Demandware (DWRE) Thomas D. Ebling on Q4 2015 Results - Earnings Call Transcript

| About: Demandware, Inc. (DWRE)

Demandware, Inc. (NYSE:DWRE)

Q4 2015 Earnings Call

February 09, 2016 5:00 pm ET

Executives

James F. Hillier - Vice President-Investor Relations

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Justin A. Furby - William Blair & Co. LLC

Abhey R. Lamba - Mizuho Securities USA, Inc.

J. Derrick Wood - Susquehanna Financial Group LLLP

Nandan G. Amladi - Deutsche Bank Securities, Inc.

David E. Hynes - Canaccord Genuity, Inc.

Ken Wong - Citigroup Global Markets Asia Ltd.

Koji Ikeda - Oppenheimer & Co., Inc. (Broker)

Brad Sills - Bank of America Merrill Lynch

Frank Robinson - Goldman Sachs & Co.

Ross MacMillan - RBC Capital Markets LLC

Operator

Good day, ladies and gentlemen, and welcome to the Demandware Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded.

I would now like to turn the conference over to James Hillier, Vice President of Investor Relations. Please go ahead.

James F. Hillier - Vice President-Investor Relations

Good evening and thank you for joining today's call to discuss our results for the fourth quarter. Here with me today are Tom Ebling, our CEO; and Tim Adams, our CFO. Tom will provide highlights for the quarter, and outline some of our accomplishments, and Tim will talk about financials in more detail. We'll wrap up with a Q&A session.

Before we begin, let me remind you that during the call, we will discuss both GAAP and non-GAAP results to supplement investor understanding of the company's financials. A GAAP to non-GAAP reconciliation schedule is provided in the press release that we issued this evening and posted to our website.

Also, today's discussion contains forward-looking statements such as statements regarding the market acceptance of cloud solutions, the growth of digital commerce and retail, our business strategy, demand for our solutions, the growth of our customer's businesses, seasonality of our business, our pipeline and our projected financial results.

Forward-looking statements involve risk and uncertainty, and our actual results could differ materially from those projected in our forward-looking statements. Company assumes no obligation to update the information provided during today's call, revise any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in forward-looking statements. These risks and uncertainties include risks relating to Demandware's future financial performance, market growth, demand for Demandware's solutions, and general business conditions, as well as other risk factors that could adversely affect our results as set forth in our most recent quarterly report on Form 10-Q filed with the SEC.

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

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Thank you, Jim, and thank you for joining us on today's call. Looking back on our performance in 2015, we had a strong year delivering on key customer success and growth objectives. Entering the year, we had five important goals. One, to prove that our model works for large enterprise customers; two, to retain, delight and grow existing customers; three, to accelerate market share capture; four, to expand geographically; and five, to enter into the retail store with point-of-sale. I'm pleased to report we made excellent progress against all of these objectives in 2015.

On our first goal, we have proven that our model works for large enterprise accounts. We have 30 customers who each process more than $100 million of gross merchandise value or GMV through our platform in 2015, up from 22 customers in 2014 and 17 customers in 2013. 15 customers of these 30 customers generated more than $200 million in GMV, up from 10 customers the year before, and eight customers generated more than $300 million in GMV, double the number in 2014. Of the eight new $100 million GMV customers in 2015, five customers were existing customers that grew to this level with us and three customers were signed at over $100 million.

Over the last two years, we re-platformed seven $100 million retailers on Demandware, with at least five more retailers scheduled to go live in 2016. We have also achieved the successful launches in a much shorter timeframe than the difficult multi-year implementations our customers have traditionally experienced with their prior on-premise vendors. Over and over again, we hear stories from existing and prospective large customers about multi-year projects costing tens of millions of dollars that fell far short of the original goal or failed outright. We have now proven that Demandware implementations even for existing large online businesses dramatically reduced the time and risk associated with large-scale commerce platform deployment. In short, our model is better even for the largest online businesses.

Turning next to our goal to retain and grow existing customers; during 2015, our comparable customers increased their GMV by 25% on a constant currency basis, nearly double the 14% growth for U.S. e-commerce projected by comScore and eMarketer, despite what proved to be a more challenging retail economy. Put simply our customers are taking market share enabled by Demandware Commerce, and a powerful combination of technology and community that empowers retail differentiation of brand experience and heightened consumer engagement.

Customers on Demandware can conduct flash sales, leverage store inventory in corporate analytics, launch new brand and expand internationally more rapidly. Our customers can do this with greater success than their retail peers thanks to the scalability and continuous innovation provided by our cloud platform, combined with our LINK program and customer success organization.

We have long believed that speed and innovation are the most sustainable competitive weapons for an online business and the growth of our customers in the face of a challenging retail cycle proves the benefit they receive from our platform and business model.

Customer retention is another key driver of sustained growth in subscription revenue, and remains very strong. Again this year our churn was well under 5% and our subscription dollar renewal rates were above 120%. Our retention of customers, especially our largest customers remains excellent; and in 2015, we saw a number of our largest customers expand on our platform, including adidas, s.Oliver, L'Oréal, Columbia and HUGO BOSS.

On our third goal, to accelerate market share capture, we have a total of 54 customers on the 2015 Internet Retailer 500 list in North America and Europe. This is up 29% from 42 accounts on their 2014 list. Furthermore, this does not even include a number of large enterprise accounts that we signed in the second half of 2015, notably our win rate in 2015 was consistent with our three-year average. Even with an increase in average commerce platform deals done.

During 2015, a majority of our contracts with commitments of $2 million or more were with customers that have previously been using a custom platform. As we told you at Investor Day, 48% of the North America 2015 IR 500 and 68% of the European 2015 IR 500 have custom platforms. These retailers represent a massive opportunity for Demandware. Our other $2 million wins were with customers that switched to Demandware after being unsatisfied with competitor e-commerce platform.

