Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rally Software (NYSE:RALY)

Q2 2015 Earnings Conference Call

August 28, 2014 5:00 PM ET

Executives

Jeff Cooper – Vice President-Finance

Tim Miller – Chairman and Chief Executive Officer

Jim Lejeal – Chief Financial Officer

Analysts

Matthew Charles Pfau – William Blair & Company L.L.C.

Patrick D. Walravens – JMP Group Inc.

Michael Huang – Needham & Company, LLC

Alex Zukin – Stephens Inc.

Richard Baldry – ROTH Capital Partners

Nandan Amladi – Deutsche Bank Securities Inc.

Operator

Good afternoon, and welcome to the Rally Software Second Quarter Fiscal Year 2015 Earnings Call. Today’s call is being recorded.

At this time, I’d like to turn the call over to Jeff Cooper, Vice President of Finance at Rally Software. Please proceed.

Jeff Cooper

Thank you, operator. Good afternoon and welcome to the fiscal second quarter 2015 Rally Software earnings call. Our press release, CFO commentary, and a simultaneous broadcast of this call can be accessed on our Investor Relations website at investors.rallydev.com.

On the call today are Tim Miller, our Chief Executive Officer; and Jim Lejeal, our Chief Financial Officer. After the prepared remarks, we will open the call for questions.

Our commentary today will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS unless we state otherwise. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. During the call, we may offer additional metrics to provide further insight into our business or results. This detail may or may not be provided in the future.

The purpose of today’s call is to provide you with information regarding our fiscal second quarter 2015 results. Some of our comments may contain forward-looking statements, which are based upon information available to us as of today’s date and are subject to risks and uncertainties.

Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual Company results could differ materially from these forward-looking statements. We encourage you to review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations.

With that, I will turn our call over to Tim Miller, our CEO.

Tim Miller

Thanks, Jeff. Welcome everyone and thank you for joining us today as we report our Q2 fiscal 2015 results. I’m pleased to report Rally posted record total revenue closing Q2 with total revenue of $21.5 million. We also closed the quarter with record subscription and support revenue of $17.4 million, up approximately 23% year-over-year.

For the quarter, net loss on a non-GAAP basis was $7.4 million, or a net loss per share of $0.30 per basic and diluted share. In general, we are pleased with our Q2 results and believe they indicate that our collective efforts to return our business to high-growth performance are starting to pay off. We still have a lot to do before I’m comfortable with the state of the business, but these results indicate to us that our hard work has returned positive results, and if we stay focused and execute our future is very bright.

Let me highlight a few of the areas where our focus paid off for the business. Profitability and cash spend. For the sixth quarter in a row, that is every quarter we’ve been public, we beat our EPS outlook. Going forward, we commit to continue to increase our discipline regarding spend and ensuring every dollar is invested towards business growth, market leadership and to the benefit of our customers and stockholders.

Seat additions. We added approximately 8,700 seats this quarter, bringing our cumulative seats under contract to approximately 235,000 seats. This represents year-over-year growth in this key metric of 22%. At the close of the quarter, our top 15 customers had approximately 90,000 total paid seats. This year-over-year growth rate of total seats under contract for this key group of customers was nearly 46%.

We follow the success and growth of this customer cohort closely because they represent both our land and expand business model, which is critical for our long-term success, as well as our success in selling business agility solutions. We believe this class of customers are leaders in their respective markets and we’re proud to be their trusted Agile partner.

Competition. In the last quarter’s earnings call Q&A, I made reference to the fact we intended to become more competitive with VersionOne, a private company in our market. I’m pleased to report that in Q2 against this company, our internal analysis shows we won the vast majority of the dollars in competition for the quarter.

R&D leadership. I’m very pleased to report that in the last quarter, Rally filled key positions in our research and development group, substantially lessening the additional management responsibilities I’ve had since reporting to you in Q1 that I’d taken over leadership of this area of the business. First, Ben Buxton joins us from DigitalGlobe where he led the business’ Agile journey. Ben is our new VP of Software Engineering and I’m thrilled he’s joining our team.

