did more annual deals in the volume business at the low end, and so we kind of discourage those the high churn monthly deals done there. And those are easier to get to for the volume salespeople, not the relatively lower cost sales force.

The enterprise sales force which is half of that headcount today is the one where you're thinking about a couple of quarters to run, and we don't want to get too specific about that and tell our people, you can come in and do nothing for two quarters. So we have to be a little bit careful about how we talk about the ramp, but to be honest with the product portfolio today we've had people coming in from SaaS companies, who've been productive within the first or second quarter, and I can reel off a number of those. But typically you got to think about a six month ramp and then get to the half contribution and then by the fourth quarter we expect them really to be trucking at 100% quota performance, and if they're not then typically we change things around.

Chad Bennett - Craig-Hallum

Right. I guess the question, and it's probably going back to the 25% SaaS growth, we're growing the sales force 50%, channel partners I think you said maybe doubled year-over-year from a production standpoint, our conference C3 double the leads pipeline, I don't think we're seeing it today but is there reason to believe, I don't want to get ahead of you though, that we're probably early in acceleration in SaaS revenue growth at this point in time?

Leslie Stretch

The way I look [indiscernible] the way I think about it is that our aspiration is to get to 30% SaaS revenue growth over time and that's where we really want to get to. We think that's best in class and whilst we still make money, so we want to be making money, we're debt-free today and we want to grow at that pace if that makes sense. That's our plan, that's the ideal model. We're not there yet, we just accelerated the SaaS growth obviously, we had some obviously mechanical benefits but we accelerated the SaaS growth nicely, but the relative we are accelerating the growth off of a bigger base every quarter.

So I think that what we expect is, I think we've got the capacity to get to do what we need to do without going into the red, we don't want to do that. And so that's the way we think about it and that's the way we planned it, but we will be furthering 25% and hopefully 25% plus in the next year. It's off of a bigger base. I can't think beyond that at the moment but that's the plan.

Chad Bennett - Craig-Hallum

Couple of hopefully quick ones for Bob. Bob, it looks like based on the guidance and now that we know what you're thinking for the September quarter, you're going to exit the year close to 10% op margins, I think assuming you get to where you think you're going to get to. Is that a baseline we should think about growing off of going forward and kind of how should we think about leverage from there if we should think about leverage from there going forward?

Bob L. Corey

Great question. So as Leslie said, we're trying to target the productive sales force to about 100 by the end of the year. There will be some culling, we'll bring new people on, some people won't be successful et cetera, right. But trying to get to that 30%, 25% plus, 30% growth rate is kind of where we're targeting to get the Company's growth rate and we'll continue to reinvest additional operating income generated into sales capacity and marketing programs, new product innovations, et cetera, really to get to that sustained 25% to 30% growth rate.

Once we get in that range, we don't think that there's a lot of reason to continue to invest to try and take the growth much above 30% because we think that will require us to invest more heavily in sales and marketing. And so I think once we're in that 30% growth range, you can look to leverage the operating income percentage at that point. Between now and then, we're going to say in the same range of kind of where we're at.

Chad Bennett - Craig-Hallum

Got it, makes sense. Last one for me, Bob. Last year September quarter to December quarter, long-term deferred revs went up a little under $3 million sequentially. Remind me again and I can look back in my notes, were there multiyear deals obviously in that December quarter that people paid upfront for?

Bob L. Corey

Yes, every quarter since I've joined, actually except this quarter, has had multiyear billings in it, right.

Chad Bennett - Craig-Hallum

Okay, just wanted – I assumed that was a cost. Okay, thanks guys.

Operator

Your next question comes from Brian Schwartz, Oppenheimer. Please go ahead.

Koji Ikeda - Oppenheimer

This is Koji Ikeda for Brian Schwartz. Congrats on the quarter. I was wondering if you could give some additional commentary on your recent international expansion and investments, how they're tracking thus far compared to your internal expectations and if you could possibly share some of your future international sales count hiring and targets?

