Selectica's (SLTC) CEO Patrick Stakenas Discusses Q1 2016 Results - Earnings Call Transcript

Selectica, Inc. (SLTC) Q1 2016 Earnings Conference Call August 12, 2015 5:00 PM ET

Executives

Patrick Stakenas - President and Chief Executive Officer

Todd Spartz - Chief Financial Officer

Analysts

Eric Martinuzzi - Lake Street Capital Markets

Nick Farwell - Arbor Group

Operator

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

I would now like to turn the conference over to your host, Todd Spartz, CFO. Thank you. You may begin.

Todd Spartz

Good afternoon and welcome to the Selectica first quarter fiscal year 2016 earnings call. On the call with us today from the company, we have Patrick Stakenas, President and Chief Executive Officer, and myself, Todd Spartz, 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 discussions about the company’s business outlook, anticipated financial and operating results, product development and future plans. Such forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by the forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those that are contained in the company’s filings with the SEC, including the Risk Factors section in our most recent Form 10-K as supplemented in the company’s Form 10-Q, as each is filed by the company with the Securities and Exchange Commission. The company does not assume any obligation to publicly release any revisions to forward-looking statements discussed during the call.

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

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

Patrick Stakenas

Thanks, Todd. Good afternoon, everyone and thanks for joining us for our first quarter fiscal 2016 results conference call. I am finding to spend time today talking about some of the key business growth factors that have been important in the past quarter as well as factors critical to moving the business forward.

First, I would like to begin by welcoming the new additions to the Selectica team who joined our family in just the past two weeks. Of course, I am referring to the b-pack team. I am so excited to have Julien Nadaud, b-pack’s Former CEO at my side joining us as Chief Product Officer and a newest member of our executive management team. Julien brings to Selectica tremendous insight and has almost two decades of experience in the marketplace as well as vast product and technical experience with respect to the solutions that we are bringing to market. We all look forward to maximizing his talents across the business as we quickly integrate the b-pack team into the larger Selectica operations.

The supply management and ECLM space is a very competitive environment. We recognized the importance of building a strong team to fully capitalize on the significant market opportunity that lies ahead of us. I believe having the opportunity to add such talent, such as Julien along with the entire b-pack organization provides for a formidable competitive advantage for our company. I am pleased to report that we had a good start to our fiscal year 2016 building on the momentum from our last quarter.

We are seeing the turnaround. We are driving new business at an accelerated rate. And our customers are responding as evidence of significant uptick in expanding existing customer relationships. Literally, 10% of our customer base added new licenses for our solutions in this past quarter, clearly indicating we are meeting their needs and they are eager to grow with us for the long-term. The Selectica leadership team remains focused on driving disciplined execution of our transformation to be a leader in supply management and ECLM.

We are laser focused on the turnaround of our operational performance. And to be clear, we are making progress on the key elements of our transformation. We are driving top line revenue. We have customer expansion and improved operational performance. However, our progress is not yet clearly visible in our quarterly results nor do these results fully reflect the overall potential of our business. The company continues to experience long-tail impact of certain historic, strategic and structural decisions. We are steadfast approaching however, but have not yet arrived. At the crossover point, with the impact of our improvement programs, we will overtake this long-tail effect. The leadership team and employees at Selectica are all acutely aware of the impact this has on our business and we are all working diligently to get there.

Before I comment further, however, on several key strategic initiatives and operational performance topics that I believe are critical to the business that suggests on a go forward basis. I would like to turn the call back to Todd Spartz, Selectica’s CFO to review the company’s Q1 fiscal 2016 financial performance.

Todd Spartz

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

As I did last quarter, let me begin with a general discussion of the continued and improving strength of our subscription bookings. Subscription bookings are a non-GAAP measure that we do not report externally, but which we carefully monitor internally to determine the strength of our business momentum. Subscription bookings represent the annualized contract value of our contract management and supply management subscription offerings that we then generally recognized as recurring revenue ratably over the contract period. The combination of our continued and improving sales execution and the significant expansion within our customer installed base, which we expect to further improve with the addition of the incremental b-pack customers, have led to our fifth consecutive quarter of increased subscriptions bookings.

