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JDA Software Group (NASDAQ:JDAS)

Q2 2011 Earnings Call

July 26, 2011 4:45 pm ET

Executives

Mike Burnett - Group Vice President of Treasury & Investor Relations

Peter Hathaway - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Hamish Brewer - Chief Executive Officer, President and Director

Analysts

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Mark Schappel - The Benchmark Company, LLC

Richard Williams - Cross Research LLC

Greg McDowell - JMP Securities LLC

Brian Murphy - Sidoti & Company, LLC

Sean Barrett

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the JDA Software Group Inc. Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, July 26, 2011. I would now like to turn the conference over to Mike Burnett, Vice President of Investor Relations. Please go ahead.

Mike Burnett

Thank you. Good afternoon, and welcome to the JDA Software earnings call for the second quarter ending June 30, 2011. On our call today, we will discuss the operational and financial results for the second quarter. With me on the call is Hamish Brewer, Chief Executive Officer of JDA Software; and Pete Hathaway, our Chief Financial Officer.

Before we begin discussing our results, let me remind you that our comments today will contain certain forward-looking statements that often involve risks, uncertainties and assumptions. All statements, other than statements of historical fact, are statements that could be deemed to be forward-looking. These risks are described from time to time in our SEC reports including, but not limited to, our annual report on Form 10-K for the year ended December 31, 2010.

Our presentation also includes certain non-GAAP measures, which JDA uses internally in budgeting and performance monitoring activities to gauge our business performance. We believe these measures provide useful information to our investors in evaluating JDA's ongoing business results. We prepared a reconciliation of each of these measures to the most directly comparable GAAP measure in our press release, which is posted on our website at jda.com. Additionally, we have posted a supplemental presentation slide deck on our Investor Relations website to accompany the review of our results.

With that, I will now turn the call over to Hamish Brewer for a discussion of the operating results and trends. Hamish?

Hamish Brewer

Thank you, Mike. I'm sure that 2011 is going to turn out to be an exciting year for JDA. The first quarter was a record quarter, the second quarter was not as good as we were expecting. And as we look forward, we have the potential to deliver dramatic organic growth in the second half. Of course, I appreciate that the focus now will be on the results for the second quarter, trying to understand if there are underlying forces in play that will slow JDA's progress. Now let me share with you my understanding of the trends that I see.

First, let's focus on license sales. As the leading indicator for this company, this revenue line retains a significant amount of management focus and so far this year, we've seen a very strong first quarter with year-over-year growth, 27%. The second quarter showed a year-over-year decline of 19%, leaving us effectively flat year-over-year for the first half.

We knew the second quarter contribution to annual software was going to be weaker than typical going into the quarter, but we were impacted on the downside with a few transactions in North America failing to come through as expected. We spent significant time internally analyzing and discussing whether there's a reason to be concerned about an underlying issue in this important market. And at this stage, I don't think that we can positively state that this is the case.

And the reasons are as follows. First, did we see some softness in closing key transactions in the second quarter? The answer to that question is yes, although, this is limited to a handful of transactions. So I think it would be premature to declare that we are facing an industry trend. Second, did we manage to close a significant number of large license deals indicating the vast willingness in the marketplace to invest significantly in IT spending? The answer to this question is also yes. Third, is the pipeline for the second half strong enough to support the run rate increase necessary to hit the midpoint of our guidance? We believe the answer to this question is also yes.

So on balance, when we consider our prospects for 2011 in respect of license and subscription revenues, considering the composition and overall maturity of our pipeline of new business opportunities, it seems most likely to us that we'll land somewhere in the existing range of software and subscription predictions of the sell-side analysts, where we're seeing numbers from $151 million to $155 million for the full-year.

One unusual characteristic that I'd like to point out, which increases our confidence in this projection, is that the third quarter pipeline appears to be uncharacteristically strong. And we currently expect that third quarter results will be similar or potentially even stronger than the first quarter this year. So we're not relying on delivering a heavily disproportionate percentage of our second half license revenue in the fourth quarter.