Ryan Polk, an internal promotion, takes over as our new VP of Product Management. Ryan joins Ben in leading our product roadmap serving our customers. These key new team additions will help us maintain Rally’s market leadership in offering business agility solutions. We still have in place our national search for a world-class Senior Vice President of Development, and I expect to make progress on filling this role over the course of the second half of the year.

Q3 pipeline. Finally, I want to share with you that we see a very health Q3 pipeline of our business with positive signals in Q4 as well. Recall we started fiscal 2015 with a substantial investment in quota carrying headcount. These new team members are starting to mature through their on-boarding and quota carrying ramp, and as a result we’re seeing signs we believe indicate that this investment will pay off.

It’s still too early in the quarter to tell how impactful this larger pipeline will be to the business, and I caution us all to be careful in assessing this dynamic. Nonetheless, beginning in the quarter with a larger pipeline for Q3, along with a healthy Q4 pipeline already building is a positive outcome.

As I’ve stated in the past, not all our customers allow us to name them publicly. But new customers we can name, that we closed in the quarter include Appointment-Plus, Axium, Cathay Pacific Airways, Compass Learning, Digital Barriers, EBSCO Publishing, Engine Yard, Invesco, Highmark, Nexenta, PayWizard, QSR International, Rise Interactive, RMIT University, and Verizon.

Let me expand on our win with EBSCO Publishing. First, this deal was moderately competitive with both Microsoft and their Team Foundation Server product line and VersionOne. But as we engaged with the customer through the selection process and differentiated our offerings through our complete solution and our ability to scale, we won the customer’s confidence and their business. Our product announcements at RallyON, which supplemented our core offering with increased analytics and collaboration capabilities also played a role.

We continue to enjoy substantial expansion in a number of accounts again this quarter. Once again, we enjoyed expansion orders with a multinational financial services and credit card processing company as this customer added an additional 1,500 seats to their subscription. This customer has grown from an initial seat order of 1,500 seats to 5,500 seats in less than one year.

We believe there is still room to grow in the short-term, and we now estimate this customer’s identified seat potential at 9,500 seats, nearly double our estimated seat potential when this customer started with us. We also saw an expansion order from the customer we’ve identified as one of the world’s largest automakers in the form of a 750-seat expansion to this customer’s perpetual license.

We’ve increased our estimate of this customer’s identified seat potential to 7,000 seats from 5,500 seats, as our success in being this customer’s business agility partner continues. The common theme here with both of these customers is our ability to sell to the identified seat potential within an account, and the notion that the seat potential can grow over time.

Often we start a relationship with the customer with a modest seat potential estimate, but raise this estimate over time as we deliver on our promise to be the customer’s business agility partner in their go-to-market efforts.

Regarding our competitive landscape, I mentioned already the substantive improvement in our head-to-head competition with one of our frequently encountered private companies. Our ongoing heightened focus on this competitor paid off in Q2 and we expect it to continue to pay off in the future.

Finally, I will conclude my prepared remarks by once again committing to all of you that I am 100% focused on returning Rally to its past high-growth performance.

With that, I’d like to hand it over to Jim to go our second quarter financial performance in more detail and our outlook for the coming period.

Jim Lejeal

Thanks, Tim. Please note that we have made available a CFO commentary that supplements our earnings call press release we released this afternoon. Our goal here in releasing this supplemental material is to assist you in following my commentary and improve our dialogue with you as we discuss the Company’s performance. I remind us all that my review and discussion will be on a non-GAAP basis for all costs, gross margins, operating, and net income as well as EPS unless I state otherwise.

I’ll start with a review of our key metrics. As we have said, we believe total paid seats is a key indicator of our market penetration, growth and future revenue. We define a paid seat as a seat with a subscription or support contract as of the measurement date. We ended the quarter with a total paid seat count of 234,642 seats. This seat count represents a 22% year-over-year increase when compared to the 192,119 seats under contract at the close of Q2 of last year. The 8,679 seats added in the quarter represent an increase of 4% over the seats under contract at the end of last quarter.

