Callidus Software's (CALD) CEO Leslie Stretch on Q2 2016 Results - Earnings Call Transcript

| About: Callidus Software, (CALD)

Callidus Software, Inc. (NASDAQ:CALD)

Q2 2016 Earnings Conference Call

August 2, 2016 16:30 ET

Executives

Robert Corey - CFO

Leslie Stretch - President & CEO

Analysts

Chad Bennett - Craig-Hallum

Brian Schwartz – Oppenheimer

Jeff Houston - Northland Capital Markets

Eric Martinuzzi - Lake Street Capital Markets

Kevin Liu - B. Riley & Company

Scott Wilson - Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the CallidusCloud Second Quarter Financial Results 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. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Bob Corey, CFO. Sir, you may begin.

Robert Corey

Okay, great thank you. Hello and good afternoon, and welcome to the CallidusCloud second quarter 2016 financial results conference call. We issued our earnings press release a short time ago and furnished the related Form 8-K and the SEC. To access the press release, please see the Investor Relations page of our website at calliduscloud.com. With me on the call today is Leslie Stretch, our President and CEO of CallidusCloud.

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

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

We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The financial figures discussed today are non-GAAP unless stated that the measure is a GAAP number. All revenue numbers are GAAP. Please refer to today's press release for a reconciliation of the GAAP to non-GAAP financial performance and additional disclosures regarding these measures.

Additionally, in conjunction with the release of our earnings report, we have posted on our website at CallidusCloud.com under the Investor Relations tab additional charts that trend identified performance metrics that we believe will aid in understanding and evaluating our performance overtime.

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

Leslie Stretch

Thank you, Bob. Good afternoon, everyone. Before I begin my prepared remarks, I would like to thank each and every one of my colleagues for their hardwork and efforts during a very busy quarter.

I want to begin by reviewing Q2 2016 and then I want to provide some color on the business and our goals for the remainder of the year. As I said, Q2 was an extremely busy quarter. Our SaaS revenue was a record with growth again strong at 33%. I was very pleased with our profitable growth execution in the quarter. Our operating margins were above our targets and our bottom line reflected this improvement. I was also pleased with our sales execution. We had a strong bookings performance, and we had several landmark deals. We signed a five-year $13 million new business agreement to implement our flagship sales commission solution for one of the world's largest software companies, replacing a competitor whose multiple implementations had failed. I believe overtime we will build an effective go-to-market strategy with that software company becoming part of their reference architecture and strengthening our partner channel.

We also signed a 10-year $11 million agreement to implement commissions for one of the largest European telcos. We sold Producer PRO seven times and we executed two more conversions in the quarter. Separately, we made our first telco Dealer Pro sale demonstrating the effectiveness of our vertical product strategy. We also went live with over 1,000 users per commissions with a world leading SaaS player replacing a competitor. We signed over 100 net new logos and we signed 19 multi-product deals in the quarter. I was especially excited by our progress in the enterprise space where we clearly took the lion's share of the major commission's deals that mattered. Notable new customers included Geico for commissions, Lending Club, America's number one credit marketplace for commissions, the NASDAQ for commissions, VoYa Financial Advisors for commission's producer firm workflow, Michael Kors, the retail leader for commissions, sales performance manager and workflow.

FinancialForce.com, a cloud-based applications provider selected commissions and territory in quota. Tata Motors selected commissions and workflow. We continue to be the number one choice for communications companies looking to drive sales performance. We have over 70 of the world's top telcos on the platform and added some notable new wins in the quarter. Vodafone Germany selected commissions and workflow. Singtel, one of the largest mobile operators in Singapore selected commissions, telco Dealer Pro and sales performance management suite. And Hawaiian Telecom chose commissions, this was one of the new deals brought by our Accenture joint initiative team.

Splunk, the leading software provider for operational intelligence choose enablement and Litmos mobile learning. Saber, the travel service software provider selected configure price and quote and our sales executions suite. 3G Xerox selected configured price and quote. IRIS Software group, a business software provider in the United Kingdom selected configure price and quote. Our Litmos mobile learning business performed well, growing fast and adding new marquee customers; Sears Holdings, Survey Monkey, Ultimate Fighting Championship, and Ups Quality Foods, the largest independent privately-held snack brand in the U.S. we're just a few of the notable Litmos wins in the quarter. For Clicktools, Telstra a global communications leader, ClickSoftware and WaltersClue all selected Clicktools, our voice of the customer solution in the quarter.

Let me update you on our conversions to cloud. As I mentioned, we executed two cloud conversions in the quarter. So a small number, this underlines the strength of our new cross selling upsell business in Q2. We still have a long way to go with conversions and a great deal of work to do bringing our own premises customers to the cloud. I do expect more conversion momentum in the second half of this year but the impact on revenue will come in 2017. To help the process we have begun to build an implementation factory to support the conversion initiative and to make the movers cost effective as we can for our customers. I have personally visited with many of our top on-premises clients and we will continue to support them as we transition the remainder of these customers to the cloud platform.

