Callidus Software Inc Q4 2007 Earnings Call Transcript

Jan.29.08 | About: Callidus Software, (CALD)

Callidus Software Inc.(NASDAQ:CALD)

Q4 2007 Earnings Call

January 29 2008 4:30 pm ET

Executives

Ron Fior, SVP and CFO

Leslie Stretch - President and CEO

Analysts

Ajay Kasargod - Piper Jaffray

Chad Bennett - Northland Securities

Kevin Liu - B. Riley

Ted Ketterer - TK Associates

Gregg Speicher - Moss Creek

Matthew Campbell - Knott Partners

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2007 Callidus Software Incorporated Earnings Call. (Operator Instructions)

I would now like to turn the call over to Mr. Ron Fior, Chief Financial officer. Please proceed sir.

Ron Fior

Thank you. Welcome to Callidus Software's fourth quarter and full year 2007 conference call. With me on the call today is Leslie Stretch, President and CEO of Callidus Software.

Shortly after the market closed today, Callidus issued financial results for the fourth quarter and full year 2007. The press release is posted on the wire and is available on our website at CallidusSoftware.com.

We'd like to remind you that during the course of this conference call, we'll make forward-looking statements including predictions and estimates. These statements, including the statements regarding future revenues, On-Demand bookings, future expenses, sales and marketing expectations and strategies, product development, and strategic partnerships involve a number of risks and uncertainties.

Actual results may differ materially from any future performance suggested in our forward-looking statements. We refer you to the company's Form 10-K for 2006 and Form 10-Q for the third quarter of 2007 on file with the SEC for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements.

We expressly disclaim any obligation to update this forward-looking information. On today's call, Leslie will begin with comments about our overall business and financial results and then I will discuss the financials in greater detail. We will conclude with a question-and-answer session.

With that said, I'll turn things over to Leslie.

Leslie Stretch

Thank you Ron. Good afternoon everyone. Let me just apologize for my voice; I am afraid I am suffering from the unseasonably cold California climate this year. So bear with me.

Let me first talk about our financial highlights for the quarter and for 2007. Total fourth quarter revenues were $24.9 million, up 4% compared to the same quarter last year. For fiscal year 2007, we demonstrated strong revenue growth of 34% over the prior year; at $101.7 million we surpassed the $100 million mark in fiscal year revenue for the first time in company history.

Fourth quarter license revenues were $6.8 million, down 26% year-over-year. Our On-Demand Annual Contract Value bookings, however, were up 850% year-over-year to $6.6 million, almost matching the license business.

Our total transacted business perpetual license plus On-Demand ACV bookings was an all time high of $13.3 million. The mix of business between perpetual license and On-Demand reflects the dramatic expansion of emphasis on software to service in the markets that we sell to today. Those bookings do not include contracted implementation services.

On-Demand revenue is generally recognized ratably over the contract served. We are very pleased with the progress we've made in this area of our business and I'll provide more color later on the call.

Because of the rapid growth of our On-Demand business we will now report recurring revenues, subscription and support together as a revenue line and will separate out services revenues.

Subscription and support revenues were up 27% to $6.5 million. Services and other revenues were up 19% to $11.6 million. In each case these figures are compared to the fourth quarter of 2006.

Operating expenses were better than we originally expected coming in at $15.5 million, including $1.5 million in the restructuring charges related to the cost saving, reduction in force measure we executed in the quarter.

Our net loss for the quarter was $2.7 million or $0.09 per share compared to net income of $0.1 million or $0.00 per share for the fourth quarter of 2006.

I just want to highlight some of our other accomplishments in the quarter and talk about our strategy and our focus going forward. On the On-Demand businesses I previously mentioned we achieved record growth in the quarter, including the payees we acquired from Compensation Technologies, we now have over 44,000 payees signed up for On-Demand service.

Our On-Demand customers are now in the wide range from as few as 100 payees up to well over 5000 payees now. Our offering serves customers across many industries, as well as payees in over 120 countries. We believe we are the unequivocal leader in the sales performance management On-Demand space, larger and growing faster than any of our competitors.

We closed a number of On-Demand transactions in the quarter, most of which were competitive sales situations. We signed our largest On-Demand customer to-date a leading pharmaceutical company with over 5,000 payees. We believe that our proven track record with large payee clients is an important differentiator as many of our On-Demand competitors have not proven that their solution can scale to 1,000 payee per customer and upwards.

