Determine, Inc. (NASDAQ:DTRM)
Q1 2017 Results Earnings Conference Call
August 10, 2016 05:00 PM ET
Patrick Stakenas - President and CEO
John Nolan - CFO
Eric Martinuzzi - Lake Street Capital Markets
Scott Berg - Needham & Company
Brian Kinstlinger - Maxim Group
William Meyers - Miller Asset Management
Greetings and welcome to the Determine, Inc., First Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Mr. John Nolan, CFO for Determine, Inc. Thank you, sir. You may begin.
Thank you. Good afternoon and welcome to the Determine first quarter fiscal 2017 earnings call. Presenting on the call today from the Company, we have Patrick Stakenas, President and Chief Executive Officer; and myself, John Nolan, Chief Financial Officer.
Before we get started, please note that this conference will include forward-looking statements within the meaning of the securities laws. These forward-looking statements will include discussion about the Company’s business outlook, anticipated financial and operating results, product development and future plans. Such forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by the forward-looking statements.
Such risks, uncertainties and other factors include, but are not limited to, those that are contained in the Company’s filings with the SEC, including the Risk Factors section in our most recent Form 10-K as supplemented in the Company’s Form 10-Q, as each is filed by the Company with the Securities and Exchange Commission. The Company does not assume any obligation to publicly release any revisions to forward-looking statements discussed during the call.
In addition, on the call we will refer to certain non-GAAP financial measures to help understand the Company’s past financial performance and future results and to supplement the financial results that we provide in accordance with GAAP. The Company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP counterparts in our earnings release filed with the SEC earlier today. It is also available on our website at www.determine.com in our Investor Relations area.
We will also be discussing bookings and operating measures that are not derived from the Company’s revenues or any other amounts presented in accordance with GAAP and the Company’s statement of income, balance sheet or statement of cash flows or other equivalent statements.
With that, I would like to now introduce Mr. Patrick Stakenas, President and Chief Executive Officer of Determine. Patrick?
Thank you, John. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal 2017 earnings conference call. I wanted to offer my continued thanks to all colleagues here at Determine in our new Indi headquarters as well as operational teams around the globe for their continued hard work as we strive to make significant progress in our efforts to grow the business, achieve profitability and deliver the most effective solutions to meet our customers’ business needs, which is clearly no small path. Joining me today at our new corporate headquarters in Carmel, Indiana, along with John Nolan, is Art Fisher, our General Counsel.
As I note in our release earlier today, the momentum in the business is strong, as we transform our business and execute on the plan I discussed with you in our 2016 year-end call in June.
I want to spend a few minutes today discussing a couple of key business and operational topics, reviewing where we are with respect to delivery of our new disruptive Determine Cloud Platform, providing an update on the sales pipeline, discussing our continued business transformation and finally, updating you on our efforts with respect to managing the business for its profitability in fiscal 2018.
But before I comment any further on these initiatives or the quarter, I would once again like to introduce our Chief Financial Officer, John Nolan, to review the first quarter 2017 financials. John?
Thank you, Patrick.
Please note that a few items discussed on the income statement will refer to both GAAP and non-GAAP data, while the remaining income statement items in the balance sheet will refer to GAAP data only.
In the first quarter of 2017, we continued our focus on integrating our platforms and rationalizing expenses. The focus on these areas is helping to set the stage for Determine to continue to move towards growth and profitability.
Total GAAP revenue for the quarter was $6.5 million, up 4% compared to the same period last year and down $200,000 or 3% from the prior quarter. Much of the increase over the prior year is attributable to our acquisition of b-pack while all of the decrease over the prior quarter is attributable to a decline in non-recurring revenue, primarily related to contract timing of a mentioned [ph] new customer.
Total non-GAAP revenue for the first quarter was $6.5 million, up 4% from the year ago period, but down 3% from the prior quarter with the causes of the increase and decrease is same as that of the previously discussed GAAP revenue. The $8,000 difference between GAAP and non-GAAP revenue is due to the impact of revaluing the deferred revenue balances acquired from b-pack as required by GAAP purchase accounting.
Total GAAP gross profit for the first quarter was $3.4 million or 52% of total revenues, an increase of $77,000 versus the same quarter prior year and an increase of $89,000 from the prior quarter. The increase year-over-year is due to cost reductions and improved gross margin on non-recurring revenue and the quarter-over-quarter increase is due to cost reductions and the growth of recurring revenue.
Non-GAAP gross profit in the first quarter was $3.7 million or 57% of total revenues, equal on a percentage basis to the same period last year and up 2 percentage points from the prior quarter. The year-over-year parity was achieved by increasing the margins on non-recurring revenue.