Let me update you on our partnerships. I think we're making good progress on our key initiatives, we sharpened our focus in Q2 to drive business with the most critical partners we target at top of the enterprise segment. This is an important evolution of our strategy giving us more bandwidth to drive the alliances that can make a difference. I'm especially pleased with our progress that Accenture, Deloitte, Salesforce, Open Symmetry and Cognizant. Our relationship with Workday has progressed and we have begun a more focused effort with SAP. There are several other independent software vendors that we continue to make progress with and I will update you in due course. I believe that we have the right amount of focus now to drive our propositions to market.

Let me update you on operations platform. We opened our German data center and immediately had a positive effect. It was instrumental in two of our largest client deals in the quarter. However, having visited our European operations before, during, and after the Brexit vote, we've made the decision not to proceed with our London data center at present.

Let me update you on our acquisitions. We received a great response to our acquisition of The View Central and Badgeville Technologies. View Central provides the much needed course administration and functionality that benefits Litmos. Badgeville has been a key part of our sales identification product and is an important differentiator in the commission's space. Additionally, it's turning out to be a fully-fledged engagement platform that I believe will be a game changer for us. Plus both acquisitions bring some marquee reference customers, they are small in relative terms today but they are growing. We can cross-sell View Central to learning customers and we can cross-sell Badgeville to learning, CPQ, and commissions customers. We continue to see superb opportunities in the current market and talking great technologies. I expect us to continue to add capability through acquisition in the second half of the year.

Let me update you on sales hiring. We're ramping ourselves hiring in Q3, our target is to add substantially to the enterprise field by the end of the year and preparation for the future. I believe the markets we address will more than sustain a long-term profitable growth model, and we have a specific opportunity in the enterprise related to competitive weakness among other factors. But the bulk of our sales hiring will take place in the U.S., we will continue to opportunistically expand in EMEA, APAC and Latin America.

Professional services; I was pleased with our margin performance in professional services. I expect this business to continue to have lower growth than our SaaS business as our joint initiatives with partner stake-hold and we continue to automate more of the implementation effort, particularly in commissions. We also continue to provide more integrations than ever as it evolves to positively impact timeframes and costs for our customers.

In closing, we did have some higher than usual customer usage reductions towards the end of the quarter, including one customer who due to their own business changes ended there use of a standalone product, not commissions, and this was not a competitive situation. Several others made changes to their usage but remained customers. We did see some hesitancy around events in Europe but still managed to close some large landmark business in Germany, specifically. Once these specific events had some effect on the SaaS revenue projection in the short-term, we do have the momentum and market opportunity to grow the cloud business 29% to 31% this year whilst making up profit guidance. As I just mentioned, we are continuing ourselves hiring plans and our industry marketing efforts of ramping up in the second half in preparation for 2017.

I'll now hand over to Paul to go through the financials in more detail.

Robert Corey

Okay. Thanks, Leslie, and again good afternoon to everyone. Before I begin my detailed comments, I, too, would like to thank each and every employee for their hard work that has contributed to the record success in Q2.

ACB bookings for the quarter tied the record high for the quarterly bookings. We signed three seven-figure ACB deals. And we signed two multi-year deals with eight-figure total contract value; one for five years for over $13 million with one of the world's largest software companies, and one for 10-years for over $11 million with one of Europe's largest telcos. We did experience higher than usual reductions in usage by some customers and terminations within the quarter that will have an impact on SaaS revenue short-term. But our enterprise retention rate remains over 90% and our bookings momentum is strong.

I'd like to remind everyone again that the financial figures I discuss today are non-GAAP unless I state the major as a GAAP number. All revenue numbers are GAAP. As previously noted, please refer to today's press release for a reconciliation of the GAAP to non-GAAP financial performance and additional disclosures regarding these majors.

During the quarter, I'm very pleased to report SaaS revenue of $36.2 million, an increase of 33% over last year, including about $1 million of BridgeFront revenue. Excluding BridgeFront revenue, SaaS revenue increased 30% over last year. Q2 Total revenue increased to a record $49.8 million including BridgeFront, an increase of 20% over last year with our guidance for the quarter. Excluding BridgeFront, total revenue increased 17% over last year. The reductions and usage towards the end of the quarter did have an unfavorable impact on reported SaaS and total revenue in the quarter. We reported zero license fee revenue in the quarter as we've stopped selling on premise software and are exiting that legacy business.

Key metrics with which we evaluate our operating performance are; SaaS revenue growth, which, as I just mentioned, increased 33% in Q2; SaaS deferred revenue was a record $81.1 million, an increase of 23% over last year, this includes $2.5 million from the acquisition of View Central and Badgeville. Cash flow from operations was about $6.9 million, a significant increase from $2.6 million last year. Our enterprise customer retention rate continues to be over 90% based upon the number of contracts. We believe our targeted productive sales capacity is sufficient to achieve our projected SaaS revenue growth rate in 2016.

