Determine's (DTRM) CEO Patrick Stakenas on Q3 2016 Results - Earnings Call Transcript

| About: Determine, Inc. (DTRM)

Determine, Inc. (NASDAQ:DTRM)

Q3 2016 Earnings Conference Call

February 10, 2016 05:00 pm ET

Executives

John Nolan - CFO

Patrick Stakenas - CEO

Analysts

Eric Martinuzzi - Lake Street Capital Markets

Brian Kinstlinger - Maxim Group

Nick Farwell - Arbor Group

Operator

Greetings and welcome to the Determine, Inc. Third Quarter Fiscal Year 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Nolan, Chief Financial Officer for Determine. Thank you. Mr. Nolan, you may begin.

John Nolan

Thank you. Good afternoon and welcome to the Determine third quarter fiscal year 2016 earnings call. Presenting on the call today from the company, we have Patrick Stakenas, President and Chief Executive Officer and myself, John Nolan, Chief Financial Officer.

Before we get started, please note that this conference will include forward-looking statements within the meeting of the securities laws. These forward-looking statements will include discussions about the company’s business outlook, anticipated financial and operating results, product development and future plans. Such forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by the forward-looking statements.

Such risks, uncertainties and other factors include, but are not limited to, those that are contained in the company’s filings with the SEC, including the Risk Factors section in our most recent Form 10-K as supplemented in the company’s Form 10-Q, as each is filed by the company with the Securities and Exchange Commission. The company does not assume any obligation to publicly release any revisions to forward-looking statements discussed during the call.

In addition, on the call we will refer to certain non-GAAP financial measures to help understand the company’s past financial performance and future results and to supplement the financial results that we provide in accordance with GAAP. The company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP counterparts in our earnings release filed with the SEC earlier today and available on our website at www.determine.com in our Investor Relations area.

We will also be discussing booking and operating measures that is not realized in the company’s revenues or any other amounts presented in accordance with GAAP and the company’s statement of income, balance sheet or statement of cash flows or other equivalent statements.

With that, I would like to now introduce Mr. Patrick Stakenas, President and Chief Executive Officer of Determine. Patrick?

Patrick Stakenas

Thank you, John and good afternoon everyone. Thank you for joining us for our third quarter fiscal 2016 results conference call. And many thanks again to all of my colleagues at Determine for their hard work and commitment these past three quarters as there has been great progress in our efforts to grow and right size the business while delivering new top line revenue.

Joining me today here in Carmel, Indiana, along with John Nolan, are Jeff Grosman, our Chief Operating Officer; Dave Bush, our Chief Sales Officer; and Art Fisher, our General Counsel. It is with their hard work, support and ongoing efforts that we are making solid progress as a company.

I would like to review what turned out to be a very busy and productive quarter for us. We achieved record new annual recurring revenue or ARR bookings. We increased recurring revenues overall as a company. And we have moved our non-recurring revenue business to profitability.

It was strong, well-thought quarter. And we have executed on numerous new customer agreements across our solutions. And I am pleased with our success, which included several exciting six-figure deals. We as a new brand, Determine, has successfully completed the assimilation of three former companies - Iasta, b-pack and Selectica into one force, pulling together all business functions into a single team. That being said, we still have much work to do with respect to fully rolling out our integrated Determine platform which encompasses a complete source to pay and enterprise contract life cycle management suite of solutions.

However, all key business functions including sales, marketing, IT, finance and research and development now operate as one synchronized organization. This quarter once again exemplifies the clear need in the market place for robust source to pay in contract management solutions.

Our strategy is to continue to market and sell our industry-leading point solutions which carry deep, deep functionality and capabilities in a suite fashion. We have strong evidence to support the suite approach as we’ve added several large new customer who’s acquired multiple products for their initial rollout.

Our customers along with industry-leading research, from Gardner, Ardent, Spend Matters, PayStream and others, continue to support our plan to deliver a fully-integrated suite of technology solutions that provide a full source to pay in contract management functionality.

In the third quarter, there were four key areas of focus - continued alignment of our cost within the business. Our progress in this area is solid. However, we know going forward, we need to do more and move faster with respect to expense management.