On our fourth goal of international expansion, we continued to expand in new regions like Italy with the signing of Boggi, the well-known Italian menswear brand in the fourth quarter. Other European wins with large retailers included Markafoni and Cortefiel in Q2 and Ubisoft in Q4. In Asia, we held two successful Retail Connect events during September. We had more than 100 retailers attend our Tokyo event and more than 70 retailers attend in Shanghai exceeding our expectation.

Our platform provides customers with unique competitive advantage allowing them to quickly launch new sites and new brands internationally with minimal to no involvement from Demandware. As evidence of this capability, we ended 2015 with 1,506 sites, up 32% from last year. New site launches during the quarter included Clarins, PANDORA (7:52), HUGO BOSS, and L'Oreal in China; MenInvest in Japan; and HARMAN International launching multiple sites across Europe. adidas, Movado, Samsonite, and Wolverine Worldwide launched new brand. All told, Demandware customers operate sites serving approximately 50 countries worldwide.

Finally, with respect to adding point-of-sale capability, we're extremely pleased with the progress of Demandware Store, the first of its kind cloud-based point-of-sale and store operation solution.

We are moving into production with several charter customers in 2016, including Timbuk2 and Vineyard Vines. We are targeting general availability in North America in the second half of 2016, and general availability in Europe in 2017. We've already seen the acquisition of point-of-sale technology and our unified commerce strategy benefit sales of our digital commerce platform.

Brookstone and Patagonia were two 2015 signings where having point-of-sale technology and a unified platform vision were crucial buying criteria. One year in, the acquisition and integration of the Tomax team, and the development of our cloud-based point-of-sale solution have progressed exceedingly well.

Having attended many NRF trade shows over the years, I found it personally gratifying to see the tremendous level of interest and excitement from retailers around our omni-channel offering at last month's NRF event. In a few short years, we've gone from a newcomer at NRF to center stage due to the power of our unified platform vision.

Our booth was packed and we conducted over 40 live demos of Store Center with store-based retailers. One CIO of a large retailer mentioned that based on our demos and unified platform vision, he was inclined to stop their current point-of-sale upgrade and evaluate Demandware. While other e-commerce and point-of-sale providers are talking more about omni-channel, we are proud of taking the early lead with this opportunity, and to continue to invest aggressively to lead the market with cutting-edge cloud-based e-commerce and point-of-sale solution.

We believe the power of a customizable, version-less cloud offering that continuously delivers innovation in the store environment will deliver the superb consumer experiences that consumers increasingly demand, and will free retailers that are trapped by legacy five year to seven year upgrade cycle. Recall that before Demandware, e-commerce retailers focused 80% of their attention on keeping the lights on and 20% on innovation. Demandware flipped the script, allowing them to focus 80% on innovation for the brand and consumer. We plan to deliver this same value proposition to retailers in the store, providing a unified consumer experience wherever the consumer is shopping.

Turning from our goals to our performance this year; our subscription revenue reached $201 million, representing a 38% increase over last year and a 43% increase on a constant currency basis. For the quarter, we reported subscription revenue of $66 million, up 34% over the fourth quarter last year, and 37% on a constant currency basis. During the first three quarters, we signed contracts with strong brands and retailers such as iRobot, ModCloth, and Patagonia, and one business with Scholastic and Pret A Manger, which are outside our traditional verticals.

Our success continued in the fourth quarter with wins including Charlotte Russe, Destination Maternity, and Melissa & Doug. Across all markets and geographies, our new customer bookings increased 22% in 2015 on a constant currency basis. The difference between this and our low-30%s target primarily reflects the timing of two large multi-million dollar U.S. orders, which were pushed into 2016. Of the two deals, I'm happy to say that one has already closed. The other we expect to close in Q1 or early Q2. Including these two deals, we would hit our bookings target; and even with the delay, I'm pleased to report that during 2015, we more than doubled our number of $2 million deals year-over-year.

Furthermore, we saw healthy pickup in U.S. bookings, which grew approximately 35% in 2015, offsetting slower than expected growth in Europe. Our average ACV across new customers was $430,000 in Q4, and neared $470,000 for 2015, including only new commerce platform wins, our average ACV was over $500,000 for 2015.

And bear in mind that on average new Demandware customers generate revenue, that is approximately 15% above their minimum commitment in year one. We have a robust pipeline entering 2016, up nearly 40% from last year on a constant currency basis. To ensure we capture this pipeline opportunity, we have a strong sales and marketing team with head count up 30% year-over-year. At the sales leader level, we have also chosen to make some changes in order to augment and increase our expertise with large enterprise accounts, as our mix shift in this area grows.

I would note that as our mix shifts towards larger enterprise customers, sales cycles can be a bit slower. While some large enterprise deals close quickly, we observed others that have moved beyond our typical six months to nine months sales cycle. Our large deal pipeline has never been greater and represents over 40% of our total funnel.

However, in order to factor in the potential for longer closing timelines with large enterprise accounts, and some softness we're seeing in Europe, we are adjusting the range of our expected 2016 bookings growth to 25% to 35% year-over-year on a constant currency basis. At the midpoint, this would represent 30% growth on a constant currency basis in new committed minimum ACV in 2016, and an even greater amount of revenue in the future once they're live.

Retailers sign with Demandware and expand on our platform for a number of reasons, but the two we hear most often are innovation and peace of mind. First on innovation; we delivered nine major releases in 2015 including new and enhanced features like visual merchandising, improved omni-channel fulfillment, dynamic product recommendation, and distributed commerce feature. With Demandware, the only enterprise cloud platform to enable Buyable Pins on Pinterest.

As we said at Investor Day, this will be an important year for our predictive merchandising and Demandware Store solution. We believe there is tremendous value in the data we're collecting every day about shoppers and their behavior across over 1,500 sites. Predictive merchandising applies machine learning and predictive analytics across our platform data to create highly personalized shopping experiences for consumers. We are taking the first major step along this journey later this quarter, as personalized recommendations will be available to all Demandware customers worldwide. Furthermore, our true SaaS model and our shared success approach gives us a unique opportunity to apply elements of our predictive intelligence technology to our network data, something that simply cannot be replicated by either traditional on-premise or cloud-based managed service providers.