Non-GAAP gross margin percentage on recurring revenue was 73.6% in 1Q 2017, this is a decrease of 2 percentage points from the same period last year and an increase of 5 percentage points versus the prior quarter. The year-over-year decline was driven principally by the change in the configurator business unit that we discussed on our last two calls. The quarter-over-quarter improvement was driven by cost reductions and revenue growth.
Note that the difference between GAAP and non-GAAP gross profit is the difference in GAAP versus non-GAAP revenue, as well as the elimination of the amortization of acquired intangibles, stock-based compensation and severance.
Total GAAP operating expenses in the first quarter were $5.5 million, down 10% from the same period last year and down 33% from the prior quarter. The year-over-year change is due to the impact of the cost reductions we discussed on the last call as well as the favorable $500,000 payment to settle litigation. The quarter-over-quarter change is due to cost cuts, the favorable 1Q litigation settlement payment, as well as the impairment, restructuring and the negative $500,000 in settlements that were recognized in the last quarter of fiscal 2016.
Turning to the balance sheet, we ended the quarter with $9.7 million in cash, compared to $11.3 million in the year ago period and $9.4 million in the prior quarter. Note that all periods include cash borrowed against our credit lines. The deferred revenue balance at quarter end was $10.2 million compared to $8.2 million in the year ago period and $10.4 million in the prior quarter.
Billings, a non-GAAP measure defined as revenues plus the change in deferred revenues for the first quarter were $6.3 million up 4% from the same period last year and down 22% from the prior quarter.
I would now like to turn the call back over to Patrick to review some key strategic and business performance topics. Patrick.
Thank you, John.
As noted earlier, at the time of the call, I strongly believe the momentum in the business is really strong and as we continue to execute on the plan, as I discussed with you in June. From a product perspective, we continue to be on track to release our integrated Source to Pay and Enterprise Contract Lifecycle Management unified suite offering this fall. In the market, we have branded it as a Determine Cloud Platform. Eric Faulkner, our CTO along with Julien Nadaud, our Chief Product Officer and their teams are working tirelessly to ensure we hit the October release.
What's particularly exciting for us is that customers, prospects and market analysts from the likes of Gartner, Forrester, Spend Matters, Paystream Advisors and others continue to share their enthusiasm for this truly integrated and disruptive platform we are delivering to the marketplace. On the revenue side, while overall recurring revenue was up quarter-over-quarter, as noted in specific comments I made on last quarter's call, there is and will be some intravariability in quarterly bookings due to the transformation of our solutions.
In first quarter, our new recurring revenue bookings were 850,000, a bit lighter than our run rate that we typically like to stay on, but as mentioned last quarter, we believe this is temporary, and it’s direct result of the business pivot to the new platform. As we construct it, some of our prospective customers decided to hold on commitments so they could be guaranteed starting out their relationship with our Company under new Determine Cloud Platform.
To that end, there has been significant activity in this quarter securing prospects on the Determine Cloud Platform as well as migrating customers. And just over a month into Q2, we have already closed a significant number of deals on the new platform.
As I mentioned last quarter, we are squarely in the heart of the transformation zone, as noted in Geoffrey Moore's books Zone to Win. It is here where we're finally able to free our future from the legacy pull of the past. Our initiatives are in response to the emerging shift of the needs of the marketplace as customers and future prospects are looking to leverage true SaaS procurement systems that are fully integrated with contract management. We believe the Determine Cloud Platform is a disruptive force in the marketplace.
We have set what we believe are realistic numbers while we make our way through the transformation zone. However, it is more important to complete the transformation than hit a short-term bookings numbers. We’ve set the transformation as a corporate goal and every one of the Company is rallying behind it to deliver this success.
On expenses, as expected, we saw meaningful results from the actions taken last quarter to manage and streamline the business. As we talked about at our last call, expenses are being managed downward, and we're on track. We are committed to efficiently and effectively drive this business, and it continues to be our plan as we discussed last quarter to manage the business to profitability in fiscal 2018.
Most encouraging in conjunction with delivering the Determine Cloud Platform is of the fact that the platform sales pipeline continues to build in a very promising manner. The efforts of our sales and marketing team, specifically Dave Bush, Sean Delaney and Rose Lee are driving a strong uptick in the pipeline for the Determine Cloud Platform as they educate prospect and customers on the benefits of using this new integrated offer.
One additional insight, understanding it’s still early, is that the Determine Cloud Platform deals are beginning to have faster cycle times than our historic standalone offerings and carry more implementation costs. We hope to offer more insight on this as we move forward with the selling and delivering of the new offering, but I am very optimistic about all aspects of our future sales performance once we have fully delivered the platform.