We offer our renewal rate on a quarterly basis to provide insight into our ability to meaningfully grow our existing customer base. We calculate our renewal rate by comparing the number of paid seats of all our existing customers at the beginning of a 12 month period to the number of paid seats for those same customers at the end of such period, taking into account non-renewals, upgrades and downgrades. As of July 31, 2014, our renewal rate calculated against this customer cohort was 114%.

Moving to the income statement. Total revenue for the quarter was $21.5 million, which represents a 9% year-over-year increase over the same period last year. As you may recall, in Q1 of last year we announced a price increase for our perpetual licensees which took effect in Q3 of last year. We believe the price increase stimulated demand for perpetual licenses, resulting in a significant increase in our perpetual revenue in Q2 of last year. As a result, total revenue and perpetual revenue growth comparisons are difficult.

Subscription and support revenue for the quarter was $17.4 million, which represents a year-over-year increase of 23%. Perpetual revenue for the quarter was $1.4 million, which represents a year-over-year decrease of 50%. Our perpetual revenue results in Q2 beat our internal expectations going into the quarter as a couple deals closed in Q2, which we expected to close in Q3. We believe that our decrease in perpetual revenue is, as I just described, largely a result of strong perpetual revenue in Q2 of last year.

As you know, the majority of our product revenue comes from annual subscriptions contracts and, therefore, shows as subscription and support revenue. However, we do expect some customers to buy perpetual licenses. The revenue associated with this licensing model is lumpy and hard to predict. Large deals can significantly impact this revenue line given the revenue recognition pattern of this license option.

Services revenue for the quarter was $2.7 million, which represents a 5% year-over-year decrease. Calculated billings, a non-GAAP measure which can be derived from our financial statements by taking revenue plus the change in deferred revenue, closed the quarter at $18.1 million, representing a year-over-year increase of 13% as compared to the second quarter of last year. Calculated billings growth is also adversely impacted by our unusually strong perpetual revenue in Q2 of last year.

Our Subscription and Support billings, which can be derived from our financial statements by taking subscription and support revenue plus the change in deferred revenue, closed the quarter at $14 million, representing a year-over-year increase of 35%.

As we have discussed previously, there are a number of factors that can impact our deferred revenue, calculated billings and our calculated billings growth. In the past, we have normalized billings for the impacts of multi-year prepaid contracts. In addition to multi-year pre-pay contracts, other factors that can impact billings materially include add-on orders that co-term with the original contract that expires in less than one year and contracts that are off-balance sheet in nature.

Due to the number of factors required to normalize to get to a true apples to apples number, we have decided not to provide normalized billings. However, looking at the change in short-term deferred revenue can help investors normalize for the impact of multi-year prepaid deals, should you want to do this.

Gross profit for the quarter was $16 million, as compared to $15.9 million in Q2 of FY 2014, reflecting an increase of $150,000 or 1%. Total gross margin for the quarter was 74%. Our product gross margin was 86%, and our professional services margin was negative 5%, which is largely a result of increased capacity added at the end of last fiscal year.

Now I’ll turn to the operating expenses for the quarter. Sales and marketing expense was $12.5 million, representing a year-over-year increase of $3.7 million or 42%. This increase was driven mainly by increased headcount across our sales and marketing organizations and variable spend in our lead generation activities. We also hosted our annual user conference RallyOn! in Washington D.C., which impacted sales and marketing spend in the quarter. As a percentage of revenue, sales and marketing expense was 58% for the quarter, as compared to 44% for the same period in FY 2014.

Research and development expense was $6.3 million, representing a year-over-year increase of $1.6 million or 35%. This increase was driven mainly by increased headcount as we continue to invest in product development. As a percentage of revenue, R&D expense was 29% for the quarter, as compared to 23% for the same period in FY 2014.

G&A expense was $4.4 million, representing a year-over-year increase of $900,000 or 25%. This increase was driven mainly by increased headcount to support our growth. As a percentage of revenue, G&A expense was 20% for the quarter, as compared to 18% for the same period in FY 2014.

