Mattersight Corporation (NASDAQ:MATR) Q4 2015 Results Earnings Conference Call February 10, 2016 5:00 PM ET
Kelly Conway - President and CEO
Sheau-ming Ross - VP and CFO
David Gustafson - EVP and COO
Jason Wesbecher - EVP and Chief Marketing Officer
George Sutton - Craig-Hallum Capital Group
Matt Blazei - Lake Street Capital Markets
Matt - JMP Securities
Mark Gomes - Pipeline data
Jon Schwartz - Clare Valley Capital
Good afternoon. My name is Mike and I will be your conference operator today.
At this time, I would like to welcome everyone to the Mattersight Corporation Q4 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. I will now turn the call over to Kelly Conway, President and CEO. You may begin your conference.
Good afternoon and thank you for joining us for our Q4 2015 earnings webinar. Joining me on the webinar from the Mattersight team is Sheau-ming Ross, our CFO; David Gustafson, our Chief Operating Officer and Jason Wesbecher, our CMO and they’ll all be participating in today's call.
Before we get into the agenda and the meat and material, I’d like Sheau-ming to review the safe-harbor language. Sheau-ming?
Thank you, Kelly. During today's call, we'll be making both historical and forward-looking statements in order to help you better understand our business. These forward-looking statements include references to our plans, intentions, expectations, beliefs, strategies and objectives. Any forward-looking statements speak only as of today's date. In addition, these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied by the forward-looking statements. The risks and uncertainties associated with our business are highlighted in our filings with the SEC, including our Annual Report filed on Form 10-K for the year ended December 31, 2014, our quarterly reports on Form 10-Q, as well as our earnings press release issued earlier today.
Mattersight Corporation undertakes no obligation to publicly update or revise any forward-looking statements in this call. Also, please be advised that this call is being recorded and is copyrighted by Mattersight Corporation.
Great. Thank you, Sheau-ming. Today we're going to discuss our Q4 results, highlight some trends, notable 2015 accomplishments. We're going to launch a new product today called, Work Style, which Jason Wesbecher will be reviewing and finally we will be reviewing our 2016 guidance with you.
Let's start by going through our Q4 results. All in all, we're very, very pleased with what we got accomplished in Q4. We had record results almost across all of our key metrics in Q4.
We had record bookings, record book of business, record routing bookings, record bookings from new customers, record subscription revenues, record revenues in deployment and record total account opportunity, so really a strong Q4 for us all across the Board.
With that I think I would really like to double click on the next slide on our routing accomplishments in Q4. This is a very significant development for us and really highlights the acceleration and the acceptance of our PBR product. So let me double click on some of those accomplishments with routing.
PBR or Predictive Behavioral Routing drove approximately 70% of our Q4 bookings. We sold a record of over 5,000 new routing seats in the fourth quarter. Routing drove three new logos and importantly we signed our first deal to put our PBR appliance with a third party cloud provider.
This is a great quarter with PBR and I think it's really summed up by a quote that we got from one of our clients. In fact I was having lunch with him before the year ended and he talked to me about PBR and he said you know what, “it's not too good to be true, it's just true” and I think the results really show that and we're very pleased with that.
I think given the progress we've made with routing really throughout the year and most notably in Q4, is perhaps a good time to look at the massive market opportunity we have in front of us and the leadership we're building.
So the way we think about this market opportunity if you look at the base of the pyramid, there is an excessive $6 million seats in U.S. call centers. We estimate that about 70% of that is addressable that is a seat that call centers greater than 2,000 seats.
We get typically $125 per user per month when we put our suite of products in, including our routing and analytics. So what that creates for us is a serviceable TAM of over $6 billion a year. So obviously we've got a huge amount of green space in front of us and a great product to attack it.
Let's talk a little bit more about that product and with the eye on also letting you know where Work Style has been. We're attacking the market with a really unique and highly differentiated product suite. Our products are all built around personality analytics and a deep understanding of how people communicate and what that means and algorhythm and software algorhythm that makes that truly operational and meaningful for our clients.
We're the only company out there with this suite and there isn’t anybody close. We've the analytics products, coaching products. We talked about our routing products and of course later today in this call, Jason is going to talk about the launch of Work CX that is for call centers.