Moving on to services. There are once again a number of factors in play and I'd like to describe these to you. Consulting margins remained lower than we'd like through the end of the second quarter. As I mentioned at the start of this year, we're in the process of implementing a 3-year plan to improve operating metrics and I did not expect to see much sign of improvement this year. Unfortunately, I was right through the first half, with Q2 services margins remaining below my expectations. However, I should point out that projections for the second half look decidedly better. Based on a series of changes made earlier this year, we're beginning to see improvements filter through our overall mix of business.

First, we've been enjoying several courses of relatively strong license revenues in North America, and they're starting to compile into a strengthening backlog of business for our consulting organization in North America. Additionally, we've been selectively applying pricing changes to our new book of business and that's also starting to filter through. The net of all this is that we believe that our services business in North America is going to see steady strengthening of margins in the second half from the recent 18.8% in the first half to low- to mid-20s in the second half.

The second element in play is our pricing and revenue management business, which has been negatively impacted by downturn in its primary target markets of travel, transportation and hospitality since early 2010. The services aspect of this business is significant and the low utilization in this group has reduced our overall consulting margins.

The prospects for the second half appear to be better and I believe that we're going to see an improvement in contribution from this business to both our license and our consulting margins globally.

In EMEA, 2010 was a poor year for software sales, and you may recall that we made some management changes there in the second half of 2010 in response to this issue. The first 2 quarters of 2011, have seen a dramatic turnaround, selling about as much license revenue in the first 6 months of 2011 than we did all year in 2010. So far, we have not seen this upturn translate into significant services backlog, driving utilization and margins. But I expect that we will see stronger second half and the backlog going into 2012 should be better than it was coming into 2011.

Asia-Pacific services is expected to achieve its goals this year and a good portion of the pipeline of business for the second half is already identified. So I think we'll continue to see steady performance from this group.

Next, I'd like to comment on our managed services business. As you may remember, we established this new line of business in 2009 and it was augmented by a $20 million book of business inherited from i2 in the first quarter of 2010. With the acquisition of i2, we have managed to substantially grow this business. In fact, record revenues in the second quarter of 2011 were almost double the revenues of the same quarter a year ago. However, we're not hitting the revenue growth rate that we wanted to in 2011, and we expect to come in below our expectations for the year compared to our internal target. We're working to make changes to help accelerate this growth and I expect that we'll have more to say on this subject in the next couple of quarters.

As you can see, we have plenty of work to do in our services businesses and to that end, I am delighted to be able to let you know that we've recently been able to bring David Gai on board as Executive Vice President of Services worldwide. David has impressive experience working in global services businesses, consulting services, managed services and maintenance services for several major market leaders. And I'm optimistic that this experience will help us chart a positive course through all of the dynamics ahead of us.

Moving on to maintenance. We continue to see strong performance in this area of our business, delivering a 9% year-over-year growth, which was helped by the ongoing weakness in the U.S. dollar. However, this strong performance is not just FX driven, it's also driven by strong operating metrics with a very healthy 96.7% year-to-date retention at the end of Q2. As a primary earnings engine for the company, this strong performance provides an extremely robust platform for the company as we work our way through the balance of this rather turbulent year.

Finally, the overall financial strength of our business model continues to drive very healthy cash flow from operations, transforming the soft result of the second quarter 2010, immediately on the heels of the i2 acquisition, into a very satisfying $33.7 million of free cash flow in the second quarter of 2011.

So to summarize, although license and subscription sales were less than we wanted in the second quarter, the first quarter was strong and we project that both the third and fourth quarters are going to be strong. We invested in additional sales capacity in the first half of 2011 and we expect to see that investment translate into significant organic growth in the second half of 2011.

Services margins remain low, as expected. Our managed services revenues are growing, but slower than we had hoped. We expect both of these metrics to improve in the second half. Maintenance results are very strong and we expect that to continue throughout 2011. The result of all this, together with the ongoing cost control, is that maintenance and services revenues are expected to perform well this year. However, software revenues seem more likely to come in near the middle of our guidance range.

The impact on earnings from this reduction in high margin software revenue means that we expect adjusted EBITDA and adjusted EPS to come in near the middle of our range.

Finally, free cash flow, including the payment received from the Oracle settlement, will likely exceed our guidance. I hope that this review has helped you assess the quality of our prospects for the balance of 2011, and consequently you'll be able to reach the same conclusions that we have with respect to our likelihood of hitting our guidance for 2011.