However it is also notable that we gained traction in the small and medium size business market, winning several deals against our competitors. We signed On-Demand business with Incentra, Rackspace, Brocade, Nortel and [Ethicon] amongst others.

We signed an exclusive global resell agreement with IMS health, the leading provider of market intelligence to the pharmaceutical and healthcare industries. Callidus's On-Demand will be deployed as the software platform for IMS's new IMS Precision Compensation offering. We believe the size of IMS's global sales force and their significant market penetration in pharma will enhance the visibility and reach of Callidus in this important industry sector.

As I mentioned I am delighted at the speed with which we were able to innovate and meet the growing demand for software as a service. We expect to make the necessary investments and continue to adopt our business strategy to capitalize on the SAS opportunity.

Now, just to consider our perpetual license business, while our perpetual license revenues in Q4 were lower than expected, reflecting the shift in our business, from perpetual to On-Demand offerings there were some notable highlights.

Our sales team in Europe made good progress. We had a very significant win at IMG. IMG will now use our products to manage incentive compensation for its agents and brokers across the European continent.

In the UK we closed Callidus's first utility customer Mpower, a division of the German company RWE thus demonstrating the broadening relevance of our solution set to diverse markets.

Our reseller agreement with CIS in Latin America led to follow-on order at [Dynamex] demonstrating the benefits that partnership. We also won new business in financial services including Kemper Insurance and Bank of New York.

Some of the other highlights in the quarter include a report from Gartner MarketScope for Insurance Incentive Compensation Management Applications for 2007. They now report Gartner evaluated eight incentive compensation management vendors. Callidus was one of only two vendors to receive the highest rating given in the report positive.

We released Version 5.2 of our suite of software products. The 5.2 release was significant for us with key enhancements in scalability, analytics, and producer management.

With the addition of parallel processing capabilities, which is an additionally priced option, we extended our field to the world’s larger companies. We added robust [insights] of our search analytics functionality built on the market leading business objects platform.

Our TrueProducer product continues to make traction in the market in its second full quarter of availability. And we believe we are the vendor with the most integrated set of business processes from producer management to incentive compensation payments.

We implemented cost savings measures in the quarter. We reduced the workforce by 8%. This action generated some savings in the quarter and will generate additional savings in future quarters. We also announced the $10 million share repurchase program, which is expected to begin on February 1st, 2008.

On January 14th, we completed the acquisition of Compensation Technologies, the leading provider of services for planning, implementation and supporting incentive compensation processes and systems. This strategic transaction enables us to immediately expand our portfolio of services including the introduction of valuable services around sales, operations and strategy.

Compensation Technologies had an On-Demand hosting business called Compensation Management Services. Adding Compensation Management Services together with our fast growing Callidus On-Demand business augments are recurring subscription revenues. Compensation Technologies was a growing profitable business and we expect the acquisition to result in increased gross margins for our services business.

I'd now like to talk about the outlook and strategy for 2008. Until now we've tried to keep our business focus balanced between selling perpetual licenses and our On-Demand service. Frankly we've been surprised at the level of adoption and the willingness of our customers and prospects of all sizes to consider our software as a service solution and we expect this demand to continue.

In 2008 our On-Demand offering will become our primary focus. This shift in focus will cross all areas of our company. Our sales team will generally lead with our On-Demand offering and we will increase our investment in our On-Demand sales and marketing efforts. We now have 34 account executives who are able to sell anything from the Callidus portfolio and within that number there are 13 account executives dedicated to selling Callidus On-Demand, up from five account executives a quarter ago.

We are making a shift to On-Demand for two reasons. Firstly, we believe more and more customers prefer the On-Demand delivery module. It is not just minimizing upfront costs within but it keeps us, the vendor, more involved through the life of the project helping them extract more value and allowing them to remain focused on their business.

The second reason is the Callidus and its stake holders. The On-Demand business model makes our revenues much more predictable and allows us to better align our cost structure.

In the short-term our financial results will reflect this transition. Our perpetual license revenues will likely be lower in 2008 compared to 2007. In contrast we expect our subscription and support revenues to grow strongly in the 47% to 67% range, compared to 2007. We continue to expect our On-Demand business to generate positive gross margins in the first half of 2008 and continue to expand thereafter.