As we move ahead, I am excited albeit cautiously for Q2 as both, Q1 and Q2 have a square link in the transformation zone. And there is always an element of unpredictability that comes along with this kind of major transformation.
In summary, the Determine Cloud Platform is on track and viewed as exciting to our prospects, to our customers and to the industry analysts. The customer base is strong. Determine counts over 300 customers in our global portfolio. We continue to work tirelessly to hit the sales plan in the face of the game-changing transformation of our solutions at the same time. Management has confidence in the expense work that we’ve done in the past quarters to position us and the business to profitability during the fiscal year 2018. The pipeline for the new platform is building, and we’re looking forward to numerous benefits of the Determine Cloud Platform. The entire Company is rallying to support the success of the new platform from product management, to development, to sales, to account management, customer service, marketing, everyone is work is focused on its success.
With that said, at this point, I would like to turn the call over to Q&A and answer some of your questions about the business strategy, our financial plan and our product offerings as we execute on our mission.
[Operator Instructions] Our first question comes from Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.
Understanding you’re in this transformation zone at least for Q1 and Q2, is there anything that you can tell us about, maybe somehow quantifying the pipeline? Obviously, it will come down to bookings as far as measuring the success of the business, as we set the leading indicator. You guys have been on a terrific run of 1 million plus bookings this quarter there, prior to Q1 of 2017. So, I’m just wondering is it assume too soon to say when we get back to 1 million plus or is that well within your sight?
Hi, Eric, thanks for the question. So, we -- I’ve been going through this the past several quarters, knowing that at some point there is going to be an inflection point from moving from legacy products to the new products in the Determine Cloud Platform. So, as we talked last quarter, even though we pushed everything we could to get to that magic $1 million number, many of those deals didn’t come over, it was just a matter of the customer wanted to make sure that it was ready for prime time for them anyway. So, as we look ahead in the next quarters, the pipeline will continue to increase substantially on the platform deals and of course the legacy deals that we can still bring in, we’ll bring in. But again quarter-over-quarter, the pipeline is going to shift more dramatically to the cloud platform. As far as getting back to the $1 million quarter, that’s always in our sight and we’ll continue to shoot for quarter-over-quarter. But as indicated, -- from Q1 to Q2, there is that variability that we have, and want to make sure that we let you guys know about. But my hope is that we get back to it sooner than later.
Okay. And then, just taking a look at where we finished Q1, the recurring revenue, that was up sequentially albeit small, but that’s still good to see, that’s the thing that’s going to be driving the business from here to eternity, right? The non-recurring, you talked about the -- you've got a $300,000 decline. And so what was it about that -- can you say touch a little deeper on the decline in the non-recurring side and then address where you expect Q2 for both of the segments, directionally if not specifically?
Okay. Hello, it's John here. For non-recurring revenues, what I said about in my remarks, we have a large customer that we signed at the end of last year that helped drive those sales very high. And the way that particular contract structured, we got a fair amount of it sort of non-recurring revenue in Q1, but for work that is spread over Q1 and Q2. So, there is a bit of a timing issue where the project is profitable life-to-date but it just kind of happened a little in a lumpy manner because you had payments for design and proof of concept et cetera in the first quarter, and now we've got some more sort of longer, lower margin once happening now. So, that's a big piece of that. And I hate to say the configurator business one more time, but we had one more configurator business project that got billed in the fourth quarter that’s not there this quarter either. But on a go forward basis, we still are pricing things to make money and we plan to get the margin back up. So, the revenue is going to be staying down a little bit because we've got the 2Q French summer time happening but we don’t plan -- I don’t plan for it to be as much of a gross margin drag it was this quarter.
And then kind of coming back up, also the other thing on non-recurring revenue is when you are dealing with zero margin and you are working through, there are some smart guys who could be delivering non-recurring at zero -- approximately zero margin or working on R&D. There is always that push, pull when you are trying to develop a product. So, we're just working through all those pieces.
On recurring revenues, we expect continued growth there, although slower because of the slower sales next quarter then picking up the sales pick up.
Okay. So, I think follow-up here, the kind of a flat to down on the non-recurring because of the summer seasonality or clearly down, rather than flat to down?
Yes, but not as much of -- we are hoping to manage the margin better there. So, you get some staff cost when somebody’s on -- when one of our employees is on vacation for a month and they can't generate revenue but we're still recognizing the cost, that dips a little bit too.