Laser focus on delivery and delivering a task to profitability. On this effort, I am very excited to report that we are showing positive gross margin in our professional services group for the first time in many years.

Selling new business logos while leveraging a robust base of over 300 corporate customers, in up-selling and cross-selling all products across all customers.

And lastly, completion of the assimilation of b-pack people process within technologies with the former Selectica and Iasta entities.

But before I comment further on our strategic initiatives I just reviewed as well as key operational performance topics that I believe are critical for the businesses to get success, on a go forward basis, I would once again introduce our Chief Financial Officer, John Nolan.

In the past four months since John has joined Determine, he is the beep into all the financial aspects of the business. And he and the team continue to work to uncover opportunities for both expense reduction and business optimization. John has worked tirelessly to find opportunities to better align the business with our expense goals. And I firmly believe we will begin to see the results of these efforts in the coming quarters.

With that, I’d like to turn it over to Determine’s CFO, John Nolan, to review the company’s Q3 fiscal 2016 financial performance. John?

John Nolan

Thank you, Patrick. Please note that a few items discussed on the income statement will refer to both GAAP and non-GAAP data, while the remaining income statement items and the balance sheet will refer to GAAP data only.

First, I would like to begin with the general discussion of the continued and improving strength of our subscription bookings. Bookings are a an operating measure not derived from the company’s revenues or any other amounts presented in accordance with GAAP in the company’s statement of income, balance sheet or statement of cash flows or other equivalent statements.

Our annualized recurring revenue booking represents the annualized contract value of our offering that we generally recognized as recurring revenue ratably over the contract period. The combination of our continued and improving sales execution and the significant expansion within our customer install base translated this quarter into 1.44 million in new bookings, 64% increase over the same period of prior year. This is our third $1 million plus new bookings quarter in a row.

Total GAAP revenue for the quarter was $7.1 million, up 19% compared to the same period last year and up 5% compared to the prior quarter. Total non-GAAP revenue was $7.2 million, up 14% from the year ago period and up 5% over the prior quarter. Please recall that that $88,000 difference between GAAP and non-GAAP revenue is due to the impact of revaluing the deferred revenue balances acquired as required by GAAP purchase accounting.

Total GAAP gross profit for the quarter was $3.7 million or 52% of total revenue, an increase of 3 percentage points over the prior year quarter. The gross profit percentage point increases year-over-year reflect the continued and significant decline in non-billable professional services delivery.

Non-GAAP gross profit in the quarter was $4.1 million, or 58% of total revenues, up 2 percentage points from the same period last year and on par with the prior quarter. Again, the year-over-year improvements are being driven by less non-billable professional services work and continued focus on cost reduction. Note that the difference between GAAP and non-GAAP gross profit is the difference in GAAP versus non-GAAP revenues as well as the elimination of the amortization of acquisition-related intangibles, stock-based compensation and severance expense from the cost of our revenue.

Total GAAP operating expenses in the quarter were $6.6 million, and included $140,000 of acquisition-related expenses and $660,000 of stock-based compensation, and we’re down 3$ from the same period last year and decreased 1% from the prior quarter. Non-GAAP operating expense which excludes stock-based compensation, acquisition-related expenses and severance expenses were $5.5 million, down 4% from the same period last year and increased 5% from the prior quarter.

The year-over-year decline is due to management’s continued focus on rationalizing cost. The quarter-over-quarter increase is due to the timing of the merger with b-pack and that we only reported two months of b-pack in the prior quarter.

Turning to the balance sheet, we ended the quarter with $9.8 million in cash compared to $8.5 million in the year ago period and $8 million in the prior quarter. Net cash used in operations is $1.4 million in the quarter and there was a total increase in cash of $1.8 million for the quarter. Please note that the cash balances referenced in all periods include cash borrowed against our credit lines. Deferred revenues were $9 million compared to $8.1 million from the same period last year and $8.3 million in the prior quarter.

Billings, a non-GAAP measure, defined as revenues plus the change in deferred revenues for the quarter were $7.8 million, up 14% from the prior quarter.

Lastly, as many of you know, we announced this past week a $5.5 million financing package. The financing is composed of two elements - $2.5 million of convertible debt and $3 million in loan guarantees. The $2.5 million in convertible debt that we closed in December is a five-year note with interest of 8% cash or 10% payment in kind. The convertible price is $3.75 per share and the company can call the debt if the company’s stock is trading over $10 per share.