We continue to invest in our productive sales capacity while stay true to our financial goals of delivering predictable leverage to our reported earnings. Our investment in sales and marketing will continue to trend at about 31% to 34% of revenue for the year. Additionally, the normalized SaaS billings growth rate for Q2 was 28%. I want to remind you that Q2 last year also had three seven-figure deals and we reported over 100% bookings growth in that quarter. As such it is a tough compared to our year-over-year.

Remember, the normalized SaaS billings growth rate adjusts for the effect of multiple-year billings in each period. Our non-GAAP earnings was $0.06 per share on the high side of our guidance of $0.04 to $0.06, doubling over last year. Our team continues to be focused on executing the plan of SaaS revenue growth and delivering a world-class customer experience. All the while, delivering predictable leverage to our reported earnings.

Okay, let's move onto some specific results for Q2. Unless I mentioned otherwise, the percentage increase or decrease are as compared to the same period of the prior year. Total recurring revenue, which includes SaaS and maintenance revenue, for the quarter was $39.3 million, including BridgeFront of about $1 million revenue. That's a 28% increase from last year and up sequentially from Q1 by $1.7 million.

SaaS revenue, which totaled $36.2 million, increased 33% compared to $27.2 million last year, SaaS revenue was unfavorably impacted by higher than unusual -- rather than higher than usual reductions and usage by certain customers within the quarter. This affected a percentage growth of SaaS revenue in the quarter and more reduced percentage growth of SaaS revenue for the remainder of the year.

Maintenance revenue declined by 13% to $3.1 million. Maintenance revenue has decreased and we project will continue to decrease due to customer conversions to our Lead to Money suite in the cloud. We completed two conversions from on premise to the cloud during the quarter. We estimate that maintenance revenue will range from $2.6 million to $2.8 million in Q3 and Q4.

During the quarter, the mix of contracts with annual terms increased from 76% in Q1 to 84% in Q2. I'm happy to report that our non-GAAP recurring revenue gross margin exceeded our expectations at 77% consistent with Q2 of last year. We do project our recurring revenue gross margin will remain above 75% throughout 2016.

Professional services for the quarter was $10.5 million, an increase of 1% than last year. We anticipate professional services revenue to trend between $10.6 million $12 million per quarter for the remainder of the year. Professional services gross margin increased slightly from 27% in Q1 to 26% in Q2, just above our expected range. We are maintaining our gross margin guidance to trend between 21% to 25% throughout 2016. Our overall operating expenses were $29 million, an increase of 17% from last year. Operating expenses as a percent of revenues was 58%, down from 60% last year. The percentage improvement compared to Q2 last year reflects the scalability of investments we have made across the board to support the growth in our business.

Sales and marketing expense was $17.2 million, an increase of 29% over Q2 last year, or 35% of revenue. During the quarter we hosted our largest ever C3 event in Las Vegas contributing to the increase in sales from marketing expense. Additionally, we have continued to increase sales and marketing personnel, increased other marketing events from programs, and commissions have increased associated with higher bookings. We expect sales and marketing expense will trend 31% and 34% of revenue. We will continue to invest in this area to support our revenue growth targets as needed.

Research and development expense was $6.1 million for the quarter, an increase of 14% over Q2 last year, and represented 12% of revenue this year, a slight decrease from 13% of revenue in Q2 last year. We continue to expand our worldwide engineering investments to support our internal innovation and product development. We do expect R&D expense to remain around 12% to 14% of total revenue throughout 2016 to support the product development for our growing customer base.

G&A expense was $5.7 million, a decrease of 8% from Q2 last year and represented 11% of revenue compared to 15% of revenue last year. While we continue to support our infrastructure investments, we anticipate that G&A expense will trend 10% to 12% of revenues throughout the remainder of the year.

Our non-GAAP operating income for the quarter reflecting the leverage in our financial model doubled to $4 million or 8% of revenue compared to an operating income of about $2 million at 5% of revenue last year. Our non-GAAP net income for the quarter increased 115% to $3.4 million or $0.06 per fully diluted share compared to the prior year of $1.6 million or $0.03 per fully diluted share. We did record about $310,000 of foreign loss primarily related to the weakening of the British pound in the quarter. This was our 12th consecutive quarter of positive earnings per share due to net income per shares calculated based on $59.1 million diluted weighted average shares outstanding.

EBITDA for the quarter increased 66% to $5.8 million or 12% of revenue compared to $3.5 million at 8% of revenue last year. Cash and investments were $94 million at quarter end, this is a decrease of $7.9 million sequentially from Q1. The decrease reflects use of about $11.5 million of cash to complete the acquisitions of View Central and Badgeville, offset somewhat by cash flow from operations in the quarter of about $6.9 million.

DSOs in accounts receivable was 81 days consistent with last quarter and improved from 88 days in Q2 last year. Our balance sheet is the strongest it's been in the history of the Company with no bank debt.

SaaS deferred revenue was $81.1 million, an increase of $6.7 million sequentially. This includes $2.5 million from the acquisition of View Central and Badgeville. Total deferred revenue increased sequentially by $6.3 million to a record $88.9 million. Total deferred revenue increased less than SaaS deferred revenue as deferred maintenance declined due to normal amortization and in conversions to the SaaS platform.