We expect that our recurring revenue and margins will compare favorably with stand-alone On-Demand companies. I would like to point out however, that while our On-Demand business will improve our revenue visibility, our quarterly Annual Contract Value bookings will continue to fluctuate, while subscriptions revenues on the other hand will steadily rise.

When I was appointed as CEO on December 1st, I spoke about profitability. We've implemented several measures on this front. As I mentioned, we completed a 9% reduction in force in Q4 and we expect to realize approximately $5 million in savings in 2008 related to this action. We also expect to improve the gross margins of our services business. The acquisition of Compensation Technology and their management team was an important step in this process.

The gross margins will not improve overnight but we do expect incremental improvement over time. We still expect to be profitable in 2008 but this will be dependent on our attaining certain levels of perpetual license revenues.

We see strong demand for sales performance management solutions and believe we are well positioned to continue to leave this segment, both at the enterprise level and through our On-Demand offering.

Now let me turn the call over to Ron to go through the financial results in more detail.

Ron Fior

Thanks Leslie. We continue to be pleased with the progress that our On-Demand business is making. While our total bookings perpetual licenses plus On-Demand were strong, perpetual license revenues were lower than we expected. We expect the contribution from On-Demand to continue to be substantial.

I would like to draw your attention to the presentation of revenues and related expenses on our income statement. We are now showing three lines of revenue and related expenses, which we feel better reflects to three main areas of our business. We've reclassified prior periods for comparability and you should expect to see this format going forward.

Now I will walk you though the numbers in more detail. Unless I mention otherwise, the comparative percent increases or decreases are as compared to the same period of the prior year. Total fourth quarter revenues were $24.9 million, up 4%. By geography, 70% of fourth quarter revenue was generated in North America. This compares to 63% in the fourth quarter of 2006.

By vertical, total revenues for the fourth quarter breakdown as follows, Insurance 25%, Banking 40%, High-tech manufacturing and Life Sciences 19%, Telecommunications 10%, and Retail and Distribution 6%.

Now, let's look at license revenues. License revenues were $6.8 million for the quarter, up 9% from the third quarter, but down 26% compared to the prior year period.

On the booking side, we had two license transactions over $1 million in the fourth quarter, this compares to two transactions in the fourth quarter of 2006 and two in the prior quarter. Excluding transactions under $100,000, our average license bookings in Q4 was over a $1 million, this compares to $840,000 in Q4 of 2006.

Remember this number can vary greatly from quarter-to-quarter, depending on the number of $1 million plus deals we complete. License gross margin in the quarter was 96% consistent with prior quarters.

Let's look at subscription and support revenues. Subscription and support revenues for the quarter was $6.5 million up 27%. Subscription and support gross margin for the quarter was 57% down from 67% in the fourth quarter of 2006. The decrease was primarily due to the investment we made to grow our On-Demand business offsetting the consistently high support margins.

Services and other revenues: Services and other revenues for the quarter were $11.6 million up 19%. Services and other gross margins for the quarter was 12% down from 13% in the fourth quarter of 2006 as utilization was less than expected.

Overall gross margin for Q4 was 46%, down from 57% in the prior year due primarily to the increased mix of service revenues as compared to license revenues.

Now let's move on to operating expenses. Total operating expenses for the quarter were $15.5 million, which included approximately $1 million of stock-based compensation and $1.5 million in restructuring charges. Stock-based compensation by line item is disclosed as a footnote to the income statement included in our press release.

Sales and marketing expenses were $7.7 million, up from $7.3 million in Q3. The increase was primarily due to marketing cost from our annual users conference Callidus TrueConnection.

Research and development spent for the quarter was $3.8 million essentially flat with Q3. General and administrative expenses were $2.6 million, down from $4 million in Q3. The decrease resulted primarily from reduced legal fees as well as lower bonus accruals.

As a percent of total revenues sales and marketing was 31% as compared to 29% in Q3. R&D was 15% roughly equal to Q3 and G&A was 11% down from 16% in Q3. Interest and other income net in Q4 was $593,000.

Income taxes: The provision for income taxes resulted in a benefit of $645,000 in Q4, this was primarily the result of a one-time reversal of valuation allowance we had offsetting the deferred tax assets on one of our international subsidiaries.

The foreign subsidiary has been generating profits for some time due to an inter company arrangement and we determined that it was appropriate to remove the valuation allowance and reflect the deferred tax assets on the consolidated balance sheet. The NOLs remained available to the subsidiary and we do not expect any significant changes to our effective tax rate in 2008.