And so with that, I'll turn it over to Pete to provide an in-depth review of our financial results.

Peter Hathaway

Okay. Thank you, Hamish. In reviewing the second quarter results, I'll point out that this quarter represents the first apples-to-apples comparison year-over-year because we reported a full quarter of i2 in our Q2 2010 consolidated numbers. So for the second quarter 2011, adjusted EBITDA was $38.9 million compared to $41.3 million in Q2 of 2010. And adjusted EBITDA margin declined to 24% from 26% in Q2 of 2010, due to the year-over-year decrease in software sales and services margins, as well as a change in the revenue mix, weighted more heavily this year towards services and away from software.

For the same reasons, adjusted earnings per share declined to $0.45 compared to $0.48 in the second quarter of 2010. GAAP earnings per share increased to $0.24 from $0.19 per share in Q2 of the prior year, primarily due to last year's acquisition-related and restructuring charges. A reconciliation of GAAP to non-GAAP measures is included with the tear sheet attached to our press release.

Total revenues increased 3% to $162.4 million for the quarter, including $30.8 million of software and subscription revenues as compared to total revenues of $158.4 million and software and subscription revenues of $38 million for the second quarter of 2010.

We closed 67 new software deals in the quarter compared to 54 in the second quarter of 2010. This includes 9 large transactions of $1 million or more in Q2 2011 compared to 6 in Q2 of last year.

Our average selling price for the trailing 12 months ended June 30, 2011, increased to $645,000 from $608,000 in Q2 of 2010.

Maintenance revenue presented another solid quarter. A customer retention rate on expiring maintenance contracts continues to track in line with our expectation. We ended the quarter with a year-to-date retention rate of 96.7%, similar to the strong Q2 last year at 97.3%. Maintenance revenues increased 9% to $66.1 million in Q2 2011 compared to $60.6 million in the second quarter of 2010. And the maintenance gross margin increased to 77.8% from 76.5% in Q2 of the prior year.

Last year, second quarter was somewhat negatively impacted by a higher rate of suspended revenue resulting from the integration of i2 customers, much of which was recovered in the third quarter of that year.

This recurring high margin revenue and cash flow stream represented 41% of our revenue in the quarter. Foreign exchange changes added $1.8 million to maintenance revenue for the quarter year-over-year.

Services revenue increased 10% to $65.5 million from $59.8 million in Q2 2010. However, our gross margin decreased to 17.5% from 24.3% in Q2 2010. Utilization rate decreased to 56% for Q2 2011 from 59% last year and was flat with Q1 2011.

A reminder about Q3 coming up, the Q3 2010 margins benefited from the deferred recognition of profits on a large services contract.

Moving on to operating costs, we continue to proactively monitor and manage the cost in the business. Total operating expenses decreased $2.3 million, or 3.5%, excluding the impact of the amortization of intangibles and the restructuring and acquisition-related charges. As a percent of revenue, total operating expense improved 230 basis points to 37.9% in the quarter compared to 40.2% in Q2 2010. This decrease is primarily due to cost containment and a $1.4 million year-over-year reduction in legal costs relating to the Oracle and Dillard's litigation.

Product development expenses this quarter of $19.8 million and 12% of revenue were comparable to Q2 2010. We continue to invest in R&D and product development that will enable us to maintain and expand our market-leading innovations.

Sales and marketing expenses increased this quarter to $25.4 million, from $24.5 million in Q2 2010, reflecting an increase associated with our current year's sales investment plans, which was partially offset by lower sales commissions on software. As a percentage of total revenue, the current quarter sales and marketing margin of 15.6% was comparable to Q2 2010.

General and administrative expenses decreased $3.5 million to $16.3 million from $19.8 million in Q2 2010. As a percentage of total revenue, these costs decreased 250 basis points to 10% from 12.5% in Q2 last year. As I previously mentioned, litigation costs declined $1.4 million.