Turning to peace of mind, we had another great year and a terrific holiday season from a platform stability standpoint. Over our lifetime and again in the fourth quarter, we achieved 99.99% platform availability. Contrast this performance with the press headlines reporting Black Friday outages among a number of large well-known retailers. Over the Thanksgiving weekend period, peak orders per hour among our top five retailers were up 75% and average order volumes increased 40% with more than 200 million page requests each. Demandware customers benefit from the investments we made in our leading edge infrastructure, with capacity on demand to provide scalability and 35 points of delivery around the globe.

Before turning it over to Tim, I wanted to highlight some additional information we will be providing on the business. Many of our shareholders have told us that they believe in the strength of our technology and our market position. We've also heard that our communications could benefit from increasing transparency on certain metrics.

Accordingly, we started providing more detailed information on bookings at our Investor Day and we'll also be providing comparable customer GMV growth, both on a quarterly basis and a trailing 12 month basis. The increased information on our bookings is designed to provide more clarity on our future growth and the new GMV information aims to provide more clarity on the quality of this growth.

As we go forward, we'll continue to look at the information we provide to help ensure that our shareholders fully appreciate the great opportunities we see for our growth and for value creation at Demandware.

Indeed, Demandware grows by creating value for our customers. Our platform allows us to deliver faster time to value, continuous innovation at the leading edge of change in a commerce market, and peace of mind, driving more traffic, better conversion rates and higher or average order value per customer.

We have a record pipeline entering 2016 with more referenceable midmarket and large enterprise customers than ever before. The plan to rollout some predictive merchandising in early 2016 and Demandware Store later this year will further enhance the Demandware value proposition and position us to deliver on the promise of omni-channel. I fully believe we are uniquely positioned to dominate the market for enterprise class retail commerce.

With that, I'm going to turn the call over to Tim.

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Tom, and good morning, everyone. For the fourth quarter 2015, our total revenue was $75.6 million, an increase of 44% over $52.5 million in 2014. Subscription revenue was $65.8 million, a 34% increase over $49.2 million in the fourth quarter of 2014. On a constant currency basis, our subscription revenue grew 37% in the fourth quarter. In the fourth quarter, we recognized revenue beyond the base for overage fees of $21 million, representing 32% of subscription revenue, compared to $18 million or 36% of subscription revenue in the fourth quarter of 2014.

For the full year 2015, we recorded total revenue of $237.3 million, an increase of 48% over $160.6 million in 2014, and above our guidance. Full year subscription revenue of $201 million, was at the high-end of our guidance, and represented a 38% increase year-over-year, and a 43% increase on a constant currency basis.

Overage fees for the year represented $45 million or 22% of subscription revenue, compared with $39 million, which was 27% of subscription revenue in 2014. On a trailing 12 month basis, comparable customers grew their GMV by 25% on a constant currency basis, in line with the outlook we provided to you at Investor Day. For the fourth quarter, comparable customer GMV grew 22% year-over-year on a constant currency basis.

A quick note about overage and comparable customers GMV. As we said at our November Investor Day, overage is a dependent variable, ultimately determined by GMV growth in excess of committed GMV. Overage revenue in a given quarter also depends on contract structure and contract timing. As customers renew their contracts, they have proven more willing to commit to higher minimums, while this decreases the overage number, our revenue from contract minimums increases, which is more predictable. The key independent variable, the true driver of subscription revenue performance and a better measure of underlying business is comparable customer GMV. Therefore, we will provide comparable customer GMV growth to you each quarter going forward, and this will be the last quarter for overages.

As Tom mentioned, our new customer bookings grew 22% this year on a constant currency basis. Our year end 2015 backlog was $595 million, up 29% from $462 million at the end of last year, and up 30% on a constant currency basis. Recall that backlog represents the total committed minimum subscription fees under e-commerce contract plus our deferred revenue. So, the $133 million increase in backlog during 2015 represents the increase from new subscription bookings plus contract renewals, less the minimums we recognized as subscription revenue during the year of approximately $150 million.

Unbilled contract backlog that we do not reasonably expect to be recognized as revenue this year, is approximately $388 million. Backlog we expect to recognize as revenue in 2016 is approximately $207 million, consistent with what we told you at Investor Day. Average revenue per customer reached a record $623,000 for the trailing 12-month period ended December 31, 2015, underlying our success in growing and retaining our largest customers. This is up from $611,000 in Q3 and $578,000 for 2014. Our ARPU has increased every quarter since the end of 2008, driven by our land and expand strategy and larger customers going live on the platform.

We ended the year with 331 live customers, up 24% from last year. We also had 60 customers in implementation at year-end, up from 48 customers in implementation at the end of 2014. Our total customers under contract increased by 24% to 391 customers from 315 customers under contract at the end of 2014.

It is worth noting that we had five customer terminations this year due to bankruptcy. Typically, we have one customer or two customers, and had none in 2014. These 2015 bankruptcies serve to modestly lower the growth rate in our net customer additions this year. Notably, we closely monitor the strength of our customer base and feel comfortable that barring any unforeseen events, 2016 will be more normalized to historical trends. Along these lines, we had almost no bad debt expense in Q4.

Moving down the income statement, GAAP subscription gross margin was 82%, down from 83% a year ago, non-GAAP subscription gross margin which excludes stock compensation and the amortization of intangible assets related to acquisitions was 84% for the fourth quarter versus 85% last year.

As a reminder, we are seeing a modest headwind in our subscription cost of goods sold, driven primarily by the rollout of the new solutions into the market that carry slightly lower margin than our commerce platform, which is the primary driver of the 100 basis point decline in the subscription gross margin.