Employees: Our total headcount at December 31st excluding contracted was 384 employees, down 21 from September 30th. The decrease was a function of the reduction in force we completed in the quarter.

We ended the quarter with 26 accounts execs, which is one less than last quarter. As Leslie mentioned however, we have since expanded the sales force to 34 account execs. These account execs are supported by a team of sales engineers and site sales reps, alliance and marketing employees. Our sales and marketing group at the end of the fourth quarter totaled 79 employees, down 4 compared to last quarter.

Balance sheet and cash flow: We finished the quarter with $50.6 million in cash and investments. This is an increase of approximately $400,000 in the fourth quarter. In 2007 cash and investments decreased by 42.3 million.

CapEx were approximately $480,000 in Q4. We received approximately $1.1 million from stock-option exercises in the quarter.

Our net accounts receivable balance at December 31st was $23.6 million, down $2.5 million from September 30th. In spite of the reduction in accounts receivables, day sales outstanding for the quarter was 90 days, flat with Q3. The increase in deferred revenue relating to the On-Demand bookings negatively impacted the DSO. Excluding the impact of the increase in deferred revenue, DSO would have been 83 days. Our collection history has been and we believe will continue to be strong.

Deferred revenue, including both short and long-term was $17.6 million, up from $14.4 million in the prior quarter. Most of this increase occurred in On-Demand.

Now, let's turn to Q1. I want to remind you of the Safe Harbor language provided at the beginning of the call. Further, it should be noted that we plan to update any guidance only during our quarterly conference calls.

Including the acquisition of Compensation Technologies for Q1, we are expecting total revenues to be between $25 million and $26.5 million. This would represent growth of approximately 1% to 7% compared to the first quarter of 2007. Total revenue is made up of license, subscription and support and services revenues.

We do not give guidance on Annual Contract Value bookings for our On-Demand business, but I want to caution you that we experienced strong bookings in Q4 and it is likely the Q1 bookings may be substantially lower than Q4. We do, however expect our bookings to be up, compared to Annual Contract Value bookings in Q1 of 2007, which totaled $1.6 million.

With the recurring revenue model, even modest levels of Annual Contract Value bookings increased our cumulative backlog, driving future revenues and allowing us to better align our cost structure.

Operating expenses are expected to be between $13 million and $14 million, and include approximately $1 million of stock-based compensation.

Let's talk a little bit about the full year. For fiscal 2008, we expect subscription and support revenues to be between $35 million and $40 million, an increase of 47% to 67% from the previous year. As we increase our focus on On-Demand, license revenues will likely be lower in 2008 compared to 2007. We are not providing full year guidance on total revenues, expenses or earnings per share.

Before we open it up for questions, I would like to remind you we will be presenting in some upcoming investor conferences in the near future. In March we will be at the Pacific Growth conference in New York and in April to B. Riley conference in Las Vegas.

With that said I would now like to open the question-and-answer session. Anton please prompt for questions.

Question-and-Answer Session

Question-and-Answer Session

Operator

(Operator Instructions)

Operator

(Operator Instructions)

Your first question comes from the line of Ajay Kasargod with Piper Jaffray. Please proceed with your questions.

Ajay Kasargod - Piper Jaffray

Thank you. Leslie first question - you and Ron had mentioned that perpetual license could be lower year-over-year but it depends on the level of perpetual license that you have or impact actually what type of profitability you could have or whether or not you'll be profitable. So Ron and Leslie, can you go into a little bit more detail about what levels perpetual license will be now be profitable?

Ron Fior

Ajay we are not going to give guidance on that number but obviously it’s a blend and I think you can do your own calculation as to the expense numbers that we have out there and the subscription recurring revenues, the maintenance support and subscription numbers. I think, if you can go from there you should be able to do your calculations and get a sense to what that number is.

Ajay Kasargod - Piper Jaffray

Okay. I will let others follow-up here and also just gradually you and your guys are actually building out the subscription type revenue, recurring revenue. I think, it makes it a lot easier to see your recurring lines of business. Leslie could you talk a little bit about your pipeline, about the impact to the economy and your vertical disclosure on signing, what you think the out look is like for '08?