Our employee headcount increased to 997 employees, an increase of 45 people from the prior quarter with hiring across the board. The increase includes about 30 folks coming on board in conjunction with the Badgeville and View Central acquisitions.

Now I'd like to move on to the forward-looking financial outlook and want to remind you of the Safe Harbor language at the beginning of the call. For Q3, we're projecting total revenue to be between $51.5 million and $52.5 million, representing an increase of 15% to 17% over last year. The higher than usual reductions and usage in cancellations we experienced in Q2 have had an unfavorable effect on SaaS revenue for the remainder of the year.

Furthermore, we believe the Brexit decision has created uncertainty in the EMEA markets and we're being cautious about our expectations raised to the bookings from that region. As a result, we're guiding a range of SaaS revenue for the first time and we anticipate SaaS revenue to be between $38 million to $39 million in the quarter with maintenance revenue between $2.6 million to $2.8 million and license revenue at zero.

Non-GAAP operating income for Q3 is expected to be between $4.5 million and $5.5 million with non-GAAP fully diluted earnings per share of $0.07 to $0.09. Lastly, we're projecting cash flow from operations to remain positive.

Turning our guidance for the full year of 2016; we are reducing our total revenue guidance from a range of $206 million to $210 million to a range of $203 million to $207 million, again, due to the impact of the higher than usual reductions in usage and terminations we experienced in Q2 and being cautious on the effects of Brexit on the EMEA region. This represents 17% to 20% total revenue growth over last year.

Further regarding a range of SaaS revenue for the first time and anticipate SaaS revenue to be between $148.5 million and $151 million for the year with maintenance revenue between $11 million and $12 million. On premise license fee revenue will be zero for the remainder of the year. Separately we are projecting our SaaS revenue growth to be in the range of 29% to 31% for the full year. We're maintaining our guidance for non-GAAP operating income for the full year of $17 million and $19 million representing 8% to 9% of revenue delivering a 34% to 50% improvement over 2015; accordingly our non-GAAP diluted earnings per share will be between $0.25 to $0.29 representing 25% to 45% leverage over last year. As I mentioned, we continue to project generating positive cash from operations for the full year.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Michael Nomura [ph] with Credit Suisse. Your line is now open.

Unidentified Analyst

Thanks for taking my questions; just two quick ones. You had a strong quarter and I'm just kind of curious, I haven't heard any other software company mentioned European weakness; in fact some of the larger companies have actually said that that they're not seeing much weakness. So one, I'm curious what you're seeing there that other companies aren't? And if maybe you can go into detail about the terminations and the usage, specifically because I'm not understanding that? And then maybe for Bob, when I look at the maintenance revenue going into next year; understanding that you've eliminated licenses and you're telling people that they have to convert by mid-2017, given the small number of conversions at what point in time -- how do we get to all the conversion that you need to get you by the middle of next year when you're doing three into a quarter? Thanks.

Leslie Stretch

So, on the first -- the conversion is merely conversion. The conversion momentum is taking up but we are thinking Q1. We'll do more this year than we did last year but our focus actually is to convert the Top 20. So it isn't necessarily frankly to convert every single one of the very old on premise customers that might be paying as 30K, 50K I mean. So it's not quite the picture of having to do whatever is the customer; it's really to focus on the Top 20. I think we'll see more converge happen in the second half of the year and the pipeline of the activity around the conversions is high. I think what I wanted to draw out there is the new business effect on the quarter was really much more powerful rather than just depending on conversions. So we will see more and I expect to record an uptick through the backend of this year, no, it's not based on some -- maybe we'll have some more last based on actual work that we were doing in progress now with the remainder of those Top 20 that we're really focused on.

On the UK thing -- UK construction is trying to remorse [ph] since the financial crisis in July which is one data point but I was personally there, and I'm telling you that we were told -- that we were looking at various things; data center, we're looking at new real estate; and we still think we'll hire -- continue to hire sales people there. But if we talk to some of the leading real estate -- commercial real estate people in the work they will tell you that many decisions were put on hold. It's not -- I think it's a temporary thing, I think it will pass. But we specifically have -- we have some very specific things there; as you know we have some specific customers in the UK and in Europe who are looking at our side in the UK and they are emphatically not doing that, and it surprised everybody, it was predicted to be a 70% remain and I was there before, during and after-post in the UK and mainland Europe so we can just give you our perspective. I think it's not a massive deal for us.

I think it's not a massive deal for us, I think it's prudent just to be a little bit cautious there but we are not going to do a London data center there until things settle out and we see what happens. In terms of the changes, there is only one customer that terminated their usage and that customer was not a commission's customer, and they weren't a long-standing customer. And then we had several others; the changed structure, changed teams and reduced their usage. So it really was a mixture of those things.

Unidentified Analyst

Okay, thanks very much.

Operator

And our next question comes from the line of Chad Bennett with Craig-Hallum. Your line is now open.