The $3 million loan guarantee is a two-year agreement with 12% annual interest rate in the first year and 18% annual interest rate in the second.

I would now like to turn the call back over to Patrick to review some key strategic and business performance topic. Patrick.

Patrick Stakenas

Thanks, John. We ended the calendar year 2015 and our third quarter with a team that’s pulled together as one company producing strong results that in my opinion foretell real promise for our future. As John mentioned in Q3, bookings and earnings per share was significantly higher than in the preceding quarters. In fact, sales and earnings in our third quarter 2016 were a record, well ahead of the last year’s revenue and earnings.

The third quarter was about continuing to deliver on the strategic plan that we often call the half moon that was setting motion over 20 months ago. In operationalizing the strategy, we know we have a challenging task ahead - to grow and become profitable simultaneously.

Building this task has made it difficult to reduce expenses at the accelerated rate we would all like to see, but we’re moving it along as promised. Now that the businesses are combined and rolling responsibilities are fully defined, we believe we can move faster in the month ahead in reducing our overall cost of doing business.

To ensure the delivery of our strategy, we will continue to invest in a Determine platform. The platform will leverage the strength of each of our solutions to provide a robust offering that will deliver full visibility and compliance over the entire end to end procurement in contract management solution.

At the present time, we are already migrating our sourcing cloud solution under the Determine platform to ensure the unified user experience with the procure to pay solution as well as integrated database. Plugging in the contract management solution will follow closely behind in the months to come. In the meantime, we continue to market and successfully sell our existing solutions.

Last quarter, we discussed our focus on the turnaround of our operational performance specifically with respect to the historic losses in our professional services group. Our global team is given a mandate to bring services cost into alignment while maintaining high quality deliverables and overall customer satisfaction.

So please join me in congratulating Eric Faulkner, our CTO; Jim Polskasky [ph], our VP of Global IT and the entire Determine global services delivery team on this hard fought achievement. But it does not end here and we must continue our quest to increase profitability to even greater lengths.

As we noted in our earnings release, for the first time in many years, in the current quarter we reported a non-GAAP recurring gross profit of positive $276,000 or 16% in non-recurring gross profit. As compared to a loss of $364,000 or negative 27.5% in non-recurring gross profit in Q3 fiscal year 2015 and a negative $29,000 or negative 2.1% in non-recurring gross profit in the prior quarter.

This successful initiative is a clear indicator of the past year long to focus the business in both continuous improvement as well as cost alignment. As we move to the new Determine platform, it is our aim to continue to improve delivery times as well as drive down implementation cost all the while we continue to support our existing customer base.

Our sales effort and the assimilation of our new team members in the France are helping= to drive the overall business growth. As the sales team continues to perform through closing new deals as well as up-selling and cross-selling. Our new leadership of Dave Bush, you see in the deck meeting, Determine’s overall worldwide booking this quarter were 1.44 million representing a 64% year-over-year increase.

The business sectors represented by our new customers include financial services, consumer package goods, pharmaceutical, energy, real-estate, medical imaging and manufacturing and distribution.

On the partner front, we also continued to have that considerable activity. And specifically, we’d like to update you on the Tradeshift partnership. We have recently completed cross training for North America and EMEA sales deals or field sales and a lives [ph] teams and are both now familiar with our joint value proposition. Tradeshift and Determine are approaching new business opportunities together for our joint value proposition is stronger against competitors like Coupa or Ariba.

As we discussed on our last call, we also continue to experience a shift in some of our long-term configuration business unit customers. I want to be clear here, though, that we are not losing this business to competitors. Our legacy customers are simply migrating to their own infrastructure to support their ongoing business needs.

This has been a very consistent business for us for many, many years. And we intend to continue to support our existing customer base and develop functionality interfaces that are needed to ensure they are able to continue to benefit from their historic investment in the configurator technology.

I anticipate that it will be a couple of quarters before the new level set is reached with respect to the ongoing impact of the configuration revenue decline and the company’s overall recurring revenue.