Total GAAP revenue for the quarter was $6.2 million, up 65% compared to the same period last year and up 5% compared to the prior quarter. Total non-GAAP revenue was $6.3 million, up 67% from the year ago period and up 3% over the prior quarter. Please recall that that $100,000 difference between GAAP and non-GAAP revenue is due to the impact of revaluing the deferred revenue balances acquired from Iasta as required by GAAP purchase accounting. And also note that we expect to have a similar adjustment related to b-pack when we begin including them in our financial results next quarter.

Total GAAP gross profit for the quarter was $3.3 million or 53% of total revenue, an increase of 17 percentage points over the prior year quarter and a 3 percentage point improvement over the prior quarter. The gross profit percentage point increases year-over-year and quarter-over-quarter reflect the continued and significant decline in non-billable professional services delivery.

Non-GAAP gross profit in the quarter was $33.5 million, or 56% of total revenues up 20 percentage points from the same period last year and up 2 percentage points from the prior quarter. Again, the year-over-year improvement and quarter-over-quarter improvements are being driven by less non-billable professional services work and continued focus on cost reduction. Note that the difference between GAAP and non-GAAP gross profit is the difference in GAAP versus non-GAAP revenues as well as the elimination of the amortization of intangibles acquired from Iasta from GAAP cost of revenues.

Total GAAP operating expenses in the quarter were $6.1 million, including $237,000 of acquisition-related expenses, up 42% from the same period last year and a decrease of 14% from the prior quarter. The year-over-year increase is primarily due to the acquisition of Iasta, while the quarter-over-quarter decline is primarily due to less non-recurring acquisition and impairment charges. However, management has the sharp focus on operational efficiency and we plan to continue this focus and as a result expect operating expenses to continue to decline throughout the fiscal year.

Turning to the balance sheet, we ended the quarter with $11.3 million in cash compared to $12.2 million in the year ago period and $13.2 million in the prior quarter. This resulted in net cash used in operations of $1.6 million in the quarter and a total decrease in cash of $1.9 million for the quarter. Please note that the cash balances referenced in all periods include cash borrowed against our credit lines. Deferred revenues were $8.2 million compared to $5 million in the year ago period and $8.4 million in the prior quarter.

Finally, DSOs were 70 days, an improvement of 90 days from the prior quarter’s 79 days. Billings, a non-GAAP measure, defined as revenues plus the change in deferred revenues for the quarter were $6 million, up 101% from the same period last year and essentially flat to 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?

Patrick Stakenas

Thank you, Todd. As Todd noted many of our key indicators sales, revenue, gross profit, expense reductions are all trending in the right direction with year-over-year and quarter-over-quarter improvements. These are all key factors in moving our business forward. We have urgency and we have discipline, but we actually are patient as we move to the maturation of our operational improvements and time to fully ramp our sales initiatives. We expect to see quarter-over-quarter evidence of the crossover as our sales engine continues to ramp. Our customers continue to grow their respective consumption of Selectica services and we actually work to push down expenses.

I would like to take a second to turn to the initiatives and actions we are taking to capture opportunities for improved performance. I will address three elements of our transformation, three, I am sorry new customer acquisition, customer expansion and operational performance. First is new customer acquisition. Several quarters ago Dave Bush, our Chief Sales Officer and Sean Delaney our VP of Sales began the process to augment sales talents across the organization by adding proven sales professionals with industry and functional expertise. As a result of our recent talent shift we had a solid first quarter. These results really help to set the tone for the rest of the year and we are very excited about the team’s performance.