In addition, variable compensation cost decreased $0.5 million, plus the positive impact of bad debts and recoveries more than offset the year-over-year wage increase. The effective tax rate on GAAP earnings was 25.4% for the quarter. This differed from the expected adjusted effective tax rate of 35% primarily due to the one-time favorable impact for the resolution of a tax position relating to a foreign jurisdiction for which tax statute had elapsed.

Turning now to cash flow. We had a strong quarter, generating $35.5 million of operating cash flow compared to a $2.6 million use of cash in the second quarter last year. Strong cash collections and an improvement in deferred revenue were the primary drivers of this change. DSO in the second quarter decreased to 71 days from 76 days in the first quarter, an increase from 66 days in Q2 of 2010. Free cash flow was $33.7 million after spending $1.8 million on capital expenditures during this quarter, compared to a negative free cash flow of $8.5 million in the second quarter of 2010. Our cash position at quarter end was $293 million, an increase of $135 million from June 30, 2010. This is attributable to the generation of $100 million in free cash flow during the last 12 months and receipt of $35 million from Oracle. This leaves us in a net cash position, as our cash now exceeds our debt, by $20.3 million. We had $37.1 million in restricted cash at quarter end.

In conclusion, I believe we are well positioned to fall within the range of expected outcomes for the year even though our second quarter results did not meet our goal. Specifically, we feel confident about the midpoints of our range of original guidance. This implies that the second half of the year should report strong license sales. In Q -- excuse me, in 2010 Q3, it was particularly weak, while Q4 was particularly strong. This year, our Q3 pipeline supports a possible outcome that could be substantially better than last year's. Q4 is traditionally strong and we have no indication that it shouldn't be strong again in 2011.

Our goal for 2011 is to generate meaningful organic growth. The midpoint of the range of license guidance represents 17% growth over 2010 and for total revenue growth the midpoint would be 9%. This translates into organic earnings growth for adjusted EBITDA of about 10% and adjusted non-GAAP EPS of about 8%. In terms of cash flow, all in, we feel we are going to exceed the upper end of the range of original guidance. Halfway through the year, we have produced $89 million of free cash flow, which includes the Oracle settlement of $35 million. Excluding the settlement cash, we're approximately $51 million ahead of last year's June-to-date cash flow production. And year-to-date 2011, we have generated 57% of the midpoint range of original annual guidance for free cash flow.

And with that operator, I would like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Richard Williams with Cross Research.

Richard Williams - Cross Research LLC

I wonder if you could provide more color on the deals that slipped and particularly the region, perhaps the type of business whether it be retailing or discrete manufacturing? Anything you can give us.

Hamish Brewer

Yes. There were several in North America and there was nothing specific [ph] I don't think, particularly common about the types of deal. But they were in North America.

Richard Williams - Cross Research LLC

Were they retail-oriented?

Hamish Brewer

I think that retail was certainly a sizable part of it. I don't really remember the exact details on that, Rich.

Richard Williams - Cross Research LLC

Okay. And in terms of the pipeline for 3Q, have you already closed any of this handful of deals that slipped?

Hamish Brewer

I don't believe we've closed anything significant so far. But I think we are expecting to close a good number of the deals that slipped in Q3. Some of them, we believe, have moved out beyond Q3. But we do expect to close a reasonable portion of them, certainly more than half of them I believe, last time I checked, within Q3. So we think that quite a few -- we don't think very many of the deals have actually gone away at this point.

Richard Williams - Cross Research LLC

So we've seen over the last couple of years that 3Q can become shaky at times. Any reason to think that this is similar sort of activity?

Hamish Brewer

It's hard to say. I mean Q2 has always -- historically, if you would ask me, generally speaking, what's the seasonality for license revenue for JDA? Yes, I would have said well, Q4 is the strongest and typically followed by Q2. And this year, the pattern is just different. It's -- we obviously, we had a strong Q1. And in Q3, as we look at it today, it looks pretty solid. So I know last year, Q3 was significant -- was by far the softest quarter of the year. But I don't think we're going to see that at all in 2011.

Richard Williams - Cross Research LLC

Okay. So maybe this is the new seasonality with i2?

Hamish Brewer

I wouldn't go quite that far. Maybe, just think of it more like sort of a new year [ph] or something.

Operator

The next question is from the line of Patrick Walravens with JMP Securities.

