Mattersight's (MATR) CEO Kelly Conway on Q2 2016 Results - Earnings Call Transcript

| About: Mattersight Corporation (MATR)

Mattersight Corp (NASDAQ:MATR)

Q2 2016 Earnings Conference Call

August 09, 2016 05:00 PM ET

Executives

Kelly Conway - President and CEO

David Gustafson - EVP, Interim CFO and COO

Analysts

George Sutton - Craig Hallum

Matt Blazie - Lake Street Capital Markets

Matt Spencer - JMP Security

Neil Cataldi - Blueprint Capital

Nick Farwell - Arbor Group

Mark Gomes - Pipeline Data

Shawn Boyd - Next Mark Capital

Operator

Good afternoon. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattersight Corporation Q2 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Kelly Conway, CEO of Mattersight. You may begin your conference.

Kelly Conway

Thank you very much and welcome and thank you for joining us to our Q2 earnings webinar. Joining me in the call is David Gustafson, our Chief Operating Officer and interim Chief Financial Officer. Before we get into the call I'd like David to review our Safe Harbor language, David?

David Gustafson

Thanks, Kelly. During today's call, we'll be making both historical and forward-looking statements in order to help you better understand our business. These forward-looking statements include references to our plans, intentions, expectations, beliefs, strategies and objectives. Any forward-looking statements speak only as of today's date. In addition, these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied by the forward-looking statements.

The risks and uncertainties associated with our business are highlighted in our filings with the SEC, including our Annual Report filed on Form 10-K for the year ended December 31, 2015, our Quarterly Reports on Form 10-Q, as well as our earnings press release issued earlier today. Mattersight Corporation undertakes no obligation to publicly update or revise any forward-looking statements in this call. Also, be advised that this call is being recorded and is copyrighted by Mattersight Corporation.

With that, let me turn it back over to Kelly for a business update.

Kelly Conway

Thank you. I'd like to start with a general overview of the business. First of all, over the last several quarters have really been more challenging than we had expected. However, beneath the surface, and while you can't yet see it, it is very clear from where we sit, we have made huge strides and our outlook is very, very promising. In fact, I think it's very clear to David and to me that our business has never looked more promising. The best indication of this is what we see as the significant turn in our revenue starting in Q3 and we'll go through why that turn is occurring. But we expect our revenues in Q3 will be up approximately 15% sequentially over Q2 and in Q4 an additional sequential increase of approximately 25% as compared to Q3. In addition, it is very important and we want to reiterate our guidance to achieve EBITDA breakeven in Q4.

This guidance is driven by the revenue increases we outlined above, and combined with our gross margin expansion which we will currently expect will increase back to normal historical levels in the low-to-mid 70s. And in addition, we will be holding total expenses approximately flat from our Q2 levels. So with all of that being said, while it has been challenging we are very, very encouraged by what we see.

Now let's talk about some highlights. The first and most important highlight is the evidence of the growing strength of our PBR driven customer acquisition engine. We added four -- a record of four new customer logos in Q2 and we'll go into the detail, some of the very, very prominent and impressive names that we added. We booked $4.4 million in ACD in Q2. On a rolling four quarters, the ACD is up 24% on a year-over-year basis. We signed our first customer for Workstyle. We have a record $23.1 million in ACB in backlog, which is up a 131% year-over-year. Just to note and David will cover this in further detail, this number of ACB in backlog is what we have previously referred to as revenues in deployment and going forward we'll be calling that ACB in backlog. We also had a record book of business of just under $60 million. Finally, we continue to grow our patent portfolio and we completed early in Q3 a significant financing which building on the momentum we have I think positions us to grow rapidly over the next few quarters.

With that overview I'd now like to turn it over to David to go into the details of how we see the business earnings in significant detail. David?

David Gustafson

Great, thanks, Kelly. On this next slide, I think this really paints a good picture of what Kelly talked about, first in terms of kind of the challenging nature of the first half of the year combined with the great strides that we've made, and the extremely positive outlook that we have for the back half of the year into 2017.

So what this chart shows, is it shows the quarterly incremental impact of revenue for our backlog, when it's deployed in that quarter. So just to lay out what this means, if we look at Q1 of 2016, what that means is the backlog that we had. We deployed $200,000 of revenue in Q1 that came out of backlog in that quarter. In Q2 just this past quarter, we deployed $300,000 of new incremental revenue in the quarter that came from backlog.

Now, what we're going to see is a real shift in that trend. So, in Q3 we currently see a $1 million of revenue coming onto the books of new revenue from our backlog and then a very significant ramp in Q4, of additional 2.4 million of quarterly revenue coming out of backlog. And to be very clear here, vis-à-vis our incremental numbers, so, the 2.4 is on top of the one that comes in Q3. So, we have this backlog of roughly 23 million of ACV. You can see how this number starts to come out of that backlog and hit revenue on a quarterly basis.