Leslie Stretch

Now when we go back again to Q4, aggregate demand was a bit hard than ever. And I think I am probably stealing someone else's quote here but I think I haven't seen people laying off their sales people and I think that would be a real problem for anybody in this business. So I think I expect those to continue the momentum.

Ajay Kasargod - Piper Jaffray

And Leslie, to be more specific I mean what is some of the principle drivers of potential signings here in 2008, what's driving the market? As we look at 2007 we had some lumps, we had some concerns coming about the economy in a way. What are some principle drivers of demand in 2008?

Leslie Stretch

I think the drivers remain the same but we need more coverage. I think if we take our side of the equation, first of all we have expanded, we have been able to afford to expand the coverage which we have done quite dramatically and I expect to see that paying off in the Q2, Q3, Q4. So we have done that. So that's going to be a key driver from our side. From the market side, we're still relatively small. We have still only 140 or so clients. Everybody needs the sales operation office to be automated, bidding commissions to be automated and they need the commissions environment to be linked strategically to the business.

My perspective still in 2007 is our aggregate demand. It was big and that was reflected in the total bookings. So I kind of just see that continuing.

Ajay Kasargod - Piper Jaffray

Okay and then Ron just the last question, a model related question. I think we had anticipated that the Compensation Technologies would add after looking at inner-company revenues to add about $10 million in annual revenue. How does that break up between implementation services and recurring type revenue?

Ron Fior

Well, its adding right now, probably and I haven't really gone into in much detail but it probably adding a couple 300,000 or so a quarter to the On-Demand and the balance is going to go into implementation services. It's obviously harder to identify it separately now as it is part of us, but the On-Demand piece would in fact be in the 300,000 to 400,000.

Ajay Kasargod - Piper Jaffray

Okay. So the bulk of that will be in the implementation services, I want to make sure that was clear. Okay, thank you.

Ron Fior

That's correct.

Operator

Your next question comes from the line of Chad Bennett with Northland Securities. Please proceed with your question.

Chad Bennett - Northland Securities

Yeah, just a couple of questions for Ron, probably but Leslie you can chime in. I am just trying to understand the guidance you did give for 2008 regarding the subscription and support revenues, up $35 million to $40 million. I guess may be my math is incorrect but we exited this year with about $15 million in ACV. I know some of that might not be recognizable Jan 1, but I think with the effective dating that happened in Q4 with the large bookings there, the lag is probably less of an issue now than it was a quarter ago. So perhaps $15 million there and I think we got about a $20 million annual run rate on the maintenance line?

Ron Fior

Yes.

Chad Bennett - Northland Securities

So at the low end $35 million, we are assuming essentially no additional new bookings in that subscription and support revenue number for 2008?

Ron Fior

Well there is a bit of lag in those numbers but I mean that's not very aggressive I would say.

Chad Bennett - Northland Securities

Okay. So but I'm not missing anything am I, in that line item?

Ron Fior

No I mean look, you know what our maintenance has been for their support for the last year. There will be some parts of adjustments in that when there is a conversion and there will be some conversions at some of our perpetual customers, which will offset some of that but there will some -- that's a pretty moderate growth expectation.

Chad Bennett - Northland Securities

Okay. And can we take a stab at how much of the service line, the service and other lines are related to or will be related to On-Demand looking out maybe 12 months?

Ron Fior

I don't have a number for that directly I mean I think we've indicated in a particular quarter say last quarter we did $6.5 million of ACV. We would expect to generate another $6 million plus of implementation services over a period of probably 6 months to 9 months.

Chad Bennett - Northland Securities

Okay.

Ron Fior

Yeah I would just make a point on ACV on the revenue side. The thing is that to the extent of revenues occurring obviously in the second part of the year, one of the things that we have found is that On-Demand deals tend to close in the last week or two of the quarter too unfortunately. And there is a little bit of lag, there is a 30 day lag before we actually get to recognize anything on the effective dates. So you just need to kind of tie that in with all your numbers. I don't want you to be too aggressive on that.

Chad Bennett - Northland Securities

Right, I now understand and Leslie, maybe you can touch on this, I mean it sounds like certainly we are shifting resources and positioning the company as more than an On-Demand company going forward, which I think at this level on the stock price, everybody would agree with. I am just wondering have we seen anything in your traditional end-markets that may be profitable due to shifting to more of an On-Demand focus company quicker. I think you indicated a little bit above that but I am just wondering in your core financial serve, telco, insurance did something change in the last two to three months?