Leslie Stretch

So EMEA has done well in the first half of the year which is great, and we've also hired some great talent out there in both Continental Europe and in the U.K. So I'm pleased with that and I expect cloud momentum to continue and it's no accident that other companies are investing and looking at Europe, buying companies there to get footprint in cloud businesses. And I think a lot of the issues around security, the economics of SaaS really outweigh all of those kind of concerned issues that we saw a year or so ago, but we've got to be diligent about all that for our customers. So we are doing well in Europe. We signed one of our largest Marketing Automation customers in Europe in the quarter, head to head with Marketo and the other marketing automation providers. I'm very pleased with that.

In APAC it's still early days. We do have some large customers across the piece, there are some very large customers actually across APAC. And we've just gone into Japan which is the second or third largest potential market for software in the world and cloud is beginning to catch people's imagination there. So I think we're going in at the right time, we have enough business to support our expansion plans.

But still North America is still remotely under-covered to be honest. There's still a lot more – we have 80 or so sales guys around the world and 50, 60, whatever it is in North America, we still have a lot of opportunity here that just really we need to get at. So we got to balance the international with still a ton of domestic stuff where we haven't got near it.

Koji Ikeda - Oppenheimer

And I just got a quick question maybe some qualitative commentary in general on how customers are now reacting to platform suite versus silo based applications, are you guys seeing any distinct segments sizes or verticals of customers that are still kind of content with keeping separate applications where you still kind of see the need to evangelize the benefits of platform versus siloed applications?

Leslie Stretch

So it's two questions. So we are still doing, we're hammering our Commissions deals. I think we win the lion's shares of Commissions deals head to head. We did some discrete CPQ deals in the quarter, we did discrete marketing deals, I just mentioned one of them, lots of mobile learning deals. So we'll go head to head our best of breed every time, but what we're seeing, the phenomenon we're seeing is, in certain situations particularly in SMB, we can unhook a single credit offer that we can convince the customer it's not enough value for what you're paying, it actually isn't really best-of-breed anyway, and down the road why don't you want Commissions and CPQ, why don't you want marketing connected with contracts and Commission and CPQ. There's going to be a connection there. And so that's the way it's working out.

And we're also seeing some larger companies. But I have to say, uniformly, small, medium and large, the response to the Lead to Money preposition is spectacularly good. In fact I listed a dozen or so Lead to Money suite deals in the prepared remarks and they just cross industry. There are manufacturers and financial services and there are high-technology, really everything, broadcast media, everything. So it's really across industries. But it's still early days. Don't expect just to give up on the single silo opportunities as well. Commissions is going great for us, great growth business, we're the strong market leader, adding functionality all the time, new UI, new capability and tons and tons of mobile. So that's a great, great business for us and we intend to lead that space.

Koji Ikeda - Oppenheimer

Great, thanks for the color. Congrats again on the quarter.

Operator

Your next question is from Alex Zukin, Stephens. Please go ahead.

Alex Zukin - Stephens

Congratulations on the solid quarter. First just a clarifying question, Bob, on the 34% term adjusted calculated billings number, is that SaaS billings or total billings?

Bob L. Corey

SaaS billings. That's what we've consistently reported, it's just on the SaaS line.

Alex Zukin - Stephens

Okay, perfect. And then Leslie, maybe can you talk a little bit about the large deal pipeline, your confidence in that pipeline kind of exiting the quarter maybe versus this time last year?

Leslie Stretch

Sure. I'll tell you, I'll give you some anecdotes. So I gave some comparisons year-over-year in the prepared remarks but I'll just tell you, in the last couple of few weeks there we've had one of the world's largest insurers, one of the largest private banks in the West of the USA, and today one of the largest media companies in the world here in Pleasanton. So our flow through Pleasanton is bigger than it's ever been through the customer business center. So that's an anecdotal indication.