To confirm you'll have to multiply these numbers by four to get to an ACV number. This is the actual quarterly impact of this revenue hitting. And as Kelly referenced earlier, backlog is our revenue and deployment number. So we are now referencing backlog in ACV and backlog as that number.

One other things to highlight as well that Kelly mentioned is our gross margin has trended down recently. We have discussed this in the past quarter as well. That is due to this delay in the quarterly revenue coming out. We've had to hire in anticipation of what we know is coming. We have a huge backlog. We have revenue that's coming. We have had to hire in advance of that backlog to not only deploy that backlog, but to be ready to support that backlog when it comes into revenue. So, as a result we've seen a degradation on our gross margin in Q1 and Q2. That will ramp back up in Q3 and Q4 as we hold our operating expenses relatively flat and see this revenue come and deploy.

On the next slide, we're going to talk about something that has impacted our revenue. But we will see significant return in the back half of this year and be significantly accretive to revenue in Q3 and Q4. And this really shows how the business is turning. So this combined with the prior slide, really shows this massive turn in the business in Q3 and Q4. And so we see here is the impact of seasonality. We've talked previously about how we have some large healthcare customers who ramp up for open enrolment towards the end of the year and then after open enrolment they ramp down. So they increase their call center seats and then decrease their call center seats and we are paid per seat per month at those accounts. The impact of the seasonality has been in Q2. Our revenue incremental over Q1 was $600,000 lower because those seats disappeared. Those seats will come back in Q3. So we see almost all those seats coming back in Q3 that we now have an incremental increase of $600,000 of revenue in Q3 due to seasonality. A lot of these clients grow. So they grow during their seasonal period and they shrink, but not as much as they grew in the next year.

So we'll actually see seasonality ramp up even more in Q4 to the point of an additional $800,000 of revenue over Q3 from that comeback of seasonality. What I also want to describe here too is if you combine these two charts, you can see two really important things. One is how does this significantly ramp in the back half of the year? You can combine the backlog being deployed plus the return of our seasonality in Q3 to see a significant uptick in revenue, combined with an even greater ramp in seasonality and backlog being deployed in Q4, see even greater ramp in revenue.

Something else to highlight is our Q2 revenue was down. I'd like to highlight a little bit more detail in terms of why that was down. So if you look at this chart, we lost $600,000 of revenue due to seasonality which will come back. We did deploy $300,000. So there's a net loss of $300,000. We did also have a significant ramp off in non-subscription revenue. So we had almost $300,000 of non-subscription, non-recurring revenue roll off in Q2. That is really to a couple of things, either pilots that roll off or in a lot of cases it amortized deployment fees where a client renews or expands after additional period and those amortized deployment fees roll off. So we had a significant loss of other revenue as well.

Net-net to all of this, we did have churn of about $300,000 of subscription revenue in Q2. That churn is a little bit higher than we would typically expect in a given quarter. However, from what we see over the whole course of the year, we still see our subscription retention rate in the kind of mid-to-low 90s. So still in a very strong subscription retention rate, and we really don’t see churn as an issue over the course of the year.

With that I want to walk into the traction and growth that we've seen in our Routing seats. So we've seen very significant traction in Routing and we've talked about this in terms of our bookings, but it hasn't been exhibited in the revenue or in the seat count and that is now changing in Q3 and into Q4. We had some very large new logos that signed at the back half of 2015. We can now see those seats being deployed and now see that revenue coming into the picture in Q3 and into Q4. So those very significant logos took a while, but are now coming and seeing in revenue and those seats are being deployed into production. What's also happening is we have some very good sized logos that aren't these mega logos that signed in Q1 and Q2. Those are already being deployed. We're already seeing brand new logo customers that even signed in Q2 that will be turned on in Q3.

I think that exhibits that we do have some concentration risk where big logos take a long a long time to deploy, but we also have logo that deploy very quickly and Routing has the capability to deploy these logos very quickly. And that really gets to a little bit more of a double click on our Routing pipeline and new logo pipeline. We're seeing significant traction from Routing. We continue to see significant traction from Routing. We added a record four new customers in Q2. Three of those new logo customers were driven by Predictive Behavioral Routing solution and one of those was driven by our new Workstyle product that we launched at the beginning of this year.

The PBR logos were Nordstrom, one other very large top 10, big-box retailer in the U.S. and one large HMO. On top of those record four new customers that came into play, we by no means exhausted our pipeline. In fact, our pipeline continues to expand and grow every quarter. Our new logo pipeline is now three times what it was from Q1 and our sales cycles for our new routing customers continue to shorten as we see those book a lot quicker. As referenced in the prior slide, we can see those turn into relatively quickly as well.