Exactly in this past quarter, we hit an all time high in terms of aggregate new customer acquisitions. We saw some incredible wins in the quarter. I would like to share a few of these stories to provide a sense of momentum we are seeing inside the business. The first one is Edwards Life Sciences a global leader in the science of heart valves and hemodynamic monitoring, with over $2 billion in annual revenue. I was just there recently. Edwards’ innovative technologies enabled clinicians to save and enhance their patients’ lives throughout the world. It’s a great new relationship that closed in the quarter. They selected our SmartContract solution to leverage our broad functionalities to improve the consistency of language and terms across their contracts that mitigate risk and reduce contract lifecycle time. This is an ideal customer for us and a very exciting win.

We also signed a major new deal with a leading media company serving Hispanic America. We have a long-term business relationship with one of their newly hired procurement executives who immediately wanted to monitor – modernize and automate their sourcing tools and processes with Selectica SmartSource. Implementation of the Selectica products allows their procurement team greater visibility into their supply management to control, spend and increase savings.

Our next area of growth is expansion of our existing customer relationships. We have recently made a shift, a significant shift in focus on managing our existing customer base led by Jason Treida, our Chief Customer Officer and Dave Cravens, our Director of Client Success. Jason and Dave have been charged with re-igniting the growth and performance of that business segment. They have taken the challenge head on and have made a remarkable difference by upgrading their team’s talent and shifting their focus to true account management in solving for customers’ ongoing problems initiatives. This has resulted in over 10% of our customer base adding new solutions to their portfolio. Despite this competitive environment, we continue to deepen and broaden our customer relationships and expect our churn to be reduced as a result of their efforts.

One excellent example and an early indicator of future success is an internationally renown multi-billion dollar entertainment and media enterprise. This company has significantly expanded their relationship with Selectica. They have been using SmartContract for many years and this quarter a third business unit, a third business unit implemented SmartContract solutions to manage their overall contracts of MDA to the lifetime of their client relationships. The customers’ vision is to bring all of their teams together and transform their organization and provide dynamic enterprise wide control over all of their contracts.

The final element is our approach to operational performance. We are looking at all areas of the company for operational improvements. Specifically we have conducted in depth reviews of our development and delivery processes. We are slowing the volume of freed services drastically through improvements in technology and customer satisfaction overall. As a result of our in-depth review, we have undertaking changes to our development model. In fact we have made a change in leadership at the hand of our development team by appointing Eric Faulkner, our previous CIO into the role of CTO. This change in conjunction with adding Julien Nadaud joining the team as Chief Products Officer from b-pack has reenergized and refocused product management and development team. These efforts will expedite our existing initiatives and help drive towards an integrated platform.

Internally, we have been out of our path to refine our weekly and monthly metrics that clearly tie critical path activities and cost containment to our end goals. We will continue to evolve our metric and analytics to shorten the performance management cycle. We are getting smarter. We are getting more efficient and we are getting more effective in managing the entire organization especially overall operational metrics.

With this I would like to now turn it over to Q&A before we have our closing remarks.

Question-and-Answer Session

Operator

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

Eric Martinuzzi

I would like to dig a little bit deeper on the new partnerships. I know the international thrust of your business is obviously something that’s kind of top of mind with the arrival of b-pack, but can you discuss those new partnerships, the [indiscernible] partners and performance and Xoomworks what you think that can do for sales?

Patrick Stakenas

Sure. I think from a partnership perspective especially in international areas that we are not going to put feet on the street or people on the ground. We are going to leverage those partners. They are very quickly ramping up and as far as being able to resell the product and support the product ongoing. So, certainly in the France marketplace and the UK, EMEA in general we have people there and we will continue to drive that revenue from a direct perspective. But in other parts of the world when we have companies like Xoomworks that want to take on the opportunity to drive our products into their customer base and sell broadly we are supporting them basically through our channel, our channel group. But again it’s a great way to open up new markets, it’s an inexpensive way to open new markets and with new products like the b-pack products adding, we expect those to continue to evolve.