In terms of where we are with large deals, I expect the second half of this year to produce some nice large deals for us and some seven-figure SaaS deals, and there will be some licenses too but we did less license than we've done in the run rate as you know in this current Q2 that we are reporting, but there probably will still be some license out there. But really the SaaS seven-figure ACV deals, large ACV deals, pipeline is good.

Alex Zukin - Stephens

Perfect. And Leslie, can you talk about maybe your continued approach to M&A? Clearly you have a lot of product right now. Just wanted to get an update on how you're thinking about acquisitions.

Leslie Stretch

Sure and I think I'll reiterate what I've said in the past recently. We have enough to make our projections. The issue for us is having the right talent, the right sales coverage, SC coverage as well, good marketing positioning, you can see from the prepared remarks, on marketing we are all over the place presenting our solution not just in our own conference. So that's key. I think that there's just a lot more to do, lot more to do and I think we keep at it.

Alex Zukin - Stephens

Got it. And then last one for me, can you talk a little bit about the competitive environment? I mean clearly you have increased the competitive landscape, you are going and competing on other vendors' home turf. Are you seeing anybody cross over and try to compete more on your home turf and just general update on competition?

Leslie Stretch

So I don't see anybody release a world leading commissions platform in recent months or quarters, never say never. There are a few players out there that do quite well because in my opinion, and I can't give you the statistical facts, but anecdotally I'll tell you that we see a ton of SPM, sales performance management and commissions RFPs and campaigns underway, which is very exciting. But I don't think we're doing that. Clearly Oracle has got a CPQ solution and we went head to head with them a few times in the quarter and we I think listed a nice win in the prepared remarks. In mobile earnings, I think we've got a chance to really be the world leader, especially with our content story which we can say a little bit about today but we'll say a lot more in the second half of the year. I think that's very important.

And then coming back to your M&A thing, look we just got debt-free and it's great to be a money-making debt-free SaaS company, a money-making debt-free SaaS company. And so never say never because there are things out there and if we can pick up decent recurring revenue businesses that make sense within the Lead to Money framework, perhaps I won't go into which domain specifically if you don't, but if we can pick them up and tuck them in, keep our balance sheet healthy, we're going to do it.

Operator

Your next question comes from Kevin Liu, B. Riley. Please go ahead.

Kevin Liu - B. Riley & Co.

Just as you expect the targets under these larger bundled offerings, can you talk a little bit about what's your selling experience within your sales cycles, to what extent did they get dragged out longer, and then also talk about any sort of discounting you might do when you do go to a multi-bundle approach?

Leslie Stretch

Sure. So I mean we're pretty sensitive to – we don't go out there naively and say, add all this product and hang the sales cycle. We're pretty sensitive to shorter sales cycles. And by the way, often people that are buying the silos are buying one product with a view to adding another and another later on after go live and that's a very compelling story for us.

The view to pricing and discounting, look, we go up against CPQ vendor or a Commissions vendor or a Marketing Automation vendor, we have added value. As long as we can maintain our margin health, that's the key for us. We're going to use that capability to add value for the customer and differentiate the core, but so far – again as I said earlier, small sample set to talk about ASPs in the suite with any credibility. I think we need a few more quarters of execution to talk about that but I'm pleased with what we have so far.

Kevin Liu - B. Riley & Co.

And certainly the 34% billings growth on a normalized basis as well as your reiteration on the 25% guidance suggest you're seeing solid sales momentum, but maybe talk about what sort of visibility you have into that, do you already have most of what you need in order to get to that 25% growth number for the year since that will represent an acceleration from the first half or are there some deals say on the [indiscernible] side or some of the smaller faster turn deals that would contribute to that growth over the back half of the year?