So our logo engine is working. On top of that our account management and farmer engine is working as well. We -- as we've talked about our strategy, our strategy is to land with routing and a new logo, and then expand routing across additional seats and sell other add-on applications on top of those seats. And so what this shows that the add-on pipeline of our existing customers.

So we have two customers where over the next 12 months, we have over $5 million of additional add-on ACV at each of those customers. We have three existing customers where there's $3 million to $5 million for each of those customers of add-on pipeline over the next 12 months, six in the $1 million to $3 million range and four in the $0.5 million to $1 million range. So not only is our new logo pipeline working, but our ability to have strong account management and expand those accounts is working as well. And as we continue to close those additional new logos that we saw on the prior slide from that expanding routing pipeline, we had expected they will kind of be accretive to this add-on pipeline as well on this slide or this chart.

So, with that I want to dive into these financing that we announced with an 8-K that was filed at the end of last week and in our business update press release today. We -- I think as you've seen in these prior slides, we're extremely confident and excited about where the business is going to go and the acceleration that we're going to see in the back half of the year and over the next couple of quarters. However, we're really not appropriately capitalized to grow and fund the business as we need to. Or frankly to handle the concentration that comes with the business that we have. We have inherent variability in our bookings and our deployment timelines. We need to be appropriately capitalized to handle that and take advantage of this significant opportunity that we have in front of us to expand these new logos with Routing and to then add-on those accounts.

So as a result we did have a debt facility with Silicon Valley Bank. We frankly need a bit more flexibility into the ability to leverage and utilize that capital, and it was revolver based. So we needed a bit more confidence and the amount of financing that we had access to. As a result, we completed a debt financing with Hercules Capital on August 1st for $22.5 million. We do have the potential over time to increase that up to $30 million, and we really think that this provides us with the capitalization we need to grow and fund this business and handle some of the concentration issues that come with the business that we're growing.

Additionally, as we look at financing the business, we really believe this is cheaper than equity, given where the stock currently trades, and the opportunity that is in front of us and what we see to be the growth of the business over the coming quarters. This is a much cheaper financing than looking at equity and is also flexible enough to allow us to continue to grow the business and take advantage of the market that sits in front of us.

With that I'm going to turn it over to Kelly to talk about our forward looking outlook.

Kelly Conway

Yes, let me just reiterate much of what we've said and I think based on the information that David has reviewed and that David and I have gone through extensively over the last several months, we see our outlook as extremely promising. As I said, we think the business is the strongest it’s ever been. In our outlook again, we expect our revenues to grow approximately 40% between -- from Q2 to Q4 of this year. We expect to cross over to breakeven -- EBITDA breakeven in Q4. Based on those revenue increases, the expansions of the gross margins that we outlined and again holding our expenses roughly flat from they were in Q2.

Another point that we did not mention specifically, but levering on the strong growth in new customer acquisition, we expect to see our customer logo count to increase by at least 40% in this year. And frankly we -- when you take all of that together, we see our momentum carrying into 2017 and we currently see that we should be able to grow approximately 40%. Our revenue is about 40% from 2016 to 2017 and the EBITDA profitable in 2017.

With that operator, we'd now like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Sutton with Craig Hallum. Your line is open.

George Sutton

I wondered if we could talk about all of the challenges you've had over the last handful of quarters and the opportunities you see going forward in the context of account management versus demand for what you do, because I sense that's been a large part of the issue.

Kelly Conway

Yes, George, this is Kelly. I think going into -- we've had a couple of issues. I think one has been clearly account management. We brought on some very large accounts last year, and some of those accounts have taken us longer to get up and grow and get into production. What we've done to remedy that George is we started an account management team last August roughly and we built that up from a team of three people to eight people today. And I think if you got underneath and you looked at our CSAT measures, revenue and deployment measures, you would see that there has been significant improvement in all of those indicators throughout the last six months as well.

We've also recently -- in the last six to nine months we've had two important hires on the implementation side. One has been the Chief Customer Officer, Brian Study. The second is we hired a senior executive over our operations, Ian Kerr. So really those things are all pointed at making sure we get the revenues deployed. And once they're deployed we drive CSAT in customer value. George, we've clearly been playing catch up on that. I think we are confident now that those factors which we're going against are going to start to turn in Q3 and well the wind is turning and will behind our back on that. So that's really the first issue and I'm going to pause there and let you double click and then we'll talk a little bit about the second issue.

Did that -- was that clear George for you?

George Sutton

Yes, so that, yes. I'm not sure what double click meant? So.