Chad Bennett

Thanks for taking my questions. I was kind of bouncing between another call; so if someone asked something that's redundant, just tell me. I'm interested in the large bookings during the quarter; specifically I think you noted a couple of eight-figure bookings; kind of -- one of them was a large software company. And was that a – can you -- I don't know if you said kind of what was included at that deal, if it was purely a commissions deal or if there was multiple products? And kind of what profited them to choose you over an incumbent in that deal?

Leslie Stretch

So it's mainly commission, since really a commissions deal. There are some other small elements but it's about sales performance and commissions, and is about getting control of an expanded sales field. And there was an incumbent there in a number of divisions that haven't had successful implementations for whatever reasons, and it became something -- I don't want to -- I can't give too much detail but it became something of an urgent situation. And so it was the right way to go, it was the right decision. And so that's kind of all I can say at this stage to give you a bit more color but it was -- I think we gave a fairly good color on the duration of the deal and the size, it was a substantial replacement, it wasn't small.

Chad Bennett

No, that's phenomenal. And Bob, was there anything in the large bookings or any bookings for that matter in the quarter -- I mean, I assume they are all -- none of them are upfront billing deals, all of them are kind of normal billing annual deals and I assume -- I guess, did we see the benefit in the billings number this quarter for all the deals or is there any reason anything would have been delayed from a billing standpoint?

Robert Corey

Yes Chad, the deals you're asking about were very normal, run in the middle deals. There were no upfront billings, so multiple year billings in the mix. Like we said, we closed three seven-figure deals and there was a good distribution mix of mid six-figure deals or six-figure deals between -- six-figure deals in the quarter which was good distribution. And we did mention that we increased the mix of annual contracts to a 4% in the quarter, slightly up from 76% but again that were 76% last quarter in Q1. But again, there were there were no multi-year billings in there. And I think I touched most of the points on your question.

Chad Bennett

Yes, you did. And just one last one for me, on the usage language that talked about; just to make sure I understand it correctly. So when you talk about usage, are you talking about effectively a decrease in payees more in the SMB or volume part of the business or how should we think about the usage language?

Leslie Stretch

Good questions, there are just a couple of enterprise customers. It was -- one of them was a customer that stopped using, it was in the commissions products. We do want to preserve our ability to do business with them as if we don't want to get into back and forth on more than that so if you don't mind, but there was a couple of others who went where division went away and a couple of other reductions. So when you put that together with the other pieces of the puzzle that we talked about, that was the effect that I have.

Chad Bennett

Okay, thanks guys.

Operator

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

Brian Schwartz

Thanks for taking my questions this afternoon. One last question Bob just on the usage; is there any way that you could have a number for -- if you could help us with the number; it looks like your lawing [ph] the revenue guidance by about $3 million. Is it possible to parse how much of that is from -- kind of these onetime effects from the usage and how much is from taking a more conservative approach to the European business?

Robert Corey

We've looked at that and we said, it's kind of -- both are including in our revision to our guidance. And we're just not wanting go into the detail of how much Brexit is versus these usual things. But I would remind you that it was unusual reductions in usage we saw in the quarter, right. And when we say that that means companies are using less of our products but they are still customers, so really one termination Leslie already outlined in the color of his earlier comments.

Brian Schwartz

Thank you. And then I have two questions Leslie for you. The first question is on the product adoption out there, the clouded adoption; how they are because you don't segment or break the business out by your clouds. But we are hearing from the work that we're doing, our channel charts, our survey work that we always hear about the good momentum in the core, in the incentives market but we are hearing good feedback on the training; and then enablement and the marketing products are doing pretty well out there in the market. So I just hope and maybe you could shed any additional light on the product mix in the quarter or the pipeline momentum and just how the different cloud they are doing these days in the market?

Leslie Stretch

It's a great question. I think that one thing that came up in the quarter was a good traction with CPQ, we had some good names signing onto CPQ, I was very pleased with that. Enablement still continues to be a study thing but I think it should be much more exciting, frankly. Litmos is just on fire, and I think it's getting to the point not yet here but it's getting to the point where we'll probably get more specific around the growth rate and size of that. And then as you're right, in the core space sales performance management is a mainstream requirement and we were looking -- I was just looking over the salesforce how market assessment from August last year because the new ones are coming up this year; and out of the Top 20 application needs we had eight of those, we had five out of the Top 10. And so the market is absolutely, in my opinion, beautifully set up and we've obviously had this attrition the kind of gave us a little pause has caused us to be conservative. But our hiring for sales people is getting more aggressive, probably because we can afford, it's within our financial envelope, but it is getting more aggressive in the second half and it is focused on the enterprise. And I think mobile learning, sales execution, CPQ and CLM, and enterprise SPM; big enterprise capability now differentiates -- look at the logos that we sign in sales performance management, look at the length of deals; a 10-year deal, that's fantastic, and that was a new part of our customer that wasn't an existing footprint. And that was a very complex environment; you don't do that if you're not confident. So enterprise capability is one of most prized things, enterprise sales focus going forward is where we're putting the investment. And I actually do think that Brexit thing will blow over overtime but I don't feel -- even I haven't got the -- to kind of tough that one out but we are hiring sales guys and their investment in the U.S. is turning out to be very, very fruitful for us.