Net loss for the second quarter was $7.4 million or a net loss per share of $0.30 per basic and diluted share. We are currently generating a net loss and as such, our basic weighted average shares outstanding for the second quarter was approximately 25 million. If we were profitable today, our fully diluted share count would have been approximately 25.5 million shares when applying the treasury stock method to vested in-the-money stock options and warrants.

Cash flow from operating activities was negative $8.9 million for the quarter, as compared to cash flow from operating activities in Q2 last fiscal year of negative $3.3 million.

Turning to our balance sheet. As of July 31, 2014, our total cash, cash equivalents, excluding restricted cash, and accounts receivable balance was approximately $90.8 million, as compared to $110.7 million as of January 31, 2014, and $115.7 million as of July 31, 2013. We currently carry no bank debt.

We ended the quarter with an accounts receivable balance of $13.8 million. Total deferred revenue and short term deferred revenue closed the quarter at $36.3 million and $35.2 million, respectively. Our days sales outstanding was 70 days at July 31, 2014.

With respect to headcount, we added 37 employees during the quarter for a total Company team headcount of 531 employees.

Let’s turn to our outlook for the third quarter of fiscal year 2015. For the third quarter of fiscal year 2015, we currently expect revenues between $22.0 million and $22.5 million, representing year-over-year growth between 16% and 19% over Q3 FY 2014 revenue of $18.9 million.

For the third quarter of FY 2015, we currently expect a non-GAAP net loss per basic and diluted share between negative $0.34 and negative $0.37, with weighted average shares outstanding of approximately 25.3 million. We provide this outlook recognizing that revenue from the sale of perpetual licenses can be difficult to predict and can have a material impact on both our revenue and EPS expectations. While we have a healthy perpetual license pipeline, there are a number of opportunities that would either fall in Q3 or Q4 of this year.

For the full year fiscal year 2015, we are reaffirming the outlook we set last quarter, with total revenues in the range of $87.0 million to $90.0 million, representing year-over-year growth between 17% and 21% over fiscal year 2014 total revenue of $74.3 million. We expect subscription and support revenue to represent between 79% and 81% of total revenue for the full year fiscal year 2015.

For the full year fiscal year 2015, we currently expect a non-GAAP net loss per basic and diluted share between negative $1.21 and negative $1.26, with weighted average shares outstanding of approximately 25.2 million.

This concludes my prepared remarks, and I’ll turn the call back over to Tim.

Tim Miller

Thanks, Jim. Before we sign off, I’d say that I’m presenting at the Deutsche Bank Tech Conference in two weeks. If you’re attending, please reach out and we’ll schedule time one-on-one to update you on the business. We will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question will come from Matt Pfau of William Blair.

Matthew Charles Pfau – William Blair & Company L.L.C.

Hey, guys, thanks for taking my questions. First one on the competitive environment. You mentioned that you saw an improvement there, specifically against the VersionOne. And if I remember correctly, last quarter the primary reason for them winning deals were they were discounting pretty heavily. So, wondering what drove the improvement in competition there? Were you guys discounting as well, or did they bring their prices back up, or were there other factors that were driving that?

Tim Miller

Thanks, Matt. Tim here. So, a couple of things regarding VersionOne. We announced a new feature that they were very effective in differentiating against us, one called swim lanes. We announced the release of that, and it essentially neutralized that one area where they had the competitive advantage.

Another thing that we did was we announced two new killer products at our RallyON conference: Insights and Flowdock, basically our analytics solution and our collaboration solution. They’re getting very warm reception from the market. We also repositioned about a dozen of our other features that highlight how we clearly have the better product. So, the combination of those three things, and a few others, changed from losing most to winning almost all.

Matthew Charles Pfau – William Blair & Company L.L.C.

Got it. And then, on your renewals in the quarter, in line with last quarter for the renewal rate, but I know you guys had made some changes as far as putting together teams specifically geared towards renewals. Despite the number being in line with last quarter, how have those changes been trending? Have you seen an improvement there from the prior quarter?