Greg McDowell - JMP Securities LLC

This is Greg McDowell on for Pat. My first question, in reiterating your software guidance or at least coming in at the midpoint, are you assuming a steady state economic environment?

Hamish Brewer

We are not factoring in a sizable collapse of the economy, if that's your question, no. And we are not trying to second guess what's going to happen macroeconomically here. We're kind of assuming, plus or minus, that things stay pretty much as they are. Let's say obviously, if they were to get dramatically better or worse, that might have an impact.

Greg McDowell - JMP Securities LLC

And then the confidence you have in the second half pipeline, are there some megadeals, $5 million plus likely sort of transactions that you're assuming have to close to make that guidance? Or is this all hitting singles, doubles, triples?

Hamish Brewer

It's interesting. There's a good list of large deals, but we're not specifically dependent on any one huge deal. This isn't like the fourth quarter of 2008, where we had an enormous deal that was so big that it was actually material for the year. We haven't got that kind of situation going on.

Greg McDowell - JMP Securities LLC

And if I could squeeze in one more question. I just wanted to drill into the managed services business. And you said on the prepared remarks that it's coming in below your expectations for the internal target. I was just wondering what's behind some of the gives and takes to that managed services business that leads you to be a little disappointed with the performance so far this year?

Hamish Brewer

Yes. Let me just reiterate, by the way. Obviously, we've picked up a sizable run rate of business from i2 in January of last year. And so if you consider that effectively baked in to the Q2 numbers of last year, we almost doubled the run rate of Q2's revenues last year. So please don't read into this that I am fundamentally disappointed in managed services. I mean to double your revenue in a year is obviously quite good. But the fact is, we were hoping to do somewhat better and our internal plan was built on us doing somewhat better than that. And we just think we're going to come in a bit short based on our run rate still [ph]. And I think it's not -- I think these are operational issues. It's a new business for us. We're still working our way through how to most effectively sell it into the marketplace, how to most effectively do business development and all those kind of activities. So I think that these are operational issues and I don't have any reason at this stage to believe that there's a fundamental reduction in the opportunity that's out there in the marketplace. So this is really about JDA getting our arms around how to most effectively execute on that opportunity.

Operator

The next question is from the line of Mark Schappel with Benchmark Capital.

Mark Schappel - The Benchmark Company, LLC

Hamish, starting off with you. Regarding the deals that slipped in the quarter, were they -- were some of these deals or a good portion of these deals part of a large sort of transformational supply-chain project where the software piece may have been relatively small compared to the overall project? Or were these just kind of standard, software-only type of projects?

Hamish Brewer

I don't want to really get into the details of the specifics of these transactions. I mean, as I said, it was a mix of transactions, they were in North America. I know some of them were retail. And that's really all I want to get into in terms of the details of those transactions. They're still active transactions for us. I don't think that there's anything -- when I look at them, as I said earlier on, I don't think there's anything that when we look at these transactions, we could say there's a common theme running through them. I don't think that would be fair to say, so if you're all question is, is there some kind of theme here? I don't see evidence of it in the Asia [ph].

Mark Schappel - The Benchmark Company, LLC

Okay. And regarding deals in the quarter, specifically the big deals that were contested, which are quite, pretty much all of them, deals in competitive situations, how would you characterize your competitive win rate in the quarter in terms of percentage?

Hamish Brewer

We're pretty happy with our win rate. I mean, let's remember, we did close 9 $1 million-plus deals. On a historical -- and as you say, those last year were typically strongly contested. And on a historical basis, that's a good performance. So I'm not dissatisfied with our win rate and I think they were nice deals.

Mark Schappel - The Benchmark Company, LLC

Okay. And then finally, Pete, moving over to you, foreign exchange impacts on revenue, what was that impact this quarter?

Peter Hathaway

It was about $2 million.

Mark Schappel - The Benchmark Company, LLC

$2 million positive?

Peter Hathaway

Yes.

Operator

The next question is from the line of Sean Barrett with HMI Capital.

Sean Barrett

One of my questions was answered already. Just wanted to ask on the maintenance benefit from the FX gain, what would the growth have been without that FX benefit in the maintenance segment?