Total GAAP gross margin for the quarter was 75% down from 76%. Our non-GAAP total gross margin was 77% in the fourth quarter, down from 79% in 2014. A higher mix of services revenue from the acquisition of Tomax, as well as the slightly lower subscription gross margin, contributed to the decline in total gross margin. For full year 2015, our GAAP subscription margin was 80%, down from 82% in the prior year. On a non-GAAP basis, our subscription margin was 83%, consistent with 2014. Total GAAP gross margin for 2015 was 72%, down from 74% in 2014 and non-GAAP total gross margin for 2015 was 75% down slightly from 76% last year. In Q4, our total GAAP operating expenses increased by 21% to $55.9 million from $46.3 million a year ago. Stock-based compensation, intangible amortization and contingent bonuses within operating expenses were approximately $12 million in the fourth quarter of 2015, an increase from about $5 million a year ago.

Excluding these items, our non-GAAP operating expenses increased by $5 million or 13% year-over-year, with a $9 million increase in salaries, facilities and other spending related to our higher employee base, offset by a $4 million decrease in bonus and commissions. Had we closed the two deals that pushed into 2016, bonus and commissions would have been down $3 million year-over-year as Q4 2014 record performance resulted in higher bonus payouts across all expense lines.

For the full year 2015, our total GAAP operating expenses increased 45% to $212.5 million from $146.3 million a year ago. Stock compensation, amortization of purchased intangibles, and contingent bonuses within operating expenses were $45 million in 2015, an increase from $27 million in 2014. Therefore, excluding these items, our operating expenses increased 41% year-over-year. For 2015, our GAAP operating loss was $43 million and non-GAAP operating income was $11 million or 5% of revenues exceeding our outlook for a 3% non-GAAP operating margin. Higher than expected revenue and lower expenses drove the modest outperformance in non-GAAP operating margin versus the outlook we provided at Investor Day.

At December 31, 2015, we had 943 employees, a 60% increase from 598 employees a year ago. We increased sales and marketing head count 30% year-over-year to 271 employees at the end of 2015 from 208 employees last year. Sales related head count at year-end was 200 employees, up from 153 employees last year and down slightly on a sequential basis. We expect hiring in sales to increase in Q1 2016. Research and development head count increased 101% to 320 employees, up from 159 employees last year, driven by our planned increase in head count and the acquisition of Tomax.

Moving on to guidance. As Jim outlined at the beginning of the call, all forward-looking statements fall under the Safe Harbor provision. The non-GAAP metrics I will discuss exclude stock-based compensation, amortization of purchased intangibles, as well as contingent consideration related to acquisitions. We expect subscription revenue for the full year 2016 to be in the range of $260 million to $270 million, consistent with our preliminary outlook we provided at Investor Day. This guidance assumes the U.S. dollar per euro spot rate, which was approximately $1.11 (27:33) as of September 8, in line with our average rate for 2015.

We expect total revenue for 2016 to be in the range of $295 million to $305 million. We expect 2016 bookings to grow 25% to 35% over 2015. Comparing our bookings target to our current pipeline, our coverage ratio was higher entering 2016 than it was entering the year-ago period. We continue to expect 2016 subscription gross margin of 81% and total gross margin of 74%, both down modestly from 2015.

The year-over-year change is largely due to the rollout of new solutions into the market that carry a slightly lower margin than our commerce platform. Over time, we expect these solutions to scale and achieve margins similar to our commerce platform.

There is a modest effect of approximately 20 basis points from capitalized R&D in 2015. We expect to achieve leverage in SG&A as a percentage of revenue, along with an increase this year in R&D as a percentage of revenue, again related to spending for new solutions.

We expect to begin achieving R&D leverage in 2017. We expect our GAAP operating loss for 2016 to be between $50 million and $52 million. And our non-GAAP net operating income to be between $8 million and $10 million, resulting in a non-GAAP operating margin of approximately 3%.

We anticipate our weighted average basic and fully diluted shares outstanding will be approximately 37 million shares and 40 million shares, respectively, in 2016. For the first quarter of 2016, we expect subscription revenue to be in the range of $56 million to $58 million, which represents a 32% increase at the midpoint.

We expect total revenue to be between $63.5 million and $65.5 million, which represents a 28% increase at the midpoint. For the first quarter, we anticipate our weighted average basic and fully diluted shares outstanding will be approximately 36 million shares and 38 million shares, respectively.

At Investor Day, we detailed our framework for balancing growth and profitability, and our target to deliver 30% plus growth in subscription revenue over the next three years to five years. Our 30% plus target was based on three key components; achieving comparable customer GMV growth of mid- to high-teens, growing new subscription bookings greater than 25%, and keeping churn below 5%.

For 2016, our guidance of 30% to 35% growth in subscription revenue assumes high-teens comparable GMV growth, and we expect bookings to grow above 25% with churn less than 5%. If we assume a moderate slowdown in comparable customer GMV to the mid- to high-teens, bookings growth of 25% and a churn less than 5%, we believe we will deliver at least 30% growth in subscription revenue over the next three years to five years.

At this rate of revenue growth, we remain committed to delivering at a minimum 100 basis points of non-GAAP operating margin improvement per year over the next three years to five years. If growth rates slow, we're committed to delivering even greater margin improvement.

We had a strong year in 2015. We believe that our investments in growth and innovation will further strengthen our leadership position as we work to bring our unified commerce platform to market. I'm looking forward to a strong 2016 for Demandware.

And with that, we will open the call for questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from the line of Justin Furby of William Blair. Your line is now open.