This revenue has historically been very high margin so I also anticipate a softening of our overall growth margins until we have cycled through the shift. We are looking forward to the opportunity to reverse this trend as we deploy the new Determine platform going forward.

As I’ve discussed previously, we are deep into the integration of the platform which is driven by the sophisticated multitenant SaaS technology acquired through the b-pack acquisition. Our Chief Product Officer, Julien Nadaud, is leading the charge in functional design and rollout. And we are well in the path for a fully integrated rollout of ECLM’s sourcing and procure to pay on a single platform later in the 2016 calendar year.

With that, at this point, I’d like to turn the call over to Q&A and answer some of your questions about our strategy, our results and our future road map.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Eric Martinuzzi from Lake Street Capital Markets. Please proceed with your question.

Eric Martinuzzi

Thanks and congratulations on the good execution there on Q3. Just curious to know on the recurring rev side, like the ARR of 1.44 million, up 64%, how much if we are to back out b-pack or maybe throw b-pack in the prior year period, do you have an estimate of what the organic ARR growth is of the business?

John Nolan

Eric, I know we talk about this a whole lot. And we’re not really doing that. We have in the past and decision is made that to really not split the acquisition versus ongoing forward. The 1.44 million was contributed both part of the legacy teams and the European teams but we sort of view them all together now. And it’s not just that they’re selling things that are part of the portfolio package because they already were seeing both side sell each other’s products.

So looking backwards at a different time isn’t that meaningful to us.

Patrick Stakenas

Yes, I can tell you Eric that across the products lines, we are selling all products. So certainly going forward, I’d continue to expect that to happen.

Eric Martinuzzi

Okay. And maybe, I know you’re not giving guidance but just directionally, Q4, final quarter for your FY2016, but it is a March quarter which for some technology companies can be down versus the December calendar yearend, your Q3. What’s the expectation for the coming quarter?

John Nolan

This is John. We’ve very looked forward obviously continuing our strength in million dollar quarters. Million dollar close quarters.

Eric Martinuzzi

Okay. And then for the non-recurring side, it’s nice to see that you can make a profit on the non-recurring side of the business. Does that does stay that way? Do we have any reversals here where there are big hirings or big projects coming, there are low margin that might pull that back down or is this the expectation that it sustains profitable from here on out?

Patrick Stakenas

I would think it sustains profitable. It may not quite be that high. It’s hard to get the mix right as we’ve continued over to b-pack and then domestics. So there’s going to a little variation. But this is the continued discipline that you’re showing there continually flashing the old negative so far of the pipeline. So it’s not coming back to drive it forward.

The other thing we talked a little bit about last time is when it comes around the Q2 again, we’ll see a dip because the French - as we talked through, b-pack have higher mix as you can see going back to their 8-K of NRR work. And when you get to the summer time, we have the folks on board but they’re on vacations so they’re not able to - we’re paying for them but they’re not being able to work with the customers.

So that will have some seasonality to Q2 NRR in the future.

Eric Martinuzzi

Okay. That’s helpful. Just a couple more questions for me. The integrated platform that you’re talking about, is it being pitched to prospects as kind of the Determine 2.0 type platform? Because I’ve had experienced in the past with new platform, when we launched the new platform, we can sometimes potentially freeze the pipeline while people wait to see the new platform. Is there a risk of that happening?

Patrick Stakenas

Yes, we’re being very, very careful. And we are certainly giving this in front of existing customers who are maybe interested in moving to the platform as well as cross-selling and up-selling the different products and the platform.

But market-wise, as far as new customers, we’re very careful to make sure that we are still selling the existing products that we have today. And most customers or more prospects are buying these products in a point solutions framework. But we do have more and more that are buying multiple products.

So we are being very careful not to overhype the platform to the prospects and the new potential customers coming onboard. And so far, we’re managing that well. There is always risk of that happening as word gets out and we get more excited about it, the market gets more excited about it. But we’re going to do our best to make sure that we stay focused on selling what we have today and not oversell the product for that to happen. But risk is always certainly there, Eric.

Eric Martinuzzi

Okay. And then just a pro forma balance sheet here. I know your recent financing wasn’t finalized until just recently but does the December 2015 balance sheet that shows $9.8 million cash and then the credit facility and the COFACE loan and the convertible note, does that capture everything?