Brian Schwartz

Last question I wanted to ask you Leslie, more on the strategic side of the investment and how you're thinking about that. The work that we've done in the quarter, especially with the cosmos survey work that we've done, we've very much validated that to product penetration is low within the installed base but the product demand is high. So the question that I want to ask is, you talked about some investments that you're doing to help push along the conversion opportunity for the business. It's the right thing that you can do internally to accelerate your sales investments for our more lead generation opportunities within the installed base based on pretty good setup here of having low product penetration, good product demand in the market. Thanks.

Leslie Stretch

I think this is a great discussion, it sounds like you've been talking to some of our sales leadership probably but we'll be taking names later on. Look, I think that if you take the cross-sell first of all, new bookings in cross-sell was again a 50-50 story in the quarter. So for the first half really, we're not higher obviously in terms of multiple product customers, we're into fairly 340 decent sized customers, I'm not talking about tiny/weak customers there with multiple products. But the wide space exercise is quite an exciting one. I think -- so we've actually have done some realignment of sales development. So we've lined some realigned organization of sales development resources and actually located them in the full U.S. time zone capability which means Northern California by the way at the same time ramped up.

And I just said without getting too specific, we are going to be hiring an order of magnitude more sales people in the second half than we did in the first, and I think with substantial I didn't get the specific number but for others a substantial take on. They are primarily going to be focused in the enterprise but demand environment is great, that's why slightly kind of annoying that we have these unexpectedly and quarter changes in usage with just a couple of customers which can affect us still at the size of its less pronounced now. But the demand environment is absolute for me -- it's extremely exciting and I wouldn't be pulling the trigger on the sales investment. On; a) if I didn't think we could afford it within our financial commitments, and b) I didn't think the market opportunity was there, and c) I didn't think the sales management talent wasn't there to manage it; hire and manage it, and I think all those things are true.

So you're obviously having a survey, I totally agree with your survey results and it's good environment for us right now.

Brian Schwartz

Thank you.

Operator

And our next question comes from the line of Jeff Houston with Northland. Your line is now open.

Jeff Houston

Hi, Leslie and Bob, thanks for taking my questions. Looking at the vertical products, so you mentioned the telco Dealer Pro, you managed your first customer there. Could you to talk a bit about what it replaced and then in also looking at Producer Pro vertical product, could you provide an update there as well? I'm sorry about that. The telco Dealer Pro product, what did that replace? And then looking at the Producer Pro, could you update us on that product as well?

Leslie Stretch

I think we were very specific on the prepared remarks that we did seven Producer Pro deals and we'll come back to that in a second. The Dealer Pro is the telco solution -- if you think about the network is kind of analogous to Producer Pro, if you think about the network of people that sell telco products and services, particularly in the consumer space, it is a business that is very similar to insurance; there is a sophisticated high volume broker-dealer network. And we're primarily replacing manual systems and custom solutions or mainframe solutions for managing the dealer hierarchy. So it's a very similar strategic kind of view as Producer Pro and I'm excited at the start that we've had with that and I think all our telco customers will benefit from automation of Dealer Pro.

Producer pro is a big story and I think we're in the early innings, it's been very successful, 20 customers roughly with it just over a year from launch and they tend not to be small customers. What we're looking out there though is a much bigger vision for producer management which is being demanded by the customers. There is a lot of dissatisfaction in the customer base with old-style licensing, credentialing, registration technologies that integrate with the DOY and Nipper [ph] in particular, and we -- I think we have exactly the right vision to create a very powerful suite of products there; we are three modules out of five today, we're still looking out a more sophisticated licensing credentialing module and we're looking at a learning solution for agents which is really an exciting prospect because we're talking about very large user populations, we're talking about mandatory certification of training. So a very core business need and we need to bring it together, just been on the tour actually with some of our top insurance customers, and they totally get the vision they buy into it, they are building into the vision with us; very early days in that one but that's a very exciting hardcore market opportunity for us.

Jeff Houston

Great. So should we expect for at least in near future that you're going to focus on those two verticals; insurance and telco or are there more verticals, specific products that you might be launching in the near future?

Leslie Stretch

While we do have the MLM product, the multi-layer solution if you remember, but we're working on that so it's about the longer term burn because we've got some specific R&D work to complete this year or next year before we see a big launch of the product but those would be the three. Insurance alone would produce -- the producer management suite is really firing on all cylinders but insurance alone is an exciting market; and the one barrier to entry there is that you just have to have the credentials, the performance and quality level which is a high bar in the industry again. There are no other players in that space that get closer, it will take tens or hundreds of millions of years for them to catch up which is perfect position for us to be in.

Jeff Houston

Got it. Thank you.

Operator

And the next question comes from the line of Eric Martinuzzi with Lake Street Capital. Your line is now open.