Kelly Conway

Well, so, and then I think the second issue we had is we certainly had issues -- I think prior to David -- David has done a phenomenal job I think in getting the right visibility on the business and the projections. And prior to him coming onboard, I think we clearly had some issues in understanding two things. One, how those contracts were going to be deployed and when they were going to hit revenue and what the impact of the seasonality would be? And so, some of these issues, frankly we perhaps could have done a better job of highlighting two or three quarters ago that we were going to run into this soft spot. But we didn’t. But what I can tell you and those of you who work with David, you know how strong and capable he is. He's done a phenomenal job in the last 90 days of kind of getting underneath of all of those issues of -- when are these contracts actually going to be deployed and what's the impact of seasonality. So I think on both of those areas, both the account management and what I would call kind of the FP&A [ph] and forecasting side, we've clearly had growing pains George, and I think we're getting ahead of those growing pains finally. And I think we're -- again we're very, very optimistic about where we are. We wish we had not had those growing pains, but we did. But the fact of the matter is we're really in a really strong spot at this point, George.

George Sutton

So, as you -- because I will be asked this question a number of times tomorrow. So I figured I'd make it simpler. You expect to grow 15% sequentially in Q3 and then another I believe 25% into Q4. And historically your guidance has been at a level that I think if everything goes right you can hit that guidance. Is this guidance that requires you to have everything go right or is there room for some of these things to push out further?

David Gustafson

Yes. That's a fair point George, I think we have -- in some of the recent quarter's it was although a bit too -- I wouldn’t say -- more had to go right to get there. There is enough cushion in these -- in the guidance that Kelly gave to get there. Obviously we can't confirm that we'll definitely get there. There are things that can go either way but that is the nature of this guidance. There are things that kind of allow us to go either way on that guidance and there is some cushion built in.

George Sutton

Just two other quick ones if I could. The cash flow in the quarter -- the use of cash flow was pretty significant. Can you just give us a sense of what might have been unusual in the quarter and what might change quickly in Q3 and Q4 there? And then could you also provide an update on the consulting opportunity that you mentioned last quarter with a big consultant that was going to bring you to market? I don't think there was anything on the call today about that.

David Gustafson

So on the cash in the quarter we do have -- Q2 did have cash bonus payments for the firm in Q2. So that's an anomaly relative to other quarters from a cash perspective. So bonuses were paid in Q2 across the firm. There's another piece which is -- I don't know the exact number so I'm going to say I believe it was about a -- just over a $2 million runoff in unearned revenue where we do have, we have had one customer that prepays and we do have some other customers. We are starting to go towards a prepay model. We did not get prepays in Q2 but had a significant runoff of some of those prepays to the tune of over $2 million in Q2.

George Sutton

And then on the consulting side.

Kelly Conway

So the next piece on the consulting update.

David Gustafson

Yes, so we are -- there was one deal that our pipeline continues to grow with that particular firm. We have a number -- there was one deal we thought we would close in Q2 that we did not and there a number of opportunities that are emerging in Q3 and Q4. And I think that continues to look very promising as a way to help accelerate us go to market.

Operator

Your next question comes from the line of Matt Blazie with Lake Street Capital Markets. Your line is open.

Matt Blazie

A couple of things. You had talked on your Q4 call about having two or three rather large potential accounts you were speaking with. And I just wanted to see if there was any update on your progress of those.

David Gustafson

Yes, one of those -- we closed -- so that's a really good point. I'm glad you mentioned that. Our bookings were much-much more balanced in Q2 than they've ever been. We had no order over $800,000 in ACV. So that's the first quarter that I can recall that we didn’t have a $1 million plus order, which is over the longer term where we want to go to as we want to be able -- we want to be hitting a lot of singles, doubles and then occasionally you add on a triple and a home run. So we hit a lot of singles and doubles during the quarter. There were -- there are several accounts that have very large deals that are still working and those accounts just took -- are taking longer to come to fruition than we had originally expected. There's nothing going wrong with those deals. They seem to be very promising for the back half of the year. But as is the case when you're dealing with $2 million - $3 million $4 million deals, it's very hard to predict the timing of them. So what I would say is really important for us is a more balanced ramp up bookings production, which will -- over time -- there's a few things that are really happening that I think are very positive from that standpoint. We're dramatically increasing the customer count. That will move to reduce our customer concentration. Also our order book concentration and our deployment book concentration. So that's a very positive trend that started to really emerge in Q2 and we expect that to continue in Q3. The large deals continue to proceed. In fact, you know our pipeline across our existing accounts is the best it’s ever been. A number of those are large deals. So it's hard to predict exactly when they're going to close now.

Matt Blazie

Okay, and just so I understand, traditionally your annualized revenue ran about 80% of your annualized book of business, and obviously that's dropped significantly to 60% this last quarter. Is part of what you're thinking in terms of reacceleration of that getting back to that 80% sort of ratio again?

David Gustafson

Yes, that's right. And that -- and what you can see the chart is we're not saying that happens in a quarter. You're seeing a ramp up in Q3 and then into Q4, but you get into other numbers, 80% we still have concentration, we will still continue to have concentration. And so that depends on -- when we have a quarter like we had now with bookings like there were, those will generally be a little quicker to deploy. Some of the large bookings done in the past will be longer to deploy. So I don't want to give guidance that we will get back to 80% and stay there. But yes, that reacceleration is going from 60% back towards closer to the historical numbers.