Leslie Stretch

I think it is a steady thing. We certainly had some calls where very large blue-chip financial institutions talked about SaaS as being critical to their own success in multiple domains not just sales performance management. So those conversations came along more readily and also we mentioned that pharma deal that we signed, that's the kind of a company that you wouldn't anticipate with the payee account normally going down this route.

And then at the same time though, we are making really great progress in this multi-region sized business segment where people projected that we would struggle. So its both of those things combined.

Chad Bennett - Northland Securities

Okay. And are you guys still committed to On-Demand profitability early this year?

Leslie Stretch

I think we mentioned.

Ron Fior

Yeah, we expect positive gross margins early, in the first half of this year.

Chad Bennett - Northland Securities

Okay, all right, thanks guys.

Ron Fior

Thank you

Operator

Your next question comes from the line of Kevin Liu with B. Riley. Please proceed with your question.

Kevin Liu - B. Riley

Hey, good afternoon. Just in the On-Demand pipeline, I am just curious, you guys mentioned you closed or you booked a pretty large deal, I guess 5K plus payees there. Is the size of your On-Demand customers in the pipeline increasing in terms of the number of payees?

Leslie Stretch

Kevin we've got 29 customers relatively small sample, they are not knocking anything out, but I think our environment scales to the biggest on-premise client that we have. So we could take any of them into the SaaS world.

Is there a trend? Hard to tell, 29 customers don't. We are getting a few now of this sort of enterprise clients but I think I mentioned earlier we seem to be getting the small business tractions, I think. My read on that is some of the small private companies that may not be able to cover the market or perhaps is missing the deliver capabilities that we have. So, it is hard to predict any particular size but we're getting good enterprise traction and good small business traction.

Kevin Liu - B. Riley

And then giving some of your success on the On-Demand side, are you seeing some of the other players within the space, getting more aggressive pricing or anything of that nature?

Leslie Stretch

It is hard to say to be honest. We know the price we have to sell this design and it tends to be in the right sell situation even in the small market, the value equation tends to be quite good and they can see that they are getting, they are not having all the money upfront, they are not having to buy the hardware, infrastructure after the full time heads.

And so the pricing shouldn't be such a sensitive area, so we kind of haven’t, we have seen less of our activity competing on our peer price basis in the past few quarters, I would say in the On-Demand space. And there is a point where we don't make money. If they wanted just not make money and do deals like that, it's up to them. But there is a point where we have to sort of say look this is the service, this is the value, lets move forward.

Kevin Liu - B. Riley

And then you guys have already kind of moved up your sales headcount pretty nicely in this first quarter. What are your expectations for the full year? Are you going to need to bring in some additional headcount for coverage?

Leslie Stretch

We've got the biggest complement of sales people we have ever had. We've also got 11 people in the sort of demand creation telesales space we didn't mention. It’s a very big complement. They can deliver a good performance for us this year. We'll see how we go in this. If we have to pick it up, we'll do I guess this quarter-to-quarter but we wanted to set off with that level of a headcount.

Kevin Liu - B. Riley

Okay. Then just a last question on the R&D expenses going forward. I think when you guys mentioned your 8% workforce reduction is a good chunk that must have also come out of R&D. It doesn't look like that is going to take place in Q4 and what should we expect to see moving forward?

Leslie Stretch

It is work in progress, we don't want to degrade the quality of the solution set or stop building new products. It is a piece of work in progress and we are aware of how it looks and how you expressed that we are aware of that.

Kevin Liu - B. Riley

Okay. Thank you for taking my question.

Leslie Stretch

A pleasure

Ron Fior

Thanks Kevin.

Operator

Your next question comes from line of Ted Ketterer with TK Associates. Please proceed with your question.

Ted Ketterer - TK Associates

Hey guys I apologize I got on the call late and so I did not hear Leslie's introductory remarks but I was wondering if you talked about the IMS transaction, how it came about and what you might see there or what IMS sees as a potential and also is there any IMS revenue in any of the guidance and projection that you've outlined here?

Leslie Stretch

Okay, so the way the deal came about was they approached us, they did an independent evaluation of the market with some assistance from some consultants and they approached us looking for a partnership. Having them in the partnership before we specifically wanted to build a structure that had skin on the game both ways. We received an upfront payment, which is a kind of a royalty. Effectively with them we received our subscription inflows for which ever level of On-Demand service we supply through their IMS precision compensation offering.