Peter Hathaway

Yes, well that represented $1.8 million. So it was 9%, I'd just do the math, I don't know the number off the top of my head, but it represented $1.8 million.

Operator

The next question is from the line of Brian Murphy with Sidoti & Company.

Brian Murphy - Sidoti & Company, LLC

Hamish, I know you made some comments on Asia-Pacific, and I think I missed those. So, A-Pac was down about 50% in the first half of the year. Do you expect that to rebound in the back half of the year? And also, was the underperformance in the first half mostly related to Japan? And how are things changing over there?

Hamish Brewer

You're right, we certainly experienced the impact from the earthquake and the following tsunami in Japan. And I think that what we're seeing is we're seeing the pipeline in Japan recover. But it still hasn't translated into revenue for us yet. And so, there's still, in my mind, there are some questions as to what the likely revenue flow is going to look like for the second half of the year in Japan. The -- Japan, historically, by the way, is our largest revenue contributor in Asia-Pacific. So if Japan goes -- if Japan stops, then a big portion of our business stops. So I think the positive sign is that the pipeline has -- seems to have restarted, but it hasn't yet started translating into revenues, the risk we've got there. Overall, in Asia-Pacific we had a good first half last year, particularly a strong second quarter, if you look back. And we haven't been able to replicate that. And I think that to some degree is lumpiness. We think that overall for the year, there's obviously still risk for Asia-Pacific because of the Japanese situation. But we don't anticipate a disastrous year for Japan. So the second half should -- we're hoping to pick things up a little.

Brian Murphy - Sidoti & Company, LLC

Okay. That's great. And you also referenced some investments that you made in sales capacity in the first half of this year that you expect to maybe bear fruit in the second half of the year, can you just give us some color on that? Is that more quota reps? Is that pre-sales? Inside sales? Business developments? Support staff? Anything there would be helpful.

Hamish Brewer

Yes. We've added I think, on a year-to-date basis, we've added about [indiscernible] I think we've -- I can't remember the exact number that we've added. But our plan was certainly to increase our headcount both for quota-carrying reps and also for presales and corporate sales into the back office and marketing development. Overall, our plan is -- I think through June we've added about 20 reps, it looks like. A reasonable number, globally. And we've added about 23 sales people and about 13 corporate sales people. So the investment is -- certainly, we've made the investment in the people. Now we've got a fair number of them onboard. And typically with these kind of guys, you're looking at 6 months or so then to build that pipeline and start to deliver results. But we've hired those people through the first half. Hopefully we're going to see some benefit from them starting to play into the second half of the year.

Brian Murphy - Sidoti & Company, LLC

Okay. And just one last one. Were you surprised at the performance out of Europe this quarter? And sort of what are the expectations for Q3? Is that part of your outlook for Q3? Or is that just mostly confined to North America?

Hamish Brewer

In Q2 for Europe, was good. They had some sizable deals that they were going after and they were able to bring them in. We originally, at the start of the quarter, anticipated some of those deals might land in Q3, so there's a sort of offset effect there. And that we anticipate that Q3 for Europe is going to be softer unlike the other parts of the world. But overall, I'm very -- as I said, they sold almost as much in the first half as they did last year, so I'm very satisfied with the progress that we're making in Europe.

Operator

[Operator Instructions] The next question is from the line of Jeff Van Rhee with Craig-Hallum.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

A couple of housecleaning and then just a couple of broader questions. First just Pete, on the CapEx, I think the guidance in February and April was $25 million to $30 million. I think you've done about $4 million or $4.5 million now, what's the expectation on CapEx for the year?

Peter Hathaway

Jeff, I think we can -- we probably won't top $25 million at this point. Because as you're -- I think you're subtly pointing out, some of that is related to that -- to the managed services, which isn't growing as fast as we thought. So I think it's fair to pull back on that a bit.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Okay, fair enough. And then on the G&A, I just missed, there were a lot of pieces in the G&A number, you mentioned something about bad debt but I didn't catch part of that -- all of that.