Eric Martinuzzi

Any idea of when they will start to contribute or it’s too soon to tell?

Patrick Stakenas

Yes. It’s too soon to say, I can tell you that in the past models like this that have executed on you should expect to see things in three months to six months at least have opportunities pipeline ramping up and we do expect to see some results in time. But again it’s a process, it’s a building of relationship process and it’s a training process and typically it works best when you have joint customers and that’s what we have. So we expect them to ramp up in the quarters to come.

Eric Martinuzzi

Okay. And then on your pipeline and I guess your own pipeline now includes b-pack, but you are obviously excited about it, it’s terrific to hear that level of excitement in your voice. The – on the legacy side I guess kind of I don’t want to use the term domestic, but sort of a legacy select which I guess now includes I asked that pipeline, can you certainly would quantify the size of the pipeline as you exited Q1 versus maybe Q4 or a year ago for us?

Patrick Stakenas

Yes. We really can’t talk about the pipeline specifically, but I can say that the overall vision to the b-pack to the organization does add a dramatic amount of new opportunities that we can work on. Certainly the pipeline in the U.S. had been growing quarter-over-quarter as evidence of the new business that we are selling and we are closing these deals. And certainly with b-pack that’s going to add that as well. As a matter of fact we can look at specifically we are not talking about necessarily the bookings perspective, but if you look at how we have moved from quarter-to-quarter, we have seen some significant increase in bookings and I think we will continue to see that in fact 21% quarter-over-quarter type bookings we are seeing 134% year-over-year and I expect with the enhanced pipeline we expect those numbers to get bigger and bigger.

Eric Martinuzzi

Okay. And is that – are we talking about apples-to-apples kind of annual contract value here that could adjust for multi-year bookings?

Patrick Stakenas

Yes, very similar.

Eric Martinuzzi

Okay, alright. And then shifting over to the operating expense side, the sales force obviously you are focusing on that part of your business, you are adding new heads, where are we as far as number of heads and target for a quarter or two out?

Patrick Stakenas

Well, as far as – I don’t want to talk part of that question.

Eric Martinuzzi

Yes, headcount, your sales headcount now and where you would like it to be a quarter or two out?

Patrick Stakenas

Yes. So, on plan, we are on track with our sales headcount and we expect we are going to add with the business as it goes forward, but we don’t actually talk about specific sales numbers and sales people, but I can tell you that we are on track to plan. And as we continue to ramp up the revenue, we will add appropriately.

Eric Martinuzzi

Right. The operating expense question probably for Todd, the operating expense went up sequentially here between Q4 and Q1 roughly $600,000, I know there are some non-cash items in there. What’s the explanation for the increase?

Todd Spartz

Well, actually, if you strip out the non kind of operational types of expenses, the expenses were fairly consistent quarter-to-quarter. We right now are focused on operational improvement in all areas. And so we expect that over the next several quarters we are going to see continued declines quarter-over-quarter. And as Patrick mentioned, we want to grow bookings, we want to grow billings and revenues and shrink expenses each quarter consistently over time.

Eric Martinuzzi

Okay. The b-pack impact on your financials, I have done my best guess at estimating kind of a Q2 impact, the August and September, I know the transaction closed July 31, but is there anything you can from kind of a non-GAAP perspective, what sort of run-rate was the company at either a monthly run-rate, a quarterly run-rate that we can use to model on a go forward basis?

Todd Spartz

Yes. Eric, it’s still just a little bit too soon to discuss those numbers. We are obviously we have acquired them effective July 31. We will be consolidating and including them in our results when we report the September 30 results sometime late October, early November. We are internally working on the models right now. We are starting to get a pretty good handle in terms of what we expect them to be, but are not ready to report them.

Eric Martinuzzi

Okay. And then turning to the balance sheet and cash flow statement, do you have a pro forma balance sheet as of July 31, I think it was a little over $1 million to close the deal out of cash and where did that come from?