Leslie Stretch

I will let Bob take that but if I answer that, I'm not going to answer that in a way that says to our sales force, take the rest of the year off. So I'll let Bob…

Bob L. Corey

I will echo that sentiment. The factors that contribute to the SaaS growth are renewals, retentions and then new period ACV booking. And so we have expanded the sales force, we're seeing that normalized, as you referred to it, billings growth rate at 34%, we need to continue to perform in Q3 and Q4 to achieve our numbers, pretty much like any company. If we had it all in the bag, we'd probably be upping all the guidance and saying we'd be more aggressive, right. So we're committed to the 25% growth and we have to continue to perform in the last couple of quarters to get there.

Kevin Liu - B. Riley & Co.

Got it. And last one for me, I think you may have touched on this a little in the script, with your services margin having run pretty high for a couple of quarters here, I'm just wondering what it is that brings the level back down into the 20% to 25% range?

Bob L. Corey

I think the utilization has been really improving over the last several quarters, and as you get on the larger backlog or contracted backlog to deliver, and as we've talked earlier, now it's on an international basis not just in U.S., your footprint to support the larger contracted backlog needs more people, right. So you'll see the utilization more normalize than what we've enjoyed say the last couple of quarters.

Operator

Your next question is from Scott Berg, Norplant capital markets. Please go ahead.

Mark - Northland Capital Markets

This is Mark [indiscernible] for Scott Berg. First off, congrats on a good quarter. Most of my questions have already been answered but I just wondered if you could talk a little color on any multi-product space and if you're seeing any different combinations or just a little color on how that's been going?

Leslie Stretch

I think we listed off a dozen or so multi-product, actually a dozen or so Lead to Money suite deals, there were more multi-product deals, I think more than in prior quarter. So I was very pleased with that and attribute a lot of that to the reaction to our customer conference in May. So very pleased with the progress so far, early days but really very pleased.

Mark - Northland Capital Markets

Alright, and then just to follow up quick, on the partners you had a lot of good additions there. How do you see that going forward for the next year or so?

Leslie Stretch

It's becoming a really solid channel business. I think I'm in the camp of a channel ecosystem for SaaS, it's absolutely essential and a great thing to have. I think it's going pretty well. I think it will do well in the second half. I think it's part of our long-term business model. So we know how to do it, we know how to make money whilst we do it, we know how to set up an environment that's good for our customers and helps our channel make money, and that's really important to us.

And we still have a small dedicated channel staff who are extremely productive and we're adding to that in the back half of the year. So I expect that addition of channel sales capacity to work out for us and to improve the channel for us. And we have added good talent in EMEA for the channel dedicated for the first time this year, seasoned experienced channel management there, and we're looking to do the same in APAC, Latin America as we go through the year.

Mark - Northland Capital Markets

Alright, you answered my next question as well, so I'll jump back on the queue. Congrats on your quarter.

Operator

Your next question is from Richard Baldry, Roth Capital Partners. Please go ahead.

Richard Baldry - Roth Capital

So really broad perspective, your cost line has been holding around $50 million a year I think back to '11. As we move forward and your growth rate accelerates, can you talk about how disconnected growth in that cost line can be from your revenue growth, is it something you can push a lot of off onto partners and so we could see the top line continue to accelerate while you're still getting significant leverage on the cost side or do the two start to move a little closer in tandem maybe the short-term, intermediate term?

Bob L. Corey

This is Bob. Great question. I think there's opportunity for acceleration of the operating income contribution. Like we commented on before, where we're adding resources to drive the SaaS revenue growth to get in that 25% to 30% growth range, right, once we start consistently performing at that level we won't feel the need to continue to invest or expand the productive sales capacity. We'll continue to invest in R&D for innovation and bringing new products to market but we think at that level we'll be able to generate a significant return to our investors and there will be a position for accelerating the operating income percentage once we achieve those targeted growth ranges.

Richard Baldry - Roth Capital

Alright, thanks. Congrats on a great quarter.

Operator

I would now like to turn the call over to Leslie Stretch for closing remarks.

Leslie Stretch

Thank you very much for joining us this afternoon and we look forward to talking to you all soon.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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