Jim Lejeal

Matt, this is Jim. Improvement from the prior quarter, I would say, on a modest basis, yes. And recall that we made an investment in an inside sales group that’s specifically dedicated on this metric. A lot of that investment occurred at the beginning of Q1. And so, that team is standing on its feet now and fully ramped. And so, the flat quarter performance, it didn’t go down and from a calculated basis, remained the same, but all in I would say there was a modest improvement.

Matthew Charles Pfau – William Blair & Company L.L.C.

Got it. And then a question on the earnings guidance for the full year. You guys brought it up nicely from your prior guidance. What’s been driving the improvement here over the past few quarters? Are you guys pulling back on any investment areas, or you just not need to invest in certain areas as much as you had originally anticipated and built in more cushion than you needed into the initial guidance?

Tim Miller

I think there is a little cushion obviously we’ve always consent to defend EPS in a very conservative way. If you look at G&A on a non-GAAP basis, you’re going to see about a $200,000 improvement on an absolute dollars basis. We committed in past quarters that we will be more disciplined in particular in this area of the business. And that’s what all good business should do, we’ve all invested in the business in terms of IPO readiness and being a public company, and so you’re going to start to see that about that area of the business about on a percentage of revenue basis start to shape nicely in line where it ought to be.

In terms of sales and marketing area you see us continue to invest in natural – in reaction to the positive pipeline dynamics what Jim talked about in the prepared remarks.

And then R&D I think you are going to see, slight increases in absolute dollars spend in this area and depending on how revenue shapes out performance on a percentage of revenue accordingly.

Matthew Charles Pfau – William Blair & Company L.L.C.

All right, thanks for taking my questions guys, I appreciate it.

Tim Miller

Yes, thanks.

Operator

And our next question will come from Patrick Walravens of JMP Securities.

Patrick D. Walravens – JMP Group Inc.

Oh, great, thank you. Congratulations, you guys. So, I think the big question is, are we on the road to recovery and can we expect sort of more consistent results going forward?

Tim Miller

So I think – when I think about that question, there is a couple of dynamics. We care a lot about selling to new customers and we are making some progress there but with relatively new sales force and process beginning to align new customers we see that as a key metrics that’s going to allow us to really accelerate our growth. I am not happy with the growth rates we are at today, I won’t be happy so we’re seeing closer to 30%, but have we bought them down and are we growing faster? I think it’s a little tough to call that right now, but signs that we’re seeing and the opportunities that we are seeing so on the pretty market increase in pipeline and optimism in the business is clearly much harder than it’s been in a long time.

Patrick D. Walravens – JMP Group Inc.

Great. And then when you look at the low end of the business Tim, I mean, I think there is a sense that really commoditized. How are you thinking about it these days?

Tim Miller

Yes, so we sort of talk about the team level – let me talk just a little bit about, maybe one of our customers. I’ve had two or three conversations with some pretty substantial customers over the last month or so, and they are seeing essentially the same thing. They said, we’ve got Agile execution down and we’re seeing tremendous velocity into delivering new features. One in particular said that two years ago they announced 10 products within a year. Last year they announced 50 new products and in the first six months of this year they announced over 50.

So you can see that our customers are really gained advantage from agility delivering valuable new features, but the next horizon was really how do they prioritize this portfolio of different initiatives and prioritizing those initiatives across the whole organization to deliver most impactful products requires a product like what Rally has, and then that’s part of our whole business agility.

But the most exciting part of our business is not the team level, but it’s really the level of agility what we call business agility amongst our whole organization prioritize initiatives across and helps them plan and track and manage those that’s really where we’re investing a lot of time going forward. We see that is a much bigger market opportunity even just team level of software agility.

Patrick D. Walravens – JMP Group Inc.

Great, thank you.

Operator

And our next question will come from Michael Huang of Needham & Company.