And again just to remind you of how the analysts think about it, there is this great quote from Gartner, which is the concept of using this type of data, the type of data that we have an uniquely have to proactively match customers and employees, can provide transformational benefits to organizations and what Gartner said it's less than 1% penetrated.
So again we're really pleased with the progress and I would now like to turn over the call to David Gustafson and Sheau-ming Ross to review the results and the trends for the quarter. David.
Great, thanks Kelly. I am going to walk everybody through our Q4 results now starting with bookings.
For the fourth quarter, we booked $7 million of ACV, which is a new quarterly record and our ACV bookings over the last four quarters was $22.7, which is also a new record and up 30% year-over-year.
As a reminder ACV bookings represents the annual contract value of all net new incremental bookings. It does not include renewals. So it's truly new ACV that's booked. These new book records indicate [that] we're seeing for our products in the marketplace as well as indicators that our sales engines working and scaling.
Next, we ended the quarter with the annualized book of business of $56.6 million, which is up 32% year-over-year. Our book of business metric represents the total potential revenue if all of our signed contracts were deployed and truly the best measure of the scale of our business.
It's also the best measure of our future revenue growth and the way the book of business is calculated, it is the sum of our revenue plus the revenue that's in deployment and in terms of revenue and deployment, I'll be speaking about this for a bit more detail for everyone here on this call on a subsequent slide.
Then the next major bullet here for our revenues, fourth quarter revenue was $10.4 million, which is up 25% year-over-year, with subscription revenue up a record -- up to a record of $9.6 million and that's up 30% year-over-year.
I want to stop right here on the total revenues to provide a little bit of color insight. There was a larger non-subscription revenue roll up and forecasted not on the subscription revenue side that was a new record but on the non-subscription side you'll see that on a later side that Sheau-ming will cover but we’re going to break out the subscription revenue and the non-subscription revenues.
Next on Q4 adjusted EBITDA, that was a loss of $1.7 million. This was a bit higher loss than expected to be some items that impacted specifically Q4 and I’m going to discuss those Q4 items on a later side as well.
On our other key metrics, gross margin was 72.1%, our subscription retention rate was 95% and net account growth we really described as connect same-store sales across our customers that we have for over a year. That was 128%, so really we have same-store sales that grew 28% net year-over-year at our existing customers.
With that I want to move to on to the next slide where as I mentioned I am going to provide a bit more insight into our revenue and deployment trend.
So what this slide shows is the trend quarter-over-quarter of our revenue and deployment. So that book of business metric we have is revenue plus this metric here on revenue and deployment. And as I mentioned in the previous slide what revenue and deployment is signed and contracted revenue it were in the process of deploying.
And as you can see there is a very positive trajectory upwards, which is fantastic of our revenue and deployment as that continues to grow quarter-over-quarter. It was a great sign that shows our sales volume is working. It also reflects huge bookings at some really large clients and some great new logos.
Now in some cases and in some places these large bookings at large clients can have delays. These delays in deploying typically aren’t matter of site. They don't reflect our deployment capabilities. We can typically go as fast as our client will allow us to go, but in some cases these larger clients and larger bookings we do need to go a bit slower. I want to give you a couple examples of that.
So in one case we mentioned on our last call we do have a client who is doing a migration of their entire telephony system and if were already there we would migrate with the telephony system putted in a deployment. We wait until that telephony upgraded done and then deploy at that time.
In some other accounts at the timing of hiring of agents, so they're ramping and growing and scaling their contact centers and our deployment is tied to their hiring of those new agents. In our largest ever routing order it’s a very complex deployment across several thousand fleets and six different divisions.
So that can be a bit of a longer deployment but in the long term this is great for us. It shows our ability to drive value at very large accounts and with very large orders and penetrate these large orders. In the short term it can have some near term deployment delays, but ultimately it represents huge momentum at these accounts and it really reinforces that the sales manual is working in is behind this scale.
With that I want to move on to the next slide and as I mentioned in our Q4 results I am just going to provide a bit more color into our EBITDA loss in Q4 and discuss some of those expenses.
So we did have three significant items that impacted Q4 expenses. The first as Kelly mentioned is Work Style and he talked about at a high level earlier. Jason will cover in more detail in a later slide.