Matt Blazie

And one last question was the refinancing -- you used that to pay out all of your outstanding debt to Silicon Valley, correct?

David Gustafson

That is correct, yes.

Operator

Your next question comes from Patrick Walravens with JMP Security. Your line is open.

Matt Spencer

Hi, this is Matt on for Pat. Thank you for taking my questions. If you won't mind, could you talk a little bit about any of the changes you've seen in the competitive landscape or if that's impacting deals whatsoever?

Kelly Conway

Matt, it's Kelly. We really haven't seen -- I guess the best way to talk about the competitive landscape is really for new logos, because once we get into our account -- you're selling from an embedded footprint. I think in those routing deals, in all of the routing deals we have, we really don't see any of them as competitive at this point. So there really hasn't been any change in the competitive landscape. And as our sales force gets more mature, the hunter sales force gets more mature, and as we get more case studies and references, we're seeing our sales cycles actually shortening, Matt.

Matt Spencer

And given the -- one more if you don't mind. Given the success of lifestyle, one of your -- the product you released in Q1, do you feel like there's any other areas you'd like to expand or add on new modules or I guess what's next in the R&D pipeline?

Kelly Conway

So, just, a slight correction. I think you meant our Workstyle product and thank you [Multiple Speakers]

Matt Spencer

Yes, I'm sorry about that.

Kelly Conway

Well, we have -- there's a number of ways to expand and pivot personality into the enterprise. We have to get our -- the revenues we saw deployed. We got to get to the -- grow the revenues 40% over the next two quarters and continue that in the Q1 of next year, get the EBITDA profitability by Q4. That is job one, job one(a) and job one(b) and job two. So, that's our clear focus. And so I think what we expect over the next few quarters is to hold all of our expenses, including our development expenses relatively flat, because we've got great product and plenty of product, we got to get it sold and deployed and get to profitability so that we can more rapidly expand the business using our own capital versus raising other capital.

Operator

[Operator Instructions] Your next question comes from the line of Neil Cataldi with Blueprint Capital. Your line is open.

Neil Cataldi

I didn't see the filing yet and I was wondering if you're providing the normal quarterly transparency you usually do as far as metrics and specifically can you tell us what revenue and deployment is at quarter end?

Kelly Conway

Neil, it's Kelly, I'm going to give that to David, before I disclose that.

David Gustafson

We still have our typical filings and just the revenue and deployment metric that we have given before we have changed that metric to backlog, so ACD in backlog -- so in the filings and in the webinar deck, that will be backlog as a metric as opposed to revenue and deployment.

Kelly Conway

And then the number Neil for the quarter was $23.1 million.

Neil Cataldi

How do we reconcile that to -- I understand you changed it? Maybe you can explain why you changed it.

Kelly Conway

The metric is…

Neil Cataldi

And then is there a way that you can -- sorry to interrupt -- but is there a way that you can sort of help us understand how we compare it to the $17.9 million it was last quarter.

Kelly Conway

Yes, it's the same. It’s really the same metric. We just changed the way -- the terminology of how it was described. There's been a lot of focus on -- from the SEC around non-GAAP measures and how those measures are labeled and described. And so -- by describing it as a revenue number, there's been some guidance around is that appropriate. And so there's been some SEC guidance to change the way that those metrics are labeled and described. So it is the exact same metric, but it’s not revenue. It doesn't have a GAAP term in the label as the metric. It is just called backlog now.

Neil Cataldi

Okay, so just has a new title?

Kelly Conway

Exactly, a new title.

Neil Cataldi

And then what are your thoughts -- for me, having followed the story for a long time, I think that the revenue and deployment metric is a key component to what is confusing investors today. Can you help us sort of understand or give an update as to where it is today? I think on the last call you guys had talked a lot about that number reverting back in the second half. Where would it normalize and what additional color can you provide?

Kelly Conway

Neil, I'm not sure if you were on the call when we talked about it or could see the slides. What we mentioned is that in the back half of the year we expect to deploy $1 million in quarterly revenue in Q3 or $4 million on an annualized basis in Q3, and in Q4 an incremental $2.4 million in quarterly revenue or on an annualized basis $9.6 million. So between those two quarters, we expect to deploy $3.4 million in incremental quarterly revenue or just under $14 million of ACV in the back half of the year.

David Gustafson

So does that make sense, though. That amount will roll out of backlog. So we will see that becoming unstuck in the back half of the year. Now in terms of what that number looks like, obviously the top end of that, you're putting in whatever your ACV bookings are in Q3 and Q4. So we see a meaningful impact on revenue from that backlog come into play. Whether that backlog decreases or not, frankly if you book a lot it might not decrease.