Okay. So, in the aggregate, down a little bit in total revenue Q2 versus Q1, and then the expectation, I don’t want to make too much of a leap, but you would be coming into what is a seasonally stronger calendar Q4 which is your fiscal Q3, again I’m not asking for specific numbers but directionally, does the December quarter rise quarter-on-quarter versus the September?
Okay, right. And then, on the expense side, I don’t have a clean picture on the non-GAAP OpEx. I am estimating that it was about $4.8 million in Q1, which is obviously some really tight -- some great focus there on the expense side. I know that's not a pleasant thing to live through. But, where is that or do we have any kind of prelaunch marketing expenses, road shows, channel education costs, does that OpEx number grow sequentially in September despite the decline in the revenue in September?
So, we have to remember there is a five in that four eight, and I show about four eight [ph] non-GAAP OpEx. There is $500,000 one timer in there for the customer settlement that was in the first quarter -- excuse me, the legal settlement payment. So, that won't be there going forward. Last call, and we actually were a little lighter because of some hiring on some of our R&D, so I expect that to be going up little bit. So, the mid-five -- last time we talked about it’s being south of $6 million and it’s still there and it's in the mid 5s of sort of where I would say it should be.
Now, you've talked about the pipeline building in a promising manner. It seems like just from the press release, you are across a variety of verticals. Is there -- I'd think the low hanging fruit would probably be in your installed base. Could you characterize the pipeline just from a new logos versus installed base versus let's say a year ago when you didn't have the Determine Cloud Platform as an option?
Well, keep in mind that as we went from contract management, then we had sourcing and then P2P, we've been cross-selling up-selling those throughout the entire year. Now, that we have a platform, we can accelerate those and of course the P2P customers that are a lot them in France, we can up-sell and cross-sell as well. So, as far as our percentage mix, I don't have that have to give you particularly on the numbers. But I would say it's going to continue to rise as we roll out the platform. When we roll out, the platform the technology that really allows you to up sell and cross sell much easier, because you're turning out modules versus having to re-implement everything. So, right now, I think we'll continue to see more new business and then again as we go forward, we'll keep up-selling and cross-selling the new customers.
And then, I asked about the OpEx but one last question on the gross margin. Do we see continued expansion on the gross margin or so to speak with what we had in Q1?
Yes, I'd give more of the same where we are at this point. I am still figuring out some of the ins and outs. So, that's my assumption right now too. So, as -- we pricing and delivering on the new stuff, that's what we're targeting.
Okay, really looking forward to the DCP launch there in October. So, obviously an exciting time, I wish we could fast forward and be there already.
Thanks a lot.
Thank you. Our next question comes from Scott Berg with Needham & Company. Please proceed with your question.
I have a couple of quick one. First of all, Patrick, on your comments around sales pipelines and bookings in the quarter, any I guess qualitative statements on kind of what your pipelines look like today relative to maybe 6 to 12 months ago, with respect to old models versus new platforms; are you seeing the pipeline significantly more favorable to the new platform or is that something that you expect to just more build in next quarter or two?
Yes, I mean, the overall size of the pipeline hasn’t dramatically changed; just shifted from -- it’s shifting drastically from legacy products to the new products to the Determine Cloud Platform. And again, it’s just a matter of -- so for instance PSE [ph] has been building over time, which is already in the platform, it’s been on the platform for four or five years. So, now it’s the new -- shifting from the legacy products to new products. But that’s going to be continuing to grow, again depending on the needs of the customer and the level of functionality that they need. In some cases, we still have those present on the legacy products. But for the most part, most new deals that we are working on are moving quickly to the platform again. When this thing is fully prime time and the feature to feature functionality matches the legacy product, then we will move a 100% to platform pipeline.
Great, then as the new pipeline rolls out, do you need additional resources to help with those implementations and move through that process or does the existing staff -- will be able to run and handle those effectively?
Existing staff can definitely handle. In fact, our kind of look on this thing is that hopefully we’ll need less people to implement it, because it’s easier to implement, it’s faster to implement and in fact, the product itself is just easier to work with in general. So, we’re hoping there is cost savings there potentially and not needing as many people.
Great. And then the last question from me is on your comments regarding fiscal 2018 profitability, John. Now that you’re another quarter into it, and you’re not guiding obviously specifically to 2018, but is that -- is your expectations or goal to be profitable for the entire year or do you cross that threshold at some point and then we look you being profitable from that point going forward?
I think we will cross over sometime late this year or early that year, so, that we’ll have full 2018 profitability. Whether or not each quarter we’ll be profitable, it’s little hard for me to determine at this point.