Michael Huang – Needham & Company, LLC

Great. Thanks, guys. I apologize for the background noise here; I'm sitting here at the airport. A couple questions for you. So, first of all, in terms of these killer new products, your analytics and collaboration, are those in GA currently or are they – could you help us understand when they're going to be officially GA? And then, how do you believe it impacts the model? I think you had touched upon how maybe it was helping positioning into the sale cycles against VersionOne, but ultimately, how should we see this benefit the model?

Tim Miller

So two different products, Insights we’ve been using for our customers for a couple of quarters now, we use this in multiple ways. It is technically data products but it is in production and people are using and getting value we’re continuing to get agility features to it essentially it used our customer today and we’re driving benefit from them.

One of the stumbling blocks for more wide adoption was our pricing model and we removed that by including it in UE. We’ve seen tremendous adoption of those capabilities, so I think of those it’s kind of a health check folks may do every two to four weeks to see how they are doing and allow them to really sense what’s going on in their engineering organization and confidently make changes. We have not announced the date for GA potentially but I think of that as just an SLA commitment but it is not a limitation our customers using the product today. Flowdock is a slightly different story. It has been a GA product for some time.

We announced the addition of it in our UE packaging and in order for that to go GA we have some technical infrastructure that we need to do and move some data over from the current hosting center and that’s in progress this quarter and we don’t have a firm date on when that will happen. But expect that to happen in the next couple of months. But again, customers are using it today, they’re getting started, they are using it and for this use case, GA really doesn’t hinder or the need for GA doesn’t hinder the adoption.

Tim Miller

And Mike you asked – this is Jim, you asked about how it impacts the model. It’s influencing the competitive comparison that occurs when we are selling hiring the organization. These are features and functions that the competition doesn’t have.

So it differentiates us in a substantive way first, and then how it impacts the model in my mind is, you’re going to see it in the expand part of the land expand two-step execution model we take with the customer. And the customer stories we shared here highlighting once again the credit card company and once again the automotive company, this is where you’re going to see hit the model. You’re going to see in my mind, you could expect acceleration in the expand part of our engagements with the customer as agility solutions sticks and then delivers on its promise.

Michael Huang – Needham & Company, LLC

Great, okay. And then, just kind of with respect to guidance, I was wondering if you could drill into some of the key assumptions around close rates and win rates, especially win rates, given the fact that you saw some improvement here in Q2. So, assuming that we see kind of a similar win rates in Q3 and through the end of year, and close rates, and against a much bigger pipeline, I mean does that suggest that we're going to see significant sequential growth in new seats, or how should we be thinking about that? Thanks.

Tim Miller

Well, the guidance I think we’ve laid out very clearly. And one of the things we committed to last quarter was to provide you some inside into revenue mix and we delivered on that commitment in the prepared remarks. At the end of this year we will give you a reaffirmation, I think, a thinking through of our long-term operating model. And when we get important milestones that I think we all think about in terms of cash flow positive performance, operating cash flow, free cash flow et cetera. But beyond that I don’t know we expand or care to expand in more detail than what we laid out.

Michael Huang – Needham & Company, LLC

Okay, great. Thanks, guys.

Tim Miller

Thanks, Mike.

Operator

Your next question comes from Alex Zukin of Stephens.

Alex Zukin – Stephens Inc.

Hey, guys thanks for taking my question. I guess Jim can you remind people of the seasonality of the deferred revenues, given that short-term deferred was up about 10% in the quarter, year-over-year?

Tim Miller

Yes sure. So seasonality, our fiscal year ends January 31 and therefore Q4 as of December and January months and we enjoy year end buying initiatives and year beginning buying initiatives in Q4 is a meaningfully productive quarter for us when you look at on a full fiscal year basis. In terms of ranking, Q4 is the most productive, then Q1 is a bit off of that. And then Q2 and Q3 are generally in the same category in terms of the amount of sales. So we’re in the cycle of Q2, Q3 of where the seasonal off growth presents itself, and then Q4 tends to be a very good quarter for us and that showed itself in the historicals.

Alex Zukin – Stephens Inc.