Justin A. Furby - William Blair & Co. LLC

Hi, thanks. Sorry for the background noise. Just a couple of questions. The first one was I wanted to know around this bookings target for 2016, the 25% to 35% growth. I just wanted to know if your internal plan is something different than what you're communicating to us. In other words, just how conservative or not conservative is that plan and what gives you confidence that a quarter from now or two quarters from now, you're not going to take that down. And what I'm particularly struggling with is, you had some deals that pushed, so your year ago compare is a bit easier, and they pushed into this year, one of them is closed, and another one should close. So, this year's numbers should be boosted. So, I'm just struggling with that dynamic and then I've got a couple of follow-ups. Thanks.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Well, so, certainly, Justin, as sort of is the norm the quota we distribute would be higher than our guidance for bookings. So, we feel comfortable. We also feel comfortable, because of the pipeline growth though of 40% and large enterprise success. So, I think, we feel very comfortable with the direction we've given in terms of the range of bookings. In terms of the other part of your question about the couple deals that slipped. I mean, I think we've looked at this historically at Demandware and it's been my experience at other companies too with large enterprise deals, when they do slip, it does consume a lot of important time on the part of both the sales reps, regional management, theater Vice Presidents, to get those deals closed, because they're big ones and they're very important, and there's – they slip and are gone, and that time does detract from what would otherwise be sold during that time period. So, that's why, we didn't simply boost the goal by the slip deals, although it certainly does give us a little more confidence in that range, because we do have as we said one of them closed already and one other one we hope to close.

Justin A. Furby - William Blair & Co. LLC

Okay. And then is there anything to, I guess, can you elaborate a little bit on the sales changes, what you're doing specifically there? And then I've got one more. Thanks.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

When we made a change in a little bit of the sales leadership, I mean, I think there is not really much disruption as far as our process is concerned. Jeff Barnett, who is our COO and who builds our sales organization and had hired many of the key people in key roles has now assumed direct leadership of that sales organization. He had it reporting us to him before but he has direct leadership for it now, and we are doing a search to find another executive to bring into Jeff's organization to bolster that leadership. But we don't expect any disruption whatsoever given that Jeff is the one who built the model and has been involved in sales throughout and customer relationships, and has also hired many of the key people in the organization.

Justin A. Furby - William Blair & Co. LLC

Got it. And then lastly on – I wanted to touch on mobile, it seems like there's one thing that came out of the holiday, that it's really starting to take off and pick share from desktop. And I was wondering if you look at that as an opportunity in terms of re-platforming things like a lot of these customs platforms that are out there today, probably struggle there. So I'm wondering what you are seeing in terms of pipeline and do you attribute any of that growth to mobile and how it impacts you. Thanks.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

It's a little hard to directly attribute pipeline growth to any particular feature like mobile, but we certainly see – I mean, I've certainly heard when I go talk to prospective customers who have made a decision they're going to do something, they're going to change. It's usually something where their existing platform is too fragile, too hard, too not agile enough to move, et cetera. One of those causes can be mobile. Things they want to accomplish with mobile, another one can be international, it can be a lot of different factors but we certainly hear mobile among a litany of reasons why their existing platform is not adapting fast enough to changing consumer preferences that drive these kind of decisions.

Justin A. Furby - William Blair & Co. LLC

Got it. Thank you.

Operator

Thank you. And our next question comes from the line of Abhey Lamba of Mizuho Securities. Your line is now open.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Yeah. Thank you. Tom, can you talk about the adherence (35:44) in the large deals, as well as the competitive environment in those deals that's there, and does the discussion of pricing model come into picture, and how does that play out?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I think, I got the question, it started breakup a little bit, but in terms of the large deals. Competitive dynamic really had nothing to do with it. As we said, we've won one of the ones that we talked about slipping already and the other one is not a competitive situation at this point. It's a negotiation and a deal we hope to close, but it's not a situation where we are you know still un-chosen, we've been chosen, and the customer is indicating they want to close the deal. So we're hoping to get that closed.

With respect to the – I think, the second part of your question had to do with the pricing model and that type of thing.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Yes.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yes, that dynamic.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Yes, and sorry about the bad connection.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah, that dynamic is really no different than it's been. I mean, that's an important part of discussions with any prospective customer. With our existing customers, they are very happy with the model, of course they – when they negotiate they want to get a lower rate, but they're very happy with the model, because it aligns our interest with theirs. With prospective customers that's part of the educationary process we go through, obviously the competition will say negative things about our model as they want to do. But – and that's really no different than it's been in any quarter in the past. So, that really didn't contribute in any way to this to what we were talking about.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Got it. And you mentioned about bankruptcies in 2015. What are your assumptions for any potential bankruptcies in 2016, and has your guidance been (37:22) for some of that potential?

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. This is Tim. We mentioned that there were five bankruptcies in 2015, which was a high that we've never seen before. It's very hard to predict how that's going to play out in 2016. We're comfortable with the guidance that we gave back at Investor Day that we've reconfirmed on this call. As we said, a couple months ago, we've taken a cautious approach to thinking about 2016 and the collections team has done a great job this year, really keeping the close eye on existing customers, but screening prospects from a credit worthiness when they come in the door. So I think overall, we feel pretty good where we are with the customer base right now.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Thank you.

Operator

Thank you. And our next question comes from the line of Derrick Wood from Susquehanna International Group. Your line is now open.

J. Derrick Wood - Susquehanna Financial Group LLLP

Great. Thanks. So just wanted to hit on the comments on the softness in Europe and the longer sales cycle up market. Is that purely a macro factor or anything to flag in terms of competitive dynamics or internal dynamics that you had mentioned, and it sounds like there may have been a little bit of sales attrition in Q4. If you could just kind of highlight where that's coming from?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I don't think there's any real change in competitive dynamics that effect that, and I say that we grew – as we talked about, we grew North American bookings 35%, which is extremely healthy and the competitive dynamics is really not dramatically different in North America versus Europe. So I think, the European situation was, we attribute it to as we said macro conditions in Europe which were softer than North America and also just around execution. Some of our territory assignments in the way we had our sales people deployed, we've already adjusted, and we think we've got it optimized for 2016 in a way that we didn't have it optimized in 2015 as we look back on it.