Todd Spartz

Yes. So, the $1 million was just a little north of $1 million was paid to the principal of b-pack that was paid on the close that came out of our cash balances. So, that certainly will be a reduction in our cash for the quarter Q2.

Eric Martinuzzi

Okay. Given the $1.6 million cash burn in the quarter in Q1, there was not a lot of reason in the balance sheet, is there a path to breakeven?

Todd Spartz

Yes. As I mentioned, again, we are focused on continuous improvement. We are pulling together the model for b-pack. We are revisiting our internal model. We are making sure we are tracking to our model. And we are very aware of our liquidity, obviously recently we have increased our ability to borrow on our credit lines and we think that combination of all these efforts will allow us to hinder targets.

Eric Martinuzzi

Thanks for taking my questions.

Patrick Stakenas

Thanks, Eric.

Operator

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

Nick Farwell

Just to follow-up a little bit on some of the questions. I noted that your recurring revenue gross margins declined slightly about a point, what accounted for that going from roughly 73% to 72%, I realized that’s 1% isn’t a lot, but I was just curious what may cause that?

Todd Spartz

I don’t think there is anything systemic there. I think that’s probably most of our expenses that are in recurring costs relate to support in our datacenter costs. And those are fairly consistent. Over time, we typically don’t see much variability. I would have to get back to you on the specific reason for the 1% change.

Nick Farwell

Okay. It just seems with incremental volume, you would have some leverage unless you had something else going on inside the recurring revenue gross margin line that would suggest that would at least be flat sequentially not down? And 1% I realized as you pointed out is modest and….

Todd Spartz

Yes, I mean, it’s a great question, we will take a look at it.

Nick Farwell

Okay. Second of all, in the G&A, which is up almost $500,000, were there any non-recurring costs in severance expenses or other expenses, including the sequential gain in G&A?

Todd Spartz

There were – the severance costs that we had with some of the restructurings that we did were incurred in the prior quarter. So, no, that should be all – there really wasn’t any significant restructuring. We obviously reported $237,000 of acquisition cost, but there isn’t anything else that could be kind of stripped out and called non-recurring. Most of those expenses, it’s probably just a lot inning fees. I mean, we had our year end audit. And I think it’s probably things of that nature that are just kind of variable throughout the year, but not necessarily consistently increasing or anything. We certainly aren’t focused on that, but I don’t think there is anything that you can point to that would be stripped out.

Nick Farwell

Right. So, when I look at my model “and try and realize” there are lot of moving parts in it going with certainly the acquisition of b-pack. If I were to look at the company sequentially, that means ex-b-pack, which it won’t I understand, because we will be integrating their expenses, but if I look at it September versus June, would you expect operating expenses to be flat to down. Is that what I am understanding as you evaluate and try to reduce expenses as you are trying to enhance revenues?

Todd Spartz

Right. So, to be specific, I think we will see the final kind of tail to the acquisition expenses related to b-pack, but as we have done in previous quarters, those will be called out on the P&L, so you will be able to see those. I think that excluding those costs, which I do expect to be up a bit over this quarter of 2.37, we do expect that expenses will go down, excluding obviously the incremental expenses of bringing on b-pack. But if we are talking purely Selectica only business, yes, the focus is on continuous quarterly over quarter improvements in terms of reduction of expenses.

Nick Farwell

Okay. And then just to clarify the cash burn, it stated at $1.9 million, but I noticed that you paid down the credit facility by almost $600,000. So, being very simplistic I take the $1.9 million, you commented it, I think was $1.5 million and I realized this is simplistic, but you paid down the credit facility, your cash operating burn was $1.9 million. So, that’s a $1.3 million versus the $1.5 million that cash that was used in the quarter obviously, I am missing something?