Eric Martinuzzi

Thanks. On the usage issue, layer deeper there. It sounds -- maybe I don't understand the business as well as I thought but I thought these were kind of like annual contracts that renew and yet we don't have a good visibility or a large customer can kind of come to us on a short notice and surprise us. What is -- is there flexibility in the contract that allows them there or it's just kind of somebody who is on a month to month, a handful of large customer on month to month that have this flexibility available to them?

Leslie Stretch

Actually it's a great question. They actually don't have that flexibility which is why it was a surprise at the end of the quarter and I think beyond that -- we don't want to give out specifics about individual products relating to our customers because they're still customers or they will become customers. And so we're still in negotiations but I think we took the prudent view -- conservative view of the impact so that's kind of as much color as we can really give you without compromising the commercial sensibility without compromising our opportunity there. And it was just -- that was just one piece of the puzzle by the way.

Eric Martinuzzi

But that's something that could -- I don't want to be -- negotiations are ongoing and there is a chance that things come back, is there that potential, is that a correct observation?

Leslie Stretch

I'm not going to put it in the forecast, it's not a wrong observation but I think -- to your point I think where you would go in as a common thing, no this is a very rare occurrence for us but when it's happened, we've been -- it's happened a couple of times in our history, we've tried to be as transparent as we can without compromising the commercial environment, obviously, to keep you guys in the loop because when you think -- when you take that out of the equation, the momentum and the bookings in the quarter, and the deal win record was one of the best ever in our history.

Eric Martinuzzi

Yes, certainly it's a substantial transaction. I wanted -- if I could, a follow-up; for the remainder of the year, I'm wondering -- obviously it's great that you're -- the EPS is unchanged here but given we're pulling $3 million out of the top line and/or ramping up the sales higher, where is the -- I guess what other efficiencies elsewhere in the business model are allowing us to do that sales thrust and yet maintain the EPS in the absence of the revenue.

Leslie Stretch

Yes, we think the gross margin rate for recurring revenue gross margin with the decision to defer the London data center will give us a little bit of benefit there. We'll continue to interview and hire ramp sales people but they won't all happen this quarter right, so we'll be out the last two quarters of the year right. So the timing of incoming hours was going really influence the ramp of sales expense. We just say that we expect a sales rather G&A to be in that 10% to 12% range. So we'll see some moderation in G&A a bit, right. Discounting all the auditing efforts just have to begin and earnest into Q3 or Q4 and finish up next year. So those are the primary areas, just timing of the sales reps hiring who gets the margin benefit on the London Data Center referrals and G&A efficiencies.

Eric Martinuzzi

Understood. Thanks for taking my questions.

Operator

And our next question comes from the line of Kevin Liu with B. Riley & Company. Your line is now open.

Kevin Liu

Good afternoon. Leslie, I think in your prepared remarks you mentioned something along the lines of some competitor weakness that creates opportunity for you. Could you just elaborate a little bit more about what the opportunity actually is around?

Leslie Stretch

Yes, I made some specific remarks around the several deals that are real deals. One of them was the five-year eight-figure deal that we did in technology which was really a wholesale replacement of a competitor that had been active and trying to work and get their implementations to work in their environment but proven that they just can't scale. And my remarks are around the insurance and telco vertical; if you can do this in a small high-tech company -- if you can do commissions in a small high-tech company, it's not the same as doing in a large enterprise and keeping the customer. And we see several competitors who -- we've had our own challenges but we see several competitors whose ability to keep large customers isn't very good and that's an opportunity for us. In ourselves, people smell blood frankly, they've gone after it, and as a result we got an eight-figure deal. I mentioned another company which was a SaaS company where we replaced a competitor with 1,000 seeds [ph] where it was like -- it was sacred territory and that isn't the case, there is no sacred territory.

And I think -- we're going to get -- we'll get some get some flag for us, especially of our report; I'm sure the lease guys would be all over that. But over the long-term, we're going to win out at the enterprise and so it's foul that I'm referring to and the reports backed from ourselves as anecdotal reports and the replacements that we're doing on an ongoing basis which is always good fun for us, and we like that, we like to create positive references out of their challenges.

Kevin Liu

Got it. And you've referenced the focus on your Top 20 on premise customers in terms of conversion opportunity. Can you just remind us how many on premise customers do you have that could be potentially converted with respect to be pretty competitive on the vast majority of those?

Leslie Stretch

Yes, I think the number is coming down obviously, an EP issue now was something like that. We're doing a handful a quarter, I think we're going to do more in the second half but we are focused on the Top 20. We never go into those conversions thinking that they are our business, the customer has a choice. And so they are delicate negotiations, and if they take time, that's fine. The key is to show the customer a route to value otherwise they won't do it, why should they, I wouldn't I wouldn't see the value. So the skill in our sales guys is to -- and our consultants is to show them the value of the cloud and to have them engaged through our conferences with other customers who've already gone for the cloud.

But we never assume that they are going to be ours for the taking and not competitor, I'm sure that they will be. I'm actually pleased with the progress and I'm very pleased with the progress of the deals in train and particular, this quarter and next. I'm not sort of overly worried but we always go in; it's an opportunity for a competitive fudge. We have a couple of competitors who are the archdeacon's of demonic front, they just don't know a true statement when a countries shows up. And so you have to watch for that. And you're always going to be on your guard but I'm very pleased with the progress. Anyone that comes for the cloud with us will see spectacular value creation over a period of time once they get live in our SaaS environment.