J. Derrick Wood - Susquehanna Financial Group LLLP

Okay. And then you explain the – if I look at the new customer generation, it slowed down versus a year ago, but you had the bankruptcies, you had a couple slip deals, and normalizing through that would have been on a similar rate. How are you thinking about 2016 – I mean, on one hand you are moving up market, so you've got probably less deals, larger deals, you know on the other hand you've got a 30% higher sales head count. So just if you could help us think of drivers and expectations around new customer generation in 2016?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I would expect 2016 in a way to be like 2015; in that, in 2015 we had more deals than we did in 2014, and they were larger on average than they were in 2014 and I would expect the same type of thing to happen that the growth in bookings that we anticipate of 25% to 35% will be partially driven by larger deals on average, and partially driven by more deals. So we expect both phenomenon to occur in 2016.

J. Derrick Wood - Susquehanna Financial Group LLLP

Okay. I'd squeeze one more in. On the mobile side, I mean, how are you feeling with your mobile storefront capabilities and what's kind of the penetration within the install base, or said another way, the opportunity to up-sell on the mobile side within the install base?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Well, in terms of the mobile storefront, I'm interpreting that to mean our mobile point-of-sale offerings that we have the charter customers for, which we're – which we said is generally available in North America in the second half of 2016, that is a phenomenally attractive product. That it was such a buzz at NRF around that. I mean the idea that our store associate on any type of device could meet a consumer anywhere in the store and have total access to the consumer's background to the online, inventory availability, as well as the product information and conduct transactions, it's really appealing, and it's got a terrific user interface that that can be customized by the retailer, so it's an incredibly attractive product. Now, we're early on it obviously since we're working with our charter customers now and we're talking about general availability in the second half of 2016, but we couldn't be more excited about it.

J. Derrick Wood - Susquehanna Financial Group LLLP

Okay. Great. Thank you.

Operator

Thank you. And our next question comes from the line of Nandan Amladi of Deutsche Bank. Your line is now open.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Hi, good afternoon. Thanks for taking my question. So in the script you mentioned that the comparable customer GMV increased by 25%, how many of these customers actually as part of that GMV growth went to a different peer of GMV in your – in the rate plan. The reason I ask this is the most popular question I get is how big does a customer – how big can a customer get and may they decide at some point to take the business in-house?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Every contract is a bit different, that's why it's a little bit difficult to answer your question in the abstract. So, I mean, even a small customer who is doing $15 million might have a tier from $0 million to $20 million and $20 million to $40 million, and so they might trip over into $21 million go to a different tier. But the gradations between tiers at any level whether it's tripping at $20 million or tripping at $100 million, the actual take rate on the dollar just below that dollar, just above that is very small differences. So it really plays out over a very large spectrum, and that's why we talk about this sort of 1% to 3% rate from our largest to our smallest customers. But there's no sort of dramatic impact on any particular customer growing across the tier.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

So it tends to be fairly linear with a small step function, is that what you're saying?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. That's right.

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Nandan, you may recall a chart that we showed at Investor Day, which essentially is the pricing curve and as customers move up in GMV, they earn a better rate, but as Tom mentioned, it really is – it's modest incremental moves along that curve, so you're not going to see the big fluctuation from a pricing standpoint.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Right. And a follow-up if I may. In terms of the bookings mix, land versus expand, what did that look like in 2013, 2014 versus 2015?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Well, bookings, as we talk about them is almost exclusively new customers. I mean, there's a little bit of selling some of our existing products into the customer base but that's a very small portion of bookings. So when we think about bookings, we're really talking about new customers, not land and expand. I mean, there was a couple cases like historically we've talked about like L'Oreal or something that makes a big enterprise contract and there's a little bit of that in 2015, but nothing out of line with previous years. It's really about signing new customers that really drives the bookings.

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Nandan, I don't know if you were also possibly thinking about incremental revenue year-over-year in terms of new customer mix versus existing customers. There was about two-thirds new customers, about a third from existing customers, that's something we'll disclose in the K, when it gets published.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Great. Thank you.

Operator

Thank you. And our next question comes from the line of David Hynes of Canaccord. Your line is now open.

David E. Hynes - Canaccord Genuity, Inc.

Hey. Thanks, guys. So, one on the guidance, maybe for Tim. You ended with your comments about the framework for margin expansion, and I guess, this level of growth we should be expecting 100 basis points of margin expansion, then I look at your guidance and it implies I guess at midpoint margins down 160 basis points at midpoint. So maybe I missed something in the comments but just help me reconcile what's going on there.

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. So, DJ, back at the Investor Day, we said for 2015 we were targeting about 2.5% to 3%. We came in better than that, so we over-performed in Q4 relative to what we said back on the Investor Day. The guidance for 2016 from Investor Day was approximately 3%, and then the $8 million to $10 million range gives you that 3% at the midpoint.

Certainly in the year, we're comfortable where the guidance is for right now, again we've taken a cautious view, we are committed to profitability in 2016, and again over the long-term. But, in terms of seeing that step-up that you might have been expecting, two months ago we were looking at a lower non-GAAP operating margin in 2015, and it was really driven by outperformance primarily from revenue, and a little bit on the expense side that gave us the stronger 2015.

David E. Hynes - Canaccord Genuity, Inc.

Okay. And then I guess the second question, just the backlog number that you guys share. Any change in the duration of the backlog, is that 30% currency adjusted number pretty good apples-to-apples for growth rate on the backlog?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

It's pretty good; if anything, it understates it just a little bit, because our new deals signed in 2014 had a little more heavy weighting of four year and five year deals than our deals signed in 2015. But, it's not dramatic, but if anyway...

David E. Hynes - Canaccord Genuity, Inc.

Yeah.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

That understate – the 30% understates a little bit.

David E. Hynes - Canaccord Genuity, Inc.