Todd Spartz

Well, we had a really good quarter. From a collections perspective, we have a very strong year end typically and we did again this year that all got billed and collected obviously with DSOs of 70 days. That translated into a real strong collections performance. And so that really contributed more than anything else to the sharp reduction in the cash burn relative to prior quarters. And we are going to focus to continue to reduce that in the future quarters. We obviously aren’t going to have a seasonal bump every quarter. So, we are going to have a little bit reduced opportunity on the renewable billings, but that said, we also have had some really strong quarters from new bookings perspective as Patrick mentioned 21% quarter-over-quarter. So, if we can kind of maintain that kind of velocity that will certainly go a long way to helping us further reduce our burn.

Nick Farwell

Yes. I guess the other way of trying to ask this and I apologize is that really the true cash burn would be net of the reduction in the credit facility since that’s sort of your cash all?

Todd Spartz

Very much so. Yes, I mean, there was, yes, the variability in the credit facility, there was a financing, a small financing. We had a second pipe where there was some director and office approach of some stock. That obviously was the source of cash as well, but if you kind of strip all that away, you kind of wind up with an operating cash flow of about $1.6 million.

Nick Farwell

Okay. And then the last question I wanted either you or Patrick to clarify, I am not sure I understood the statement of sequential bookings up 21% when I see the aggregate number going from 6.2 in the fourth quarter net to 6.0 in the first quarter. So, what is incremental of 21% in bookings, what does that mean?

Todd Spartz

Yes, that’s a great question. I will start it off and Patrick may have some additional comments. So, first just to be clear, we don’t report bookings, but we manage – measure them internally and basically what we look at is annualized contract value from our subscription-based businesses. And so if a customer does a 3-year booking, we only look at that one year. And when we compare that number this quarter in aggregate for all our businesses, for all our geographies and compare it to last quarter, it was up 21%. The numbers that you are referring to are billings numbers and the billings did decline marginally a little less than a couple of $100,000. And again, that’s due to the – largely due to the renewals just being lighter this quarter. If you recall the algorithm that we use it’s revenues plus the change in deferred. So, last quarter, we had a big increase in deferred balances because of stronger renewals quarter, it’s just seasonally stronger. And so we didn’t have that this quarter so the change in deferred was down and so that even though revenues were up, that change in deferred was down and that’s in the billings are as strong as bookings.

Nick Farwell

Okay. So, to be very simplistic what I think I hear you saying is if you were to take total billings in the fourth quarter, let’s say, its $1 million. I don’t know, what it is, I am just using it as a number you multiply by four, its $4 million. If you took the fourth quarter and the billings were for the sake of discussion $0.5 million by four, that’s $2 million, so your billings doubled in the – sequentially went from $2 million to $4 million, because you are annualizing the incremental billings in the current quarter relative to the prior quarter?

Todd Spartz

Well, you don’t annualize the billings I mean it’s you take the revenue for the quarter, the total revenue and then you take the change in deferred balances. So in your example, where deferred revenues went from $2 million to $4 million that would add $2 million to whatever the revenue number was and that’s how you would arrive at the billings.

Nick Farwell

Okay.

Todd Spartz

I would be happy to take it offline and we can talk about it.

Nick Farwell

Thank you. I appreciate it.

Todd Spartz

Sure.

Operator

Thank you. We have no further questions in queue. At this time, I would like to turn the floor back over to management for any closing remarks.

Patrick Stakenas

Great. Thank you and thanks for the questions guys. We appreciate it. I just want to reiterate that I really am very pleased with our current position. We have a lot of work to do. We understand that. But the sale performance and the pipeline, is very, very strong. The sales team is ramping up. The product and the unified platform integration is being fast track. Julien is going to be a great addition to our business with the advent of b-pack. We are focused, we are driven and we are excited really about the future and what we have to do going forward and we have a keen eye on the operational expense numbers that we are looking at here. So, I want to thank you all very much for your time and your continued interest in Selectica and we will talk to everyone soon. Thank you.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.