Kelly Conway

And also Neil depending on the timing of the bookings, you know how much of our bookings in the back half of the year come in, in Q4 versus Q3 will make a difference as well. But we see a meaningful -- a very meaningful amount upwards of about $14 million of ACV. In addition, we also mentioned on the seasonality between the two quarters on annualized basis of $5.6 million or quarterly basis of $1.4 million due to seasonality hitting in Q3 and Q4.

David Gustafson

And if you contrast that with what happened in the first half of the year, our revenue that was deployed was 0.5 million in aggregate between Q1 and Q2 of quarterly revenue or $2 million in ACV. So we only pulled 2 million out of that backlog over a period of six months. And frankly even more than that rolled off into seasonality being rolled off. So there is a net negative impact from those numbers versus the significant change that Kelly just described here in the back of the year.

Kelly Conway

Yes. We had a confluence of things that really worked against us in the first half of the year and I'm not going to say that we shouldn’t have done a better job of signaling that to you. We should have. But we didn't deploy very much revenue. We had more seasonality than we expected and we continue to have a shift of our revenue mix towards subscription revenue, that is our non-subscription revenue decreasing. Two of those three things, the most important two of those three things, the revenues being deployed and the seasonality, current strongly starting in Q3.

Operator

Your next question comes from Nick Farwell with Arbor Group. Your line is open.

Nick Farwell

I just had a quick clarification. David, if I have this right, it looks the cash burn in the first half of the year was approximately $12 million. The $10.6 million from operations, basically a $1.4 million from investing. So you get the $12 million which coincides with some other metrics I've used. Am I accurate in that assessment?

David Gustafson

I don't have the exact data. But that sounds roughly accurate.

Nick Farwell

Well the cash changed $11.7 million. So it's got to be pretty close.

David Gustafson

Yes, that's right.

Nick Farwell

So my question is can you -- do you feel comfortable giving us some kind of cash burn guidance in the third and fourth quarter? I realized by stating you'll be breakeven-ish in EBITDA, that doesn't suggest that you wouldn't burn cash for timing and other -- perhaps other reasons?

David Gustafson

Yes, you're correct. Getting into EBITDA breakeven does not mean that you'll be cash flow positive. We do not provide that guidance, and have not provided that guidance. There're couple of things that are interesting in that guidance, still one of the reasons that the financing is appropriate. If you -- let's go through the path that we have a big booking in the quarter. So let's say we book a very large number of -- a very large ACV number in Q3 or in Q4. What happens then? It's great. We'd be -- let's say we book a $10 million ACV number. This is not guidance. I'm using this as an example. Everyone would be thrilled. Everyone on the phone would be thrilled as long you're long and not short, everybody in Mattersight would thrilled with a $10 million ACV booking number.

Well from the cash perspective though, we have some early commissions we have to pay out to the sales reps for booking that number. So no revenues in but that cash flows out of the door. We do need to buy gear and capital to expand our cloud and to expand our technical footprint in anticipation of sort of deploying those contracts. We have to sign -- we have to go hire new people to deploy those contracts and some to support that additional $10 million of annual revenue that comes in play, and we make those decisions when those -- close to when those bookings come in. Yet there's no cash in the door. In a lot of cases that cash gets paid in arrears in the month after this service is provided.

So in terms of forecasting EBITDA, that becomes a lot simpler to give guidance, because all those things I referenced don’t impact EBITDA in the quarter that it's booked. So it could get spread in the future. But from a cash perspective you have to finance that growth with cash and that cash goes out the door. So obviously we do have models internally to manage for cash, but it gets a whole lot harder for us to forecast -- to feel confident in giving outside investors a number that we feel confident in hitting around cash burn, given the impact that growth has on that cash burn and having to fund and finance that growth.

Kelly Conway

And I think Nick one of the things -- we're obviously cognizant of the cash burn. It's certainly higher than we had hoped for. A lot of that is just due to the fact that revenues are being delayed -- were delayed in the first half of the year and that -- one getting EBITDA positive and getting to cash flow from operations positive it's a very strong focus for later this year and early next year.

Nick Farwell

I have one other quick question, Kelly or to Dave. Can you help me -- you were very helpful in providing us certain deltas in sequential revenues, Q1 at 9.3 to Q2 at 9.1 if I have that correctly -- down $200,000? I saw -- I couldn't quite reconcile the roughly the $200,000, given the changes you had in -- that you enumerated for us. Could you quickly do that again, so I can find out from where the $200,000 actually came?

Kelly Conway

From Q1 to Q2?

Nick Farwell

Yes, please.

Kelly Conway

From Q1 to Q2 we had $600,000 leave due to seasonality.

Nick Farwell

Yes, I have that.