So we now just started the first quarter. We've had the first, on January the 1st we went to the market meeting with them. But we got no projections yet and I think at the moment we've been conservative. There is certainly some deal related activity there already but we haven't blended either bookings or revenue projections based on the IMS piece.

The big thing for us is that we were not in pharma a year ago. We have four very good pharma clients but with this partnership we've got access to a footprint. They put money into it, so they need to get a return and we want a return as well, and that’s the difference from any sort of just normal go to market strategic partnership.

So we are very excited about that, but it diversifies us into a really exciting market that takes software as a service for granted but also sees the whole strategic proposition of the sales operations office as fundamental to the business. And IMS already has a large sales effectiveness consultancy that they built and so hopefully this will become a key part of it. We will update you as we see progress.

Ted Ketterer - TK Associates

Okay. But in terms of '08, you haven't got anything in '08 sort of coming out of that partnership?

Ron Fior

Well its not that we don't expect things we obviously expect things.

Ted Ketterer - TK Associates

Yeah, I know but in terms of what you've been talking about today.

Ron Fior

Correct.

Ted Ketterer - TK Associates

Okay. I guess I'm really pushing this a little because it certainly has some leverage. Can you describe what their sales effectiveness program is?

Leslie Stretch

Certainly. Currently you may know they provide a whole raft of data, market data to pharma companies and healthcare companies. And there is a logical link to the sales performance data and the compensation data for sales forces and independent agents.

There is a whole link, a whole performance relationship between those areas. They’ve built themselves effectiveness practice, which probably need to be. We really need to spend some time talking to them, we’d probably talk to them about the detail of it.

But essentially it's directed at pharma companies and it's about how people manage and align territories, quotas and goals and how incentives are built and driven, and what’s behind those drives. The piece that was missing was the automation of that whole sale performance and incentives. We stand at the bottom of the chain.

So on top of our On-Demand service, they conclude the On-Demand service with a variety of other services that automate the sales effectiveness practice and I think we should probably send you something from their literature that actually explains all of the different offerings. But it's more like as I described. It's about alignment of quotas, goals, territories and incentives for the strategic goals of the business.

Ted Ketterer - TK Associates

That helped.

Operator

Your next question comes from the line of Gregg Speicher with Moss Creek. Please proceed with your question.

Gregg Speicher - Moss Creek

Good afternoon gentlemen. Did you say or did I miss how much of the acquired revenue from Compensation Technologies would be in Q1 guidance?

Ron Fior

No, I did not.

Gregg Speicher - Moss Creek

Okay. Could you?

Ron Fior

All I indicated was that there was roughly 300,000 to 400,000 of On-Demand and that was it.

Gregg Speicher - Moss Creek

Okay. So at this point of time in terms of market penetration and opportunity, which verticals do you still think have the most potential?

Leslie Stretch

Ron gave a breakdown of the revenue I think, by verticals. That's not a reasonable breakdown still but, when I go back to the discussion we just had on pharma, on markets that we were not in.

And also I think geographically that is an interesting action. We got the CIS partnership moving forward. We also got some really good growth with the management team that we now have in place in Europe. We also have some really exciting deals; we signed the utility to [SaaS]. I never thought we would a sign a utility for these solutions.

I think next we are going to sign the tax authority or the government somewhere, but this engine has relevance to all of those areas. So we are just in every market now, that utility has a door-to-door sales force effectively in Europe and in the UK utilities will be regulated as you know. So they are out there selling competitively their services.

So it's just relevant in every market on the breakdown that Ron gave. The financial services are still a big one but for us we blended insurance and healthcare into financial services. So some of the deals we mentioned last quarter, then we mentioned Kemper and insurance deals and so on. ING is in retail banking but also a very, very big portion of that deal is insurance.

So that breakdown is probably worse but then we got on the On-Demand space. We got great traction in this domain, this high-tech domain, which is where other people have been playing and that comes from the sales force partnership where other people were just shooting fish in a barrel. There they had it for themselves.

We went in and we ended up very quickly with four deals in a row against the low end competition with all the price points, payee price points that we were happy with. So it's kind of that we bought a key always looking for diversification in new markets and I think we've been quite good at that so far.