Peter Hathaway

There was a lot going on in there. So that -- there are 2. The G&A is favorably impacted by $1.4 million because of a drop in Leo [ph] expenses. We had a drop in variable comp, I think primarily bonuses because the quarter was down a bit of about $0.5 million. And then there was little bit of noise in bad debts. Bad debts was down, and we had some recoveries of some previously written-off accounts so that was favorable. And those amounts basically offset the year-over-year increases in compensation. That's kind of how the flow goes.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Okay. All right. I think I follow that. Okay, then I guess just broader question, maybe this is for everybody or maybe more so for Hamish. If I look at the numbers, I think I have organic growth down 5% in the first half. And if you adjust for the conversion of the term licenses, it would be lower than that. To get to the midpoint, we're talking 33% growth by my math for the second half. And at least by my numbers, as we go back to Q3 of last year, we've missed every quarter. Last year, Q3 we were looking at a huge pipeline for Q4. And given that track record of these deals continually pushing out, how do you adjust or how have you adjusted your pipeline modeling or your sales forecasting methodology? Namely, have you adjusted your close rates down? I mean how do you adjust after seeing that pattern over the last 4 quarters?

Hamish Brewer

Well I think that -- let's go back and talk about this specifically. At this time last year, we said that we felt that Q3 was going to be lighter and Q4 was going to be stronger. Now, actually Q3 came in slightly below our expectations, but we knew it was going to be a softer quarter. So we were directionally right that we weren't quite right in terms of the extent of it. Coming off the back of that soft Q3, we said that we were going to have a strong Q4, and we did just that. We delivered a strong Q4 going into Q1 of this year. We understood that Q1 looked like it had a good, strong pipeline and we delivered to that. And in Q2, we -- as I said earlier on, we had an expectation that it was going to be down sequentially. It came in a little bit below where we thought it was going to be. So were we right? Were we exactly right about the numerical result? No, we weren't. But we knew it was going to be lighter. And in the same way, we anticipate now that Q3 is going to be stronger and Q4 looks strong as well, at this stage. Obviously, the first 90 days or a couple of months out. So the clarity on that quarter is going to get better over the course of the next few months. But when I look at the historical accuracy of our projections, I think we've -- well, I can't say that we get the numbers exactly right and that's forecasting for you. I mean, the one thing about a forecast you can be sure of, is it's wrong. But the directional indications have been, I think, 100% accurate.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Right. But I mean -- I guess I don't want to belabor the issue, but the second half last year was down almost 15% organically and first half was down organically. We're looking at up 33% for the second half. I'm just trying to get a sense of the conviction, I guess what you're saying is there's no change in the forecasting methodology in terms of discounting forward deals?

Hamish Brewer

We haven't made a significant change because last year, we set guidance for the full year. And I believe we pretty much hit our numbers for the full year. So, is the pattern has failed [ph], this year, the same as it was last year? No. So we had a much softer Q3 last year. This year we had a soft Q2. So if you want to compare the first half of this year to the second half of last year, you can make -- obviously the math that you've gone through is correct but the fact is that right now, we anticipate that the second half is going to strengthen and that we are going to come in with effect [ph] somewhere in the middle of our guidance.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Okay, fair enough. One more and I'll let somebody else jump on the call. The mix of deals, big deal versus midsized, just talk to the midsized deals and sort of how the pipeline and pipeline progression of midsized deals has fared. You give out kind of a rolling 12 ASP on licenses and it's hard to figure out what's going on with those midsized deals. So just give me maybe a little progression in the sense of what's going on there.

Hamish Brewer

Yes. Well if you look back over the last 2 or 3 years, what you're going to see is a steady increase in the number of million-dollar-plus transactions. So by implication, they are taking a bigger share of the total dollars of the license revenue that we generate each quarter. So overall, I think the shift that's going on in our business is, there is a gradual shift towards more revenue coming out of $1 million-plus license deals. And by implication, the number of smaller deals is diminishing. And therefore, the average sale price has been creeping up steadily, so that's the math for the situation.

Peter Hathaway

I did want to make one correction on -- Mark had asked with the FX impact was year-over-year, I had said it was $2 million. It's actually $3 million year-over-year.

Hamish Brewer

Okay. So thank you very much for your questions. I appreciate you showing up for the call here. And hopefully, we'll look forward to -- concerning the results that we anticipate for Q3 and looking into Q4 when we get to talk again in October.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.

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