Thank you. Our next question comes from Brian Kinstlinger with Maxim Group. Please proceed with your question.
You mentioned, I think a shorter sales cycle. So, maybe given the product hasn’t been implemented yet and won’t be ready until the fall, maybe what gives you that confidence that the average sales cycle will be quicker, maybe what is that sales cycle that you project?
Sure. I guess the confidence that I’m getting really comes from the fact that we’re now positioning the P2P product which has been on the pipeline or been in the pipeline since the acquisition of last year which is still on the platform. But we have actually already sold [ph] deals this quarter on the platform, granted the functionality isn’t 100% but the fact of the matter is that we’ve got involved in some deals and literally the sales cycle has been a month versus three, six to nine months. So, those deals that we sold on a platform show us that when this thing is positioned properly and meet the needs of where they have right now that we can move much quicker.
And so the early sales that you said this quarter that were encouraging, were mostly those the integrated suite or was that the legacy standalones or some of both?
Yes. Well, so, it's a mix of products. But I will tell you, on the suite, the Determine platform, when customers see this thing, they literally light up. I mean, they are excited about it. And in fact the demos that we’re showing on the new platform, our RFPs are excited about it. But, in the actual revenue of this quarter, there was a mix of both, still legacy and new platform.
It sounded like there was a surge after that begun in this quarter. Is it enough to discuss what you've already booked in the annual run rate bookings in the September quarter?
I don’t want to prognosticate, but I will tell you that we have gotten off to a good start; we're excited that customers that we have closed this quarter are in the platform and that gives me the confidence.
So, I think the previous caller asked the resources to install and you said, it may take less resources. What about from a sales perspective, now that you may be able to have a more competitive product; is there a need to increase your sale hires?
Well, that's always a tough one because again, we’re -- the product is not fully in market yet. So, as we cross that threshold, so when we go to that really pushing it and sales reps are at capacity, then absolutely we’ll add. But because we are going to manage this thing to profitability, we are not going to start adding sales reps to get ahead of the sales cycle. So, it’s a delicate that we’ve got to work through. And listen, when we want to get to the big numbers and start putting big numbers on the board every quarter, we're going to have to get it shipped at some point. And when we have reputable customers on the platform and everyone is as excited as they are right now and people are coming [ph] to our doors to sell the stuff, that's when we’ll make that determination.
Great. Last question I have, as you start to sell the new platform to existing and legacy customers, is there any impact to the P&L such as lost maintenance on the old program as you implement the new programs? Just maybe go through that as we've seen once in a while companies that shift to a different -- for example a SaaS model from the license model, have some accounting changes or revenue recognition issues. Is there anything that goes on there if migrate customers?
No, really they are going from mostly SaaS subscription -- whether it's on on-prem license, it's a perpetual license, so it’s recognized as the services delivered. So, basically, the recurring revenue is the same under the different contract vehicles. So, what we're really excited about is this ability to have people buy more than one module with the new platform so that the upsellability on the new platform because you’ve done a few programming and it's modular, that's what we’re really excited. So, we’re planning on going forward not backward.
Thank you. Our next question comes from William Meyers with Miller Asset Management. Please proceed with your question.
How are you pricing your new product platform? And are you expecting the margins to be high enough to swing you to profitability? Any color there would be helpful.
Yes, the pricing is actually very similar to how we are currently pricing is today, PaaS versus SaaS. What gets more interesting however is our ability to sell additional modules on top of it. With the legacy product, you have to buy the whole thing and we charge appropriately for that. So with the new Determine Cloud Platform, we can actually take this thing up or down, but based on functionality, not doing some discounting. So, if they want less functionality, it will cost less; if they want more modules, it will cost more. But we for instance even one deal that we closed already this quarter, they're probably using 50% of the functionality, even though they bought all three products in the suite. So, that's exciting for us to know that even though they're using all the products, they can still add different modules. And John, do you wanted to add to that?
And really, I would say that it's in the -- it's a volume game, not a margin game, that when you’re in the mid-70s already, there is only so much you can go up and you will still have some incremental Amazon [ph] cost et cetera. So, the goal is to maintain margins while growing, it isn't to dramatically expand the margins with the new product.
Thank you. At this time, I'd like to turn call back over to Mr. Patrick Stakenas for closing comments.
Thanks everyone for all of your questions. As always, it's a pleasure to talk to everyone and continue to share how we're executing on our vision and deliver the best Source of Pay Enterprise Contract Lifecycle Management experience in the marketplace. And we're excited about this, guys. So, thank you very much for your time and continued interest in Determine. And we'll talk to everybody soon. Thank you.
Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a great day.
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