John Nolan

So the $2.5 million convertible was funded in December, so that cash came in. The $3 million loan guarantee was not closed until this quarter, so it did not have an impact on the balance sheet at quarter end. So that is money we can draw in the future as we need it.

Eric Martinuzzi

But that one we wouldn’t see until drawn, that wouldn’t be impacting you now or are you saying that you have drawn on it in Q4 already or --?

John Nolan

We’ve not drawn on it and, yes, you won’t see it on the balance sheet until we draw on it.

Eric Martinuzzi

Okay. All right, thanks for taking my questions.

Operator

Our next question comes from the line of Scott Berg from Needham & Company. Please proceed with your question.

Unidentified Analyst

Hey, it’s Peter Levine [ph] in for Scott Berg. A couple of questions. Can you just talk about the duration of kind of the new deals that came into the quarter, if you’ve seen any changes? And again, if you could talk about the end market.

Patrick Stakenas

You mean sale cycle, Scott?

Unidentified Analyst

Correct.

Patrick Stakenas

Yes, so they’re pretty much typical. I mean, we typically see longer sale cycles on the contract management products and the P2P products just to the nature and complexity of the solution and capabilities and functionality. But, no, I don’t think we’ve seen any material change, pretty much the same. So again, working with the pipeline that we have and bringing deals in. But again, traditionally, it’s been pretty consistent.

Unidentified Analyst

But the duration of the contracts signed in the quarter, have they been consistent with prior quarters?

Patrick Stakenas

Oh, god, sorry, I misunderstood. Yes, it continues to be two, three-year contracts for the most part.

Unidentified Analyst

And then going down the [indiscernible] here with sales and marketing, any leverage in kind of the reps, anything with the productivity and I guess any kind of forecast that you can give with this hiring?

Patrick Stakenas

Yes, so right now, we continue to upscale our sales force all the time. I mean, we’re always looking at being able to have the right people selling the right products in the right areas. And so we are continuing to do that. But from the perspective of the sales force itself, we don’t plan on adding any more in the near future.

Unidentified Analyst

Then on operating sense, is there any more leverage that we could see coming out of the model come Q4 or at least in fiscal year ‘16?

John Nolan

Yes. This is John. When Patrick talked about it, I mean we’re working on that now and we hope to have some news on that next time.

Unidentified Analyst

Those are my questions. I appreciate it.

Patrick Stakenas

Yes, thank you.

Operator

Our next question comes from the line of Brian Kinstlinger from Maxim Group. Please proceed with your question.

Brian Kinstlinger

Great. Thanks so much. I’m curious how we should think about the release of the integrated platform, the expected timing of GA. And then new products sometimes take time, although it’s not new, you’re just combining it. How quickly do you think this would lead to accelerated bookings growth?

Patrick Stakenas

Sure. The interesting thing about the platform is that the P2P products or the procure-to-pay products are already on the platform and delivered 100% inside of that platform. We’re well on our way of delivering the sourcing products as well and we’ve already created a consistent user experience or interface across those too. So technically, we’re already selling on the platform and expect to see more and more of those deals close. Contract management will follow a few months behind and it will be probably later in the year.

But I do expect though that once we are fully live on the platform as an entire suite, that it potentially could shorten sale cycles as well as give us a boost from a revenue standpoint. We’ll be able to sell deals potentially quicker in the pipeline, as well as sell larger deals down the road. As well as a key piece of this though is it is a lower install cost on the platform. So that’s going to drive down our cost and shorten delivery times and increase profitability as well. So I expect that by later this year we’ll start getting the benefit from that and we’ll see the boost of that at the end of fiscal year 2017 and going into the next year.

Brian Kinstlinger

Maybe talk about in terms of the buying patterns of the customer, do more buy an entire platform in general for you or your competitors or do they normally buy modules? Maybe you can give me the split, if you could, of how buying cycles are.

Patrick Stakenas

Yes, very common that they will buy a part of the platform, a point solution. That’s why we believe we can continue the momentum that we are going because typically, they want to see all three products, they want to know that you have the suite. But they typically buy one or two of the solutions at a time, not the entire suite. But again, they want to know that they can move on to the next product or next solution down the road and migrate up. So having the platform is absolutely key. But typically, we see them buying one or two solutions at a time, generally in the first go round.