Okay. Got it. And then last one. Tom, maybe just talk about what you're learning from your Store Center charter customers in terms of what they'd be willing to pay for that solution?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I don't know in honesty, DJ, if we're learning much about that particular characteristic yet, because our focus with the charter customers was finding the kind of customers that we could work with very collaboratively to get this to be a success in their stores, and who had the right commitment level to roll it out in their stores. So, we really haven't focused on the economics with the charter customers, so I don't think we're getting much insight into that yet.

David E. Hynes - Canaccord Genuity, Inc.

Maybe how are you thinking about it? I mean, this – we're GA-ing this in the back half of the year, so I assume there is some pretty detailed conversations going on about how you're going to price it and bring it to market, so any thoughts?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah, I mean, our thinking is that for the average customer with the number of stores that we would expect with sort of a not a pure play, but a traditional retailer, that we would potentially when they roll it out to all their stores, double or more what we could potentially get out of their account compared to just getting the e-commerce platform.

David E. Hynes - Canaccord Genuity, Inc.

Yeah. Okay. That's good to hear. Okay. Great. Thanks, guys.

Operator

Thank you. And our next question comes from the line of Ken Wong of Citigroup. Your line is now open.

Ken Wong - Citigroup Global Markets Asia Ltd.

Hey, guys. I maybe wanted to touch a little bit on kind of a past comment you guys made. You guys had talked about how customers were kind of moving around their promotional activity and just wondering what you guys are seeing more recently whether or not there's any change in customer behavior around promotions.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah, I think, Ken, what you're referring to is, we did talk about it during the middle of the year that we had a couple large customers who dramatically scaled back on promotional activity.

Ken Wong - Citigroup Global Markets Asia Ltd.

Yes.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I don't know if it was a broader trend then that, but we did have a few large customers we talked about. So – and some of those customers in the holiday season, it was actually mixed bag, some of them went back to more promotional activity in the holiday season and some did not. So, we have factored in to our 2016 projections appropriate level of conservatism about those types of customers about what they're going to be doing in terms of their GMV growth based on what we learned in 2015.

Ken Wong - Citigroup Global Markets Asia Ltd.

Got it. And then, Tim, on the profitability in terms of just how we should think about OpEx, if we do start to see more macro softness? I mean, you guys already baked in a little bit on the bookings by broadening that range downwards. Should we think, if you guys are heading towards the lower-end of that bookings guide that you guys will also scale back on some of the spending or kind of the other way around?

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Ken, we're committed to the operating margin guidance that we gave you. I think we clearly have the opportunity to manage to that in 2016. It is a delicate balance of investing for the future, both in R&D, we said would increase in 2016. We think we're making all the right moves with R&D investment. We're committed to leveraging SG&A, and we will see that in 2016.

So, I think, we still feel very comfortable with the $8 million to $10 million range that we've given you. But, we certainly have flexibility to adjust accordingly, if things turn out to be significantly different than what we see right now.

Ken Wong - Citigroup Global Markets Asia Ltd.

Okay. Got it. And then, last thing from me. You mentioned that you guys are going to, I guess, talk more to comparable GMV and you guys are going to take away the overage metric. Should we at least think that in, at the end of 2016, you guys will still provide that just to sort of – I mean, you guys gave the $45 million kind of roughly flattish number for 2016 at the Analyst Day. Will we have something to kind of compare that number to at the end of the year?

Timothy M. Adams - Executive Vice President, Chief Financial Officer and Treasurer

Ken, we're taking the overage away, because I'll apologize for this. I think it has created more confusion than benefit. And as Tom pointed out at the Investor Day, it really is the comparable customer GMV that is the driver and overage becomes an output. We did have a chart that we shared with you at the Investor Day, and if we show that same chart again for 2017 then we would show you what the overage is, there is certainly nothing to hide there. But we don't want to get into this habit of talking about it every quarter because I think it creates more confusion than it does benefit when it's really the comp (51:30) GMV that's the primary driver that we're now committed to sharing with you on a quarterly basis where in the past we would share that just on an annual basis.

Ken Wong - Citigroup Global Markets Asia Ltd.

Great. Appreciate the feedback. Thanks, guys.

Operator

Thank you. And our next question comes from the line of Brian Schwartz of Oppenheimer. Your line is now open.

Koji Ikeda - Oppenheimer & Co., Inc. (Broker)

Hi. This is Koji Ikeda for Brian Schwartz. Thank you for taking my question. We were at the NRF BIG Show last month and we noticed that pretty much everyone, the hardware and software vendors that were there, the old and the new, they were all touting that they had the golden answer to omni-channel. So as omni-channel competition continues to heat up within the retail industry, I was wondering what do you think the key value proposition that a next generation commerce software vendor like yourself has over an incumbent retail technology vendor.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I think it's very – in a way very simple. What we – the reason we disrupted the e-commerce market was the fact that we were able to deliver the combination of scalability for the enterprise, customize – complete customizability along with the ability to continuously innovate without breaking those things, so – because we could deliver changes in that environment without disrupting it. The current store environment and when omni-channel – I mean, to be successful at omni-channel, you have to embrace both the digital environment and the store environment. The current store environment has nothing like that, it is talking about upgrade cycles of seven years, if you have a change, and you need to go out, it might take a year or two years to roll it out, or if we disrupt the store environment the same way we did the e-commerce environment, there is nobody offering that type of capability. And to the extent consumers demand that kind of rapid change and kind of changing environment in store as well as online, we think we have a unique competitive advantage of what we've already delivered by extending into the store that no one else can do.

Koji Ikeda - Oppenheimer & Co., Inc. (Broker)

Great. Thank you for that.

Operator

Thank you. And our next question comes from the line of Brad Sills of Bank of America Merrill Lynch. Your line is now open.