Kelly Conway

We had about just under $300,000 leave due to -- just kind of our -- we have subscription revenue and non -- kind of the other revenue.

Nick Farwell

Yes, I have that.

Kelly Conway

We had just under $300,000 leave due to that. So that rate there gets you to the delta in revenues between the quarters. However, there were two other things going on that netted against each other. We did deploy about $300,000 of quarterly revenue of new deployment that came out of backlog. And then we had about $300,000 of actual churn. So it's real churn that actually occurred in the quarter that netted against that. Those four things netted together gets the delta and revenue for the quarter. So if we step back and look at that seasonality, it's unfortunate but it's not necessarily an issue. It's something you've to plan and manage for. That comes back then the next quarter.

The other revenue rolling off is unfortunate revenue but frankly I believe we're now around 93% or 94% of our revenue -- around 93% of our revenue is subscription and recurring revenue. Ultimately we've given guidance that falls off for a little bit of time but it creates a much healthier business because we have a much higher percentage of revenue that is subscription recurring revenue. So if we look at lot of those things, none of those are fundamental. Those are real issues that they are timing related things with the business other than the $300,000 of churn and while that was a bit higher in the quarter relative to typical quarters, we still see the year as being mid-to-low 90% subscription retention rate for the year. But we don't see subscription churn as being an actual issue over the course of a 12-month period.

Nick Farwell

So, that gets me to roughly $300,000 which corresponds to $200,000. I think I've figured it out. Thank you for your time.

Operator

Your next question comes from Mark Gomes with Pipeline Data. Your line is open.

Mark Gomes

You mentioned that you had one new logo in the quarter from the Workstyle product. Is that correct?

David Gustafson

That's correct. Yes.

Mark Gomes

So, was that -- so that sounds like you lead with Workstyle in that situation -- no?

David Gustafson

That's correct. Yes.

Mark Gomes

How does that work? In other words, I was under the impression that maybe -- that Workstyle would be a product that would be more applicable for a customer who's already using some of your product?

Kelly Conway

Mark, this is Kelly. You're absolutely right. We think more typically Workstyle will be a follow-on product after we've sold Routing. In this case a large customer came to us, was enamored with Workstyle -- the initial Workstyle rollout into a couple of hundred people and then we have the potential to grow to several thousands of people that are really using a concept personality in using Workstyle as a platform to improve how they interact with their customers. So that's how that works in that example. I would say that would be Mark the exception and not the rule. We're not going to market that way. They came to us because they wanted to use the product that way.

Mark Gomes

Got you. And looking at the seasonality, can you give us a little bit of color in terms of what we can expect on a go forward -- on a usual basis in terms of the impact of that seasonality on your operating expenses in those seasonal quarters?

Kelly Conway

I think, in fairness, we probably haven't done as good as a job as we could have at describing seasonality in past years. It's been there, but we haven't described it as well. It also hasn't been noticed because...

David Gustafson

It's grown.

Kelly Conway

You've got two things. One, we're usually deploying on top of that. So we haven't had the backlog stuck like it's been So it hasn't been noticeable. The second thing is it's growing every year as we have a bigger business and as we have more and more a really healthcare receipts, that seasonality has grown every year in terms of the magnitude and size of that seasonality. We will expect that to -- I think the right guidance is the absolute number of seasonality impact will grow every year. It'll be a bigger absolute number going down and -- Q1 and more in Q2 and then in every year it'll be an even bigger number, coming back up in Q3 and Q4. Obviously on a year-over-year basis that -- from an ACV perspective that's kind of normalized, but the swings will get bigger in terms of absolute amounts every year. On a percentage basis of our business, it's hard to give guidance in terms of the percentage really. It really depends on how much of it is a seasonal healthcare business versus other businesses that aren't as seasonal relative to the new bookings that we are deploying.

Mark Gomes

My question is really more along the lines of operational expense planning. Is there any way to smooth out the operating expenses in those quarters? Can you redeploy some resources, things of that nature in anticipation of that so that you don't end up with your lumpy operating margins?

Kelly Conway

I think I think in a typical quarter when you have the -- in a typical quarter we would be deploying more than $1 million of revenue in the quarter. And so the revenue would still grow over Q1. It just wouldn't grow as big as other quarters because of the headwind from seasonality. So from an operating expense perspective I don't think we have to redeploy you know our cut. I think what you're doing is in Q2 you're probably hiring less, and because of that little bit of headwind you get from the seasonality. But it shouldn't -- in typical year it shouldn't result in a revenue drop over Q1.

Mark Gomes

Okay, and how about from an infrastructure perspective you know servers, things of that nature.

Kelly Conway

You probably end up running a little hot. The reality is you have some extra capacity in those quarters. I wouldn't say it’s a massive piece of the business but you end up having a little bit of extra capacity in those quarters.