Got it. That’s helpful. And then, Tim, I want to drill into that, the progress on new customer growth, maybe in the quarter and in the pipeline and if you could comment kind of the seat growth in the quarter to new customers versus existing customers?

Tim Miller

Yes, so one of the things that you’ll see in the queue is we talk a little bit about – the more precise way to talk about new, it’s obviously an important dynamic of the business, but essentially 47% of our new revenue and subscription and support comes from new customers this quarter than we just added. So that kind of – I think the way to think about what percentage of the new revenue we’re getting from where. We’re not breaking down particular levels or anything at this point. What’s the question on seats?

Alex Zukin – Stephens Inc.

If you would break down the seats, it seems like it should probably follow the same cadence as you just laid out from revenue in terms of…

Tim Miller

That’s correct. We’ve always said seats is a really good leading indicator of kind of where we are for our subscription and support revenue. Obviously we don’t necessarily get that revenue in the quarter that we book it, but we do it in out quarters.

Alex Zukin – Stephens Inc.

Is it fair to say that year-over-year you saw an acceleration in seat growth in new customers?

Tim Miller

For the most recent quarter compared to last quarter clearly there was a slight betterment in my mind and that is a result of I think of the heavy investment we made in new quota-carrying reps at the beginning of the year. Recall that a lot of that investment occurred at the end of Q4 and beginning of Q1. What we said as we talked about that investment in past quarters is that we should expect to see the productivity of that investment in Q3 and Q4 as those skill sets become more fully ramped. And so, what you’re describing Alex, and the dynamic in the business we’re experiencing is accurate and it’s a reflection of that investment and those reps getting up to full ramming speed.

Alex Zukin – Stephens Inc.

Got it. And then, when you think about renewal rates, obviously flat from last quarter, is it possible to characterize maybe where you expect those to be as you ramp that team, and in your modeling assumptions, what you're looking at as kind of a good barometer for health?

Tim Miller

We haven’t guided on this and don’t expect to, but what I will say is we invested in this area of the business to improve the metric. And as those skill set get more fully capable, and as I answered Matt in the call earlier a lot of that investment happen in Q1, so Q3 and Q4 where these new employees, new reps working that dynamic of the business should have an impact on the renewal rates and therefore that calculation of that particular metric. So we haven’t guided on it.

Alex Zukin – Stephens Inc.

Got it, thanks guys for taking my question.

Tim Miller

Thanks Alex.

Operator

And the next question is from Richard Baldry of ROTH Capital Partners.

Richard Baldry – ROTH Capital Partners

Thanks. Looking at the – number of seat adds is roughly in line with the running four quarter average, but the sequential dollar growth in recurring was almost double. So, can you talk about whether that's a linearity issue – whether your ASPs sort of implicitly are climbing sharply? And we haven't seen you do over $1 million in sequential growth prior, and it's $1.3 million, which is sort of a break-out performance. So, any better way to understand that would be helpful, thanks.

Tim Miller

Yes, Rick. My answer is last quarter our seat growth on an absolute basis was healthy and as you know in our subscription ratably recognized revenue business if we’ve added a lot of seats at the end of last quarter we see the benefit of the revenue in this quarter.

So, I think therein lies some of the fact pattern. You asked about ASPs, you may recall we don’t guide, nor speak to the specificity of it. But from my perspective and more or less to answer a question that Matt Pfau asked earlier in the call, we managed to close deals in a healthy way without unnecessary aggressive discounting, in particular focusing on this one particular competitor and you are right to note that the healthy increase in our subscription revenue quarter-over-quarter is a good one.

Richard Baldry – ROTH Capital Partners

And skipping to the pro services side, that number has been trending sideways for about five quarters. How do we think about how to tie that number to your overall growth rate on a long-term basis?