Kevin Liu

And lastly just a follow-on for Producer Pro, you talked about two more modules you guys are looking to develop. Is that development all going to be in-house or are you considering the acquisitions in order to fill up the suite?

Leslie Stretch

In the case we've actually got a lot of the pieces, it's a question of putting them together. If you remember a BridgeFront acquisition covered some healthcare content capability which we like very much. So our View Central covers the capability to schedule, administer and deal for that which is already there; the question of putting it together. We actually already do the Nipper-DOI integration but we don't do on a commercial basis in the way that some competitors do, mainly because they do and what we regard is a fairly Pino-way [ph] for their customers at a low value high cost way for their customers because it's kind of like a little monopoly out there, there is only one or two -- at least one or two people that can do it. And the characteristics of that type of a market are mobile, you put your customer experience high cost. We think we can do a better job and so that's on the road, that's a bill, that is not a buy.

In terms of the enablement piece, that is a build that is not a buy, so that there is a base product there that is key but it's about making the product relevant to probably casualty and healthcare specifically, these -- you have to be intimate with the customers' business to make those things effective, and general purpose stuff doesn't fly in the market. So we're building the rest of it now.

Kevin Liu

Great, thanks for taking the question.

Operator

[Operator Instructions] And our next question comes from the line of Scott Wilson with Piper Jaffray. Your line is now open.

Scott Wilson

Thanks for taking my question. I'm in for Alex. I want to kind of key in on Kevin's line of thinking on the conversion opportunities. So if we think about these kind of 20 important customers that you have us focused on; just curious, what percentage of your remaining maintenance do these represent?

Robert Corey

The Top 20 represent a little over half of the remaining maintenance revenue. SO we've said publicly, we're targeting on those and you will get those in line and we'll continue to execute across the available conversions in the pipeline.

Scott Wilson

And then if I think about the three conversions you had in the first quarter to this quarter; what kind of multiple of ACV are you receiving relative to the maintenance they're paying right now?

Robert Corey

Historically, when customers are wanting to go to the cloud we can give three, four or five times depending upon if we came over commissions for commissions or bought additional products on the SaaS platform, right. We really didn't want to see too much more now because each of these is kind of a negotiation with the customers themselves.

Scott Wilson

Okay. And then maybe just one more kind of bigger picture question, the backwards in Badgeville this quarter. Can you kind of talk about how that came to be and what kind of plans you have to prioritize it?

Leslie Stretch

Great question. Badgeville, we had a relationship with them longstanding over several years. And we always admire their technology and the talent that they had, we really like them, the team. And we -- it would be better for us to really own it. So we've got the opportunity to do and it seems fairly quick but actually we've been talking to them for a long time and so more intensively for the last six months or so. We believe that incenses drive behavior is a core belief and that it goes beyond the simple minded slot machines. Sales people come and operate it, type of binocular of some of our competitors. Is more than that, people want to drive behavior with other tools and techniques and the portables sales, totally cabinet that Badgeville can create is super. But also Badgeville has a standalone solution for all kinds of engagement platforms, for customer engagement, community engagement, support deflection and engagement is turning out to be a revelation for us. Now that we actually got inside it, we've been using it within the sales process approach. But actually now we're inside it, there is a general purpose engagement platform there that I think is absolutely a game changer, it's a corny pump but it is, and I think it's been under invested and I think that they haven't had a lot of sales and marketing but they have a super proposition. Most importantly, every one of the people that came over is superbly talented, we're lucky to have them. So I'm very excited of the prospects there.

Scott Wilson

Great, thanks.

Operator

And our next question comes from the line of Ellie [ph] with National Security. Your line is now open.

Unidentified Analyst

I just had a follow-up question on the data center delay, what's the impact in terms of cost; how long can you hold out without making a decision either way to build or just completely move onto something else? Thanks.

Leslie Stretch

That's a great question. I mean, I think I'll let Bob have a go at that one.

Robert Corey

In so far as cost, we were anticipating spending a lot of cost to bring up the data center because we're bringing up with a minimum size and it really expanded as the -- who the customer need kind of grows. As you know, we have two data centers, primary data centers in the U.S.; one in East Coast and one West Coast who would drive all of our worldwide customers through. Up until we've just opened the German Data Center in Frankfurt successfully at the end of last quarter, early this quarter. So there is not a real significant cost impact, it will give us a benefit like I said with the gross margin going forward, as long as we defer it. We're just going to take a wait and see kind of a cautious view if you will with the Brexit transition as that unfolds. We could always make decision go ahead and do it, right. If the customer demand was so strong and we needed the capacity for being in European location, for example.

Unidentified Analyst

Okay, great. Thanks.

Operator

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Leslie Stretch for any closing remarks.

Leslie Stretch

Thank you very much for taking the time with us today. We look forward to speaking to you and seeing you on the road in due course.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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