Brian Kinstlinger

And your competitors, your two largest ones don’t sell by module and they only sell the entire platform, is that right?

Patrick Stakenas

Yes, our largest competitors, we typically see them selling the entire suite at very, very high numbers, generally in the enterprise marketplace, not in the midmarket. But, yes, most of our larger competitors, we see them positioning themselves selling the suite.

Brian Kinstlinger

And then I’m curious, in the December quarter, if you could quantify the configuration revenue and maybe if you excluded configuration this December and last December, what’s the underlying growth of revenue and/or billings, however you want to look at it?

John Nolan

This is John. We’re not really going to break that segment out. As Patrick said, we lost the large - we talked about it on our last call that we lost a very material customer. That started to impact last quarter and fully impacted this quarter. We are very much likely to see smaller yet similar impacts to the next couple of quarters as we potentially exit a couple more. But gross margin was up [ph] about a point this time. That happening over the next two quarters might be a reasonable way to look at the impact of that.

Brian Kinstlinger

Okay, that’s great. That’s helpful. The next question I had was with that, because you already grew here sequentially a little bit, since the smaller impact of what’s falling off, is it reasonable to assume you can grow revenue sequentially in the next couple of quarters or will sequential growth really be muted?

Patrick Stakenas

Yes, again, it’s going to be tough depending on the impact we have quarter-over-quarter. But I think that once we work our way through this over the next couple of quarters, I think you can start to see the growth pick up and not have the drag behind that’s causing today.

Brian Kinstlinger

And then on a competitive landscape, on the small and even medium-sized businesses, your two largest competitors, do they come down and compete? And if not, who is your main competitor? Is it generally the customers themselves? What are they doing today and who’s competing for that business?

Patrick Stakenas

Yes, so we certainly see the big guys coming down. I mean, when you’re nipping at the heels of SAP customers, certainly they’re going to come down after if the opportunity is there for them. But we certainly also see the day-to-day normal competitors that are our size or maybe a little bit bigger. But most of them, though, are more singular product focused and not a suite focused company. So as we get to the point where we’re bringing these three products together in the suite fashion, we think we’re going to be able to outflank them on those types of opportunities going forward.

Brian Kinstlinger

Great. Last question. Patrick, you’ve done a lot in the couple of quarters you’ve been there in terms of changing management and being comfortable moving forward with your strategy. Are you comfortable where you are today with the management in place? Do you have additional changes or additional needs that haven’t been filled yet? Maybe a sense of that would be wonderful, thanks.

Patrick Stakenas

Yes, no, we have a great management team right now, happy with everybody. We’re driving this thing forward. We are always shifting roles around a little bit and we may be doing some things to make sure that we have the right people doing the right things all the time. But I have a great group of people onboard now. We’ve had to make some changes, as you know, over the past couple of quarters, but certainly those changes have been impactful. In fact, if you look at the work that Eric Faulkner is doing with professional services and development, we’ve moved that engine in great strides in the past couple of quarters and I expect the entire team to continue to do things like that.

So, really excited about the folks onboard and I think we got a good team to move this forward.

Brian Kinstlinger

Thanks for taking my questions.

Patrick Stakenas

You bet, thank you.

Operator

[Operator Instructions] Our next question comes from the line of Nick Farwell from Arbor Group. Please proceed with your question.

Nick Farwell

Patrick, John, just a couple of quick, if I may, follow on from the questions that have already been asked.

Patrick Stakenas

Sure.

Nick Farwell

Specifically about the pipeline, could you talk a little bit about the pipeline with respect to each three of the point products as one dimension? And the other would be to what degree does the b-pack operation in France, perhaps if not this quarter but going forward in the next several quarters, enhance your distribution capability into Europe for the other two non-b-pack point products?

Patrick Stakenas

Sure. So we have a really good mix right now of products in the pipeline coming in from all three product lines, certainly because of the energy and momentum that b-pack had in France, so it’s giving us a leg up with that particular product line in France and we’re now moving that here. The market certainly is here for those products. Again, it’s just a matter of ramping up and getting it out there and letting people know that we have those products here in the U.S.