Tim Miller

From my perspective services is a domain of the business that what we’ve talked about is that it is a tool by which we create business agility intimacy with the customer. And while the revenue has been relatively flat over the trailing four quarters if you compare it to past years, you’ll see that there was a meaningful increase in the revenue production of that line of the business. It’s because we recognize the strategic differentiation of that arm of the business offers. I think the way to think about it is you would expect it to grow modestly and in line with the business. It’s an early indicator and a positive one, and we expect as we sell higher decision-makers hiring organization that that part of the business will benefit.

Tim Miller

It’s Tim here. There’s been a dynamic going on too. We can’t speak to in great detail, but we continue to sell more strategic service offerings through our transformational consulting group. We also have always had a really strong partnering relationship with a lot of independent coaches in the agile space. So, that part of the business has been strong. In many cases those contracts will go to our partners and we won’t be in the middle of those at all. So, there is a little bit of a shift in the strategic nature of the services that we’re offering for our largest customers that tend to go along, but we expect that number to grow substantially in part because we see the pipeline for that work just like we do in our product business quite a bit above where we’ve ever seen in the past.

Richard Baldry – ROTH Capital Partners

Great. Congrats on the sequential acceleration.

Tim Miller

Thanks, Rich.

Operator

And next we have a question from Sameer Kalucha of Deutsche Bank.

Nandan Amladi – Deutsche Bank Securities Inc.

Hi, good afternoon. This is Nandan. Sorry I got disconnected before. So, Tim, at the RallyON conference, you had talked about taking charge of the R&D process because there were – I think you mentioned four products that were in production – or in development but hadn't reached GA yet. I know you talked about two other products, Flowdock and Insights, earlier in the Q&A. Can you talk about what progress you've made since then?

Jim Lejeal

On the other two products?

Nandan Amladi – Deutsche Bank Securities Inc.

Yes.

Tim Miller

So one of our products fits squarely in this portfolio scenario planning space. It is still in what we call closed beta. We’re getting tremendous feedback from our customers, we got a email today from a customer just telling how great that product was. So we continue to get that feedback. We’ve been a little bit careful in not allowing it to get out to too many customers and too public because we think it is a big differentiator for us in the market.

We have not announced when that product will be available publically, but I can tell you that team is on track. I’ve been out to visit them and we’re paying a lot of attention and a lot of hope. This will be probably the most significant entry into the portfolio management space that we had in two to three years.

There’s another product that is a little bit farther away from being a GA product at the team level, it’s an internal product we call waffle, and it’s there to help automate a lot of the processes at the team. But nothing to announce at this point. That was interesting because we could go to market with some partners and some other interesting dynamics, but its available today for free that how we monetize that is up for debate.

Nandan Amladi – Deutsche Bank Securities Inc.

Okay. And a follow-up if I might. The strong pipeline you talked about for 3Q and 4Q.

Tim Miller

Yes.

Nandan Amladi – Deutsche Bank Securities Inc.

How much of that is dependent closing that business dependent on these new product launches or any work that you have to do on the sales productivity side?

Tim Miller

Yes, I’m sure a vast majority, if not all, of our customers in the pipeline are very aware of these products and the key wins they work that are differentiators for us. And their availability today in a beta format is enough to drive decision. This really allows us to continue to drive that price premium that we’ve always enjoyed in the market. So they are huge.

Jim Lejeal

Yes, Nandan, this is Jim. And from my standpoint doing a bottoms up analysis of that pipeline those are all discussions for the offering set as it exist today. It’s about getting business done.

Nandan Amladi – Deutsche Bank Securities Inc.

Okay, thank you.

Tim Miller

Thanks very much, Nandan.

Operator

Well, this concludes our question-and-answer session. I would like to turn the conference back over to Tim Miller for any closing remarks.

Tim Miller

Thank you. I just say now that we have a solid team in R&D that are hired, we are going to have a Senior Vice President here in the near future, but nothing to announce today. I’ll be in the road over the next – on the road over the next month, so please reach out if you would like to set up a meeting.

Jim Lejeal

Thanks, everyone.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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!

Source: Rally Software's (RALY) CEO Tim Miller on Q2 2015 Results - Earnings Call Transcript
This Transcript
All Transcripts