Mark Gomes

Okay, great. And final question. Have there been any kind of significant events that we might want to know about that have occurred since the end of the quarter? Payments, deals, things of that nature?

Kelly Conway

You know obviously the significant event we disclosed with the financing is really the only significant event Mark, and that's already been disclosed.

Mark Gomes

Okay, great. And I'll just leave by echoing what George Sutton said about making sure you guys -- you have a great opportunity in front of you and I think from an investors standpoint having conservative, beatable cushion in your guidance could do wonders for your equity valuation which will obviously come in handy later down the road as you guys want to continue expanding, maybe use equity for that.

Kelly Conway

Look Mark, we really appreciate it. And I know you've mentioned that before and we take that to heart. And again I just reiterate David is doing a great job in getting the business properly modeled and planned. It may take another quarter or two to get all of that in such a way that we're giving very conservative guidance, but certainly that's our goal and I know that David will enable us to get there.

Operator

Your next question comes from Shawn Boyd with Next Mark Capital. Your line is open.

Shawn Boyd

I'll keep it brief here. Going back to the comments earlier about $1 million coming out of what we used to call revenues in deployment or backlog in Q3 and another $2.4 million in Q4. How many customers is that split among or how many separate engagements? And then also, as a follow up to that, what are the key puts and takes to those happening on schedule.

Kelly Conway

Shawn, let me -- first, let me just make sure that we reiterate more clear. It's $1 million in Q3 and then incrementally on top of that $2.4 million as you mentioned. So $3.4 million of quarterly impact or just about $14 million on an annual basis. David do you have sense of…

David Gustafson

So that makes Shawn. So if you compare to $23 million, you just have to multiply those numbers by four.

Shawn Boyd

Exactly and I'm already kind of jumping the gun and looking at that $14 million versus a run rate of $36 million right now and saying okay I understand why they're talking about 35% to 40% revenue -- while I guess it's 40% growth in '17. So I see what you're -- I think I'm adding that, I think I'm looking at that the right way, and I'm just saying okay that's fantastic. How many customers mix it up and what are the issues that we have in terms of making sure that happens on schedule? What could go wrong?

Kelly Conway

Well, we've known this has been coming. And you can kind of see that in the -- what we used to call revenue and deployment is now backlog and that number continuing to grow as those revenues have been booked, but have been stuck there. We've been working through the deployment of these very large new logos, and we now have much more visibility into the path of those coming -- started in Q3 with a much more significant ramp into Q4. In terms of the number of deals or customers, I don't have the exact number but I think the number of -- I mean I think if I look at the number of items that are in that deployment schedule, it's probably around 10 to 15 customers that are in there. And that may be spread across 30 plus deals that are in there.

I will say the bulk of that mix is made up by four to five customers. So a very high percentage of that is four to five customers and those are some of the big new logo bookings we've talked about that have been a bit delayed and some of the large user ramps that have been delayed in the front half of the year where we now have visibility into those coming into play. So it's not trying to forecast -- we are obviously forecast in the 30 to 40 items that are in deployment and when they're going to hit, but a big bulk of that is made up by four to five logos and we have much more visibility in terms of where those are, when those are coming.

Shawn Boyd

And so, in terms of the puts and takes part of the question, what could be the -- if there was a push out on any of those four to five, I assume it'd be kind of the typical things, those changeovers at that customers, if they an acquisition, if they have a change in management, something that sort of changes their operations. Is that the right way to look at it or are there things that could be more on our side, that I need to be thinking about that could potentially push those out?

Kelly Conway

There's not much on our side at this point to push it in terms of technical deployment as much. And the number we're looking at, there's obviously upside and there's some downside too and part of that is around -- the bigger one -- we have a pretty good view in terms of the project timelines, and the go live dates and what has to happen. There is an element of this that is around hiring. So as you look at the seasonality, we have projections around how people will hire going into their busy seasons. We have an estimate that is conservative estimate. That can go either way. We have seen places where their busy season gets really busy and they have to hire even more aggressively than their plan. And we've seen periods as well where in their busy season it's hard to hire and it's hard to get those people in their seats and they hire lower than planned. So I think probably the bigger -- that's the one that we're managing on a regular basis, is the impact of that seasonal spike which again could go either way.

Operator

There are no further questions in queue. I will turn the call back over to the presenters.

Kelly Conway

Great, thank you very much and thank you for all the questions, your interest. And again let me just reiterate the basic message here that we're disappointed that it's been more challenging than we had thought, but that does not at all change our enthusiasm. We think the outlook is extremely promising, we're starting to get these revenues deployed. Our new logo acquisition engine is really starting to work. We have the balance sheet we need and we see these getting to EBITDA breakeven in Q4 which is very, very close at this point. So we're very, very encouraged and we appreciate your interest and continued support. Thanks very much, take care, bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

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