Brad Sills - Bank of America Merrill Lynch

Hey, guys, thanks for taking my question. Just one on the intelligence – predictive intelligence features that you have been kind of building out more and more, could you comment a little bit about customer interest, pipelines, what that's doing to pipelines, as you get ready to release the intelligence later?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. Well, there's two parts of it. The predictive e-mail part is one we charge for, but what we were referring to in the earnings call was the predictive recommendations, which are being embedded into the platform and will be available with no incremental fee to our customers, for all of customers worldwide and the goal is to have that available to all of them by the end of Q1. And there is a lot of interest on our customer base on that, in fact we're trying to figure out, making sure, we prioritize our attention to the ones that want to implement it most rapidly. And the reason there's a lot of attention is the reason we're embedding it, is we're confident that there is a GMV lift that will occur as customers use it by more personalizing the way experience is. So, there is tremendous interest, but it isn't sort of a bookings question, it's a question of customer satisfaction and GMV growth, which does then translate into subscription revenue growth for us.

Brad Sills - Bank of America Merrill Lynch

Got it. Thanks, Tom. And then, one, I think earlier you've mentioned your coverage ratio is up relative to your forecast, but you did take the forecast down slightly at the midpoint on bookings. Are you just baking in more conservative assumptions around close rates just given the environment or maybe if you could just describe kind of the puts and takes there please, that would be helpful?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I think, it's really just about the fact that as our mix includes more large enterprises, which is great, this was strategically something we wanted to do, it makes the prediction of any particular deal more challenging, because they can take longer. So we're simply trying to have a broader range and be more recognize that phenomenon. Certainly, one of things we don't want to get ourselves into doing is sort of get to an end of a year or something and be – respectively with the large deals trying to compromise them to get into our bookings target. So we want to have a range that we feel comfortable with, so we can still hold the line in terms of our take rate, which is what we've done successfully in the past.

Brad Sills - Bank of America Merrill Lynch

Great. Thanks, Tom.

Operator

Thank you. And our next question comes from the line of Jesse Hulsing of Goldman Sachs. Your line is now open.

Frank Robinson - Goldman Sachs & Co.

Hey. You have Frank Robinson here for Jesse Hulsing. Quick question on the sales leadership. I guess, what may – why was the decision made to have Jeff take that back over. Was the prior sales leadership that was reporting to Tim still at the company, and I guess, is there a specific issue that he's trying to solve for?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I think, we've been very happy with sort of the sales leadership under Jeff for the last two years as it's grown the business. But I think, we ended up concluding as we analyzed what was going on with the large enterprises and some of the changes in the mix, being a multiproduct company and the other things we're trying to achieve. We felt that we could benefit from a change in the some of the leadership reporting up to Jeff, so that's what we are doing. And Jeff obviously has extremely deep understanding of our customers and our business and our strategy and we felt for this period, it would be more beneficial to have him directly leading that, and then bringing on somebody who can bolster that as we go forward.

Frank Robinson - Goldman Sachs & Co.

Okay. And I know that these sales head count declined quarter-over-quarter. I guess what's the plan? I remember you – heard you say something about 1Q, but for 1Q and full year, I guess how you're thinking about growing sales head count?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

We're planning on growing sales head count approximately 20% over the course of the year. Just couple weeks ago, we were at our sales kick-off, and which we do every year in January, and we had a whole bunch of new people who had already started, many of them started January 1, which is a key date. We purposely try to make sure that they are for sales kick-off. So, we've already got new faces in our sales organization from where we were at the end of the quarter.

Frank Robinson - Goldman Sachs & Co.

Okay. And last one. If you would look at your biggest customers, say those with GMV greater than $100 million. Are a meaningful portion of those customers up for contract renewals this year?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I didn't look at it, but – I didn't look at it that way. But, I don't the percentage of those as opposed to the rest of our customer base, you know, there's a little bit over 60 customers up for renewal this year. And I don't think, it's going to – that's whatever 20% proportion of our customer base. I think roughly in the large enterprises, it's sort of a similar proportion of them that are up for renewal.

Frank Robinson - Goldman Sachs & Co.

Okay. Thanks.

Operator

Thank you. And our final question comes from the line of Ross MacMillan of RBC Capital Markets. Your line is now open.

Ross MacMillan - RBC Capital Markets LLC

Thanks for squeezing me in. So, Tom or Tim, I guess I'm just trying to understand you maintained subscription revenue guidance for 2016. Bookings in 2015 were a bit light even when you adjust for the one deal that closed, and you didn't raise comparable GMV growth. So, what's the bridge to get back to the subscription revenue maintenance (58:50) that you had given us at the Analyst Day, because if you didn't raise comp GMV and your bookings were lower, there seems to be a gap?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I mean, there technically is a little bit of a gap from what we had in mind, which is different than what we guided to, right. There is a little bit of a gap for one deal. I mean, Frank, we've closed one deal already, that's not even measurable. The difference from that deal closing December 31 versus closing before February 9. And the other deal we haven't closed, so there's a little bit of a gap there, but it's really insignificant in terms of the scheme of thing, so certainly not in any way would impact our guidance.

Ross MacMillan - RBC Capital Markets LLC

And thank you. And just one follow-up just on the sales head count, we've seen it down sequentially I think middle of 2014. What drove that and how much unplanned attrition are you seeing in your sales org? Thanks.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

There were some that was planned, as you sort of speculated and there were some that was unplanned. I don't think there was any, you know – in looking at it, I don't think there was any generic factor other than, you know, you get to an end of the year, and if – if a sales rep maybe had a mediocre year in 2014, and knew they weren't going to make quota in 2015, and they get to the point where they think the die is cast on that that's when they start looking around, right.

So I think, there were some situations like that. But I don't think there was any sort of generic factor that led to it anyway.

Ross MacMillan - RBC Capital Markets LLC

Okay. Thank you.

Operator

Thank you. And ladies and gentlemen, thank you for participating in today's conference. This does concludes the program. You may all disconnect. Everyone, have a great day.

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