So certainly, coming this way with those products, we’ll start to see more and more U.S. customers join us in the months and quarters to come. So a good mix across the pipeline and I’m happy our marketing group is doing a fantastic job of driving leads as well as we’re trying to put ourselves in a position in the marketplace to make sure people know about what we have.

Certainly in France and moving to other European countries, that gives us a stronger opportunity now that we have kind of the growth behind us to take that forward. Dave Bush, again, our key sales guy here running the sell side organization, spends a lot of time not only in North America but with the EMEA group driving that process and driving the opportunities forward, taking it deeper into other countries and doing it smartly, right? Like looking at countries that you might have a hard time breaking into because of language or because of other firms that are headquartered there and maybe going around the edges and selling to countries that are more apt to listen to us.

So we’re excited about the pipeline. It’s a good mix and I think we got a good team moving forward to drive the engine ahead.

Nick Farwell

Can you make any color for the comments on whether there’s any industry traction by verticals - tech, media, consumer products or areas where you’re making a significant amount of in rogue [ph] that is beginning to be leveraged by the sales force?

Patrick Stakenas

Yes, we certainly see more and more. In financial services, they were able to kind of duplicate or replicate the sale cycle. Retail has been really good with us that we’ve gone across the board as we grow the customer base. I wouldn’t say we’re at the point now where we have any one particular strong vertical. But things like finance, retail, now a bit of manufacturing is stepping up, distribution companies, we had a really nice win recently in packaged goods as well.

So there are a few key ones that we’re now focused on. And believe me, internally with marketing, we’re doing things smart here and trying to conserve our dollars by just being out there and being at every trade show and being at every event. We just can’t necessarily do that. What we can do though is be where our customers or our prospects are in the areas that we’re strong.

So, yes, we are seeing a few verticals that are heating up a bit and we are leveraging that in our marketing data.

Nick Farwell

Have you seen any broadening adoption by current customers, indicating that you - to the degree you can comment, that the current management team has transitioned the platform, quote-unquote, and the company to a point where you’re beginning to see adoption spread among current customers?

Patrick Stakenas

Yes, we really are. I mean, we are getting, again, on each of the different product lines, for instance, contract management, we have a number of customers that every quarter add more and more seats and are going deeper into other parts of the world with the application. Certainly from a business unit perspective and in some cases, we have a large company that’s not rolling it out to multiple business units and that’s existing product. So expansion of the current base that we have, up-selling inside of those organizations with the existing product.

And then of course the key thing that we’re seeing now is the migration of a lot of these customers that want to move to the other types of products that we have. So sourcing customers are buying contract management, contract management are buying sourcing or P2P as well. And we’ve also actually added a new piece of technology across our customer service base, a small little partner called Gainsight that’s a great little company, great products. It’s helping us get our arms around even better what our customers are buying, how they’re buying, what the utilization rates are, are they moving up, are they moving down, rationale, things like that.

So we’re using some industry-leading market tools that are pretty inexpensive great little tools that we can plug in to help us be better and do better with our existing customer base.

Nick Farwell

Just maybe in a gross sense, if the incremental ARR bookings were up 400,000, how much of that came from internal, meaning broadening your current usage by your customers, versus outside?

Patrick Stakenas

Yes, we really don’t break it out because again, it’s new business that we look at. So whether it’s new business from an existing customer or new business from a new customer, in that perspective, we don’t report it that way. But what I can say is it’s a good mix of both. And I can tell you that I’m extremely happy about some of the things that are happening and some of the things that existing customers are buying new products. And I think it’s going to continue to be a big piece of the business as we go forward.

Nick Farwell

Yes. And then one other question. If John perhaps can give us a little more color on the improvement in the gross profit margins and non-recurring revenues, are there any ways you could give us some guidance on that? For example, it could be purely non-recurring reducing heads, for example. It could be because of change in the commitment on certain contracts that were costing you a fair amount of money. It could be price increase. There are a zillion ways you could have generated this notable improvement. If we get a little more color on that, it might give us some better insight on the sustainability during the quarter.