Gregg Speicher - Moss Creek Capital

Okay, with these, I mean obviously you have broad opportunities in the pipeline. Speaking of the pipeline where do you think licenses will kind of shake out as a percentage of going forward deals? What is your sort of instinct there?

Ron Fior

Again Gregg we are not giving guidance on license and I think we've identified that we believe that license for the full year will in fact or for Q1, sorry, for the full year will in fact be down, but we also say that On-Demand will grow pretty rapidly and we talked about the revenues for On-Demand. Obviously we would expect to have significant bookings in ACV, annual contract value growing and as Leslie indicated we are talking about total activity that seems to be greater than it has been in the past.

Gregg Speicher - Moss Creek Capital

Okay, that's fair enough.

Ron Fior

That’s all I can give you at this stage.

Gregg Speicher - Moss Creek Capital

Fair enough. Am I correct to assume that all of the new sales people hired are dedicated to On-Demand or can they sell anything?

Leslie Stretch

We had a couple of Enterprise people who can sell anything and we obviously increased the On-Demand payee count from 5 to 13.

Gregg Speicher - Moss Creek Capital

Okay. All right. That's good for me. Thank you.

Ron Fior

Okay. Thanks Gregg.

Operator

Your next question comes from the line of Matthew Campbell with Knott Partners. Please proceed with your question.

Matthew Campbell - Knott Partners

Hi good afternoon. Most of my questions have been asked and answered, but could you elaborate a little bit more on the conversation technologies acquisition. How many of the individuals are coming over to your team and what are some of the key attributes that they bring to Callidus?

Leslie Stretch

They are all coming over, there are 60 plus billing consultants there. There is also the Compensation Management Systems piece which is an On-Demand service with a good payee count and some very interesting customers that we didn’t sell to that they were successful in selling to. There is also a business continuity effect and we have now a separate environment, a separate physical environment of level 3 that was their environment. So we can build out as a business continuity service. Some of our prospects, particularly our financial services prospect for the SaaS solution, have a mandatory requirement that we have a live, hot, robust business continuity environment. So that's some of the features that the Compensation brings us.

The skills in the consulting side, they do have an implementation skill-set and implementation practice, but they also have what I've told, a sales operations office skills. So they have strategic skills but are above the line than we were at. So I expect to build out as an incremental beneficial service to customers as we go forward.

Matthew Campbell - Knott Partners

Well, Leslie what's been the turn over at that particular company?

Leslie Stretch

That's a good question.

Ron Fior

So actually their turn over has been very, very good. I mean I think Bob indicated at our Board meeting just the other day that of their total employee base, he thought there were six people that were turned over last year, which is pretty phenomenal, it's about less than 10%.

Matthew Campbell - Knott Partners

So if we compare it to yourself its much better on that side of business.

Ron Fior

It is significantly better than what we've done and we expect Bob is in charge now of the combined services. Bob Conti who was the CEO of CompTech, I mean Compensation Technologies is now the head of our services group, of the combined services group. We would expect that he would in fact use some of his management talent and the things that he has done and incorporated to incorporate things, changes and compensation plans and incentive plans and those kinds of things to drive improved margin; like turnover is just one of the ways. I mean our turnover was more than 25% last year and obviously that's an expensive thing when you have to train people. So we are pretty optimistic about how this acquisition will turn out.

Matthew Campbell - Knott Partners

And have you guys paid them out completely on the buyout or are there some earn-outs as well?

Ron Fior

The earn out is actually in two pieces and that as disclosed in the 8-K, half of the earn out is based on retention essentially, retaining the right people. The other half of the earn out is actually based on improving the combined margins, that is the Callidus software plus Compensation Technologies combined services group by improving those margins pretty significantly from the level that we are at this year. I think we ended the year within this last quarter about 12% or thereabouts on the margin and the earn-out requires. I think the minimum is somewhere around 17% or so.

Matthew Campbell - Knott Partners

Okay, great. And can you remind me, have you guys started to buyback your stock and when can you do that if you haven't?

Leslie Stretch

It starts on the 1st of February.

Matthew Campbell - Knott Partners

Got it. Thanks very much.

Ron Fior

Thank you. Are there anymore questions operator.

Operator

There are no further questions at this time I would now like to turn the call back over to Mr. Leslie Stretch, Chief Executive Officer.

Leslie Stretch

Okay. Well I'd like to thank you all for joining us on the call today and we look forward to speaking with you again next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!