John Nolan

Sure. And I do believe it’s sustainable. Like you said, it’s going to vary a little bit, so I’m not into projecting it exactly the number. But I do believe it’s sustainable at the volumes we have. And it’s really been a long cycle. I mean, we have a chart that shows over the last five quarters it’s pretty much just straight up to the right [ph] chart, that about five quarters ago, the company stopped overselling services in order to get ARR and really started having more discipline about what pricing we would put into customer relationships going in from the very beginning.

And so it’s been a general working out of commitments that happened before that, that sort of led it. So they’re not going to come back in. It’s been cycling out the bad stuff and replacing it with more good stuff. And given the time elapsed, that’s what’s been happening. You had to take out the free work, basically, in order to get through it. So that’s been the - if you want to think about the biggest single driver that made that rise possible over those quarters, that’s it.

And the other piece, if you look at second quarter, our last quarter, as we’ve learned more about our new b-pack business, it has a depressed services cycle in the second quarter due to the famous French holidays. So when that revenue came back this quarter - and the costs were still there. You still had to pay people when they’re on vacation. So the costs were still there, so there’s the revenue coming back in France that also made it pop quarter-over-quarter.

So I expect it to be more sustainable but will always, I believe given the prevalence of b-pack in this line item and the French in this line item, there will likely be seasonal dips in the second quarter.

Nick Farwell

Okay. And one last part on that, John. How did the non-recurring revenues roughly break out between PS service and, say, other, just in a gross sense?

John Nolan

Yes, I mean, we’re not - it varies so much quarter to quarter and you knew the trending on that. That isn’t always consistent so we don’t really - I don’t even look at it myself really that much.

Patrick Stakenas

But I can tell you, though, that again, when you start seeing this kind of numbers for profitable expected, that just means that we’re doing more deployments, more implementations that are profit driven versus the rework, right? The rework that killed us in the past and the rework is done because of could have been a number of different reasons that you wanted to make a customer happy.

But a sign of less rework means happy customers, right? It translates absolutely directly. Happy customers translates directly into profitable business that we’re doing.

So if you think about it in terms of as we are profitable, continue to be profitable on services, that means we’re doing paid work implementing, deploying customers or adding functionality for those customers.

Nick Farwell

Yes. And I guess what I was trying to differentiate if there’s a way you could comment is generally, Patrick, is a growth generalization, there’s a difference between PS because that’s project-based. And so recurring service will quote-unquote, these are very gross metric. Don’t misunderstand me.

Patrick Stakenas

Yes, no, I get it. It’s just impossible to break it out because again, whether it’s project that we’re doing for our customer to add a function let’s say or do some work that is outside of the original scope and added scope, that really we kind of call it all PS.

If there are project works that are ongoing commitments, some of them could end up in ARR eventually even.

John Nolan

Basically, everything in NRR has an acceptance where a calendar has either an under a year or an acceptance provision that keeps it from being ARR.

Patrick Stakenas

I mean we have some things where we literally have people on site that we can charge for that they’re doing services work. But it gets booked in ARR versus NRR. So it’s kind of the way it goes.

Nick Farwell

Thank you both. I appreciate your thought.

Patrick Stakenas

Great. Thank you.

Operator

There are no further questions in queue. I’d like to hand the call back over to Patrick Stakenas for closing comments.

Patrick Stakenas

Great. Thanks everybody and thanks for your questions. And always a pleasure to talk to you. And please let me know if there’s more things after the call today that I can answer for you. And happy to do that.

I want to really thank everybody as we continue our journey and take a quick minute to reiterate that I’m really pleased with our progress. I mean we continue to deliver on a strategic vision that was set out as we mentioned just over 20 months ago. We are driving cost containment overall. Specifically now, we’re closing in the services delivery side. And hitting its drive and continue to improve and we’re committed to continuing to driving cost out quarter-over-quarter.

Our sale performance and pipeline continue to be strong and we expect to continue to see more million dollar plus quarter, bookings quarter. So that’s important. So we’re focused, we’re driven, we’re excited about the future as a leading global supplier of management enterprise contract management company and of course now, source to pay provider. So it’s a big deal for us and we’re excited about it. And we believe that the market will get excited along with us.

So thank you very much for your time and continued interest in Determine and we’ll talk soon everybody. Thank you.

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