We incurred approximately $250,000 of additional development expenses in Q4 related to the build and launch of Work Style. Now we see this as a fantastic product that will further accelerate our future bookings and our future revenue growth but did have those expenses in Q4.
Second we had increased commission expense of approximately $225,000 related to some of the increased bookings that we've seen and third we had an accelerated deployment expense of approximately $100,000.
Now those were in Q4 as we look forward to our expenses in 2016 we’re expecting to hold expenses very tight throughout the year with the exception of our continued investment in growing our sales and marketing and in terms of that overall guidance for 2016 Kelly we will provide more information on that later in the call.
With that, next I am going to turn over to Sheau-ming to provide more detail on our financial results.
Great, thank you David. As David mentioned we had record new bookings in Q4 and our ACD bookings over the last four quarters was $22.7 million. This charge shows our booking trend over the last eight quarters and going back to Q1 of last year you can see a nice consistent trend up on a rolling four quarters basis.
The red line represents a percentage of our bookings that are related to new logo customers. We also set a new record with 50% of our bookings over the last four quarters generated from new logo customers. This really underscores the fact that our sales engine is starting to work as we continued to drive significant bookings from new customers.
On to the next slide, this is our annualized book of business. As mentioned we set a new record in our annualized book of business metrics, finishing off Q4 at $56.6 million, a 32% year-over-year increase.
Our annualized book of business is a combination of the blue bar, which is our annualized total revenue and the red bar, which is our annualized revenues and deployment that David has already touched upon previously. We've shown consistent quarter-over-quarter growth in our book of business over the last seven quarters.
Turning to our subscription revenue, we also had record subscription revenue in Q4 with our annualized subscription revenue of $38.3 million up 30% year-over-year. As you can see from the chart, we've seen meaningful subscription revenue growth over the past seven quarters.
Looking at total revenue as David highlighted, we have had higher than expected run off in non-subscription revenue in which our annualized total revenue for Q4 finished off at $41.5 million. Looking at the prior seven quarters, we have seen a nice consistent quarter-over-quarter growth in our annualized total revenue as we've seen from our other charts.
As we've touched upon on our previous call another important metric that we track is our total account opportunities. The following chart shows the trend of our total account opportunity on a quarter-over-quarter basis over the past seven quarters.
As a reminder, this metric is looking at our existing subscription customers and what is the total account opportunity as we were able to fully penetrate each account. If we sold all of our products to every fee at our existing subscription client, we would have $345 million of ACD on an ongoing basis.
With our book of business at $56.6 million and a total account opportunity of $345 million, we're currently 16% penetrated. As you can see our total account opportunity has grown significantly over the last few quarters, as we've added some very large new logos to our subscription base.
Our total account opportunity has grown $152 million over where we were in Q4 of last year, which is quite significant growth. This is a very important metric for us as this is another indication that our sales engine is working.
Our Hunter team continues to add new logos that continues to increase the total account opportunity, which is the blue bar. This then give us our Farmer team a significant opportunity to further penetrate into each account and which we've seen significant success with our net account growth at 128% as of Q4.
With that I’ll turn it back to Kelly.
Great. Thank you Sheau-ming. The last slide in our financial section is really a slide that we look at to benchmark ourselves against two very key metrics is our growth rate and our gross margin and we really think gross margin is a great proxy for all the strategic value that we provide our clients and SaaS vendors provide their clients.
But really with chart, the quadrant of this chart, the grid lines in this chart is on the Y axis is gross margin and on the X axis is growth rate and so what we really considered as high growth SaaS companies is above 30% annual growth at high gross margin SaaS companies have in excess of 70% gross margin.
That’s the upper right hand quadrant and you can see that’s where we fall. We had just over 30% growth last year and about 72% gross margins. So we’re in the sweet spot of high growth, high margin SaaS companies and obviously we're very proud of the company, with the company we are keeping there with other great companies that you would know that are listed there and their stock symbols.
This is something that we continue to aspire for as we're looking toward next year to you continue to grow rapidly and in fact expand our gross margins. So just a reminder of where we sit and the progress we've made.
Now let’s look back on a couple of significant accomplishments and real challenges that we had left in this last year. We made significant progress in scaling our sales engine and we made significant investments and let me just highlight that in a high level.
First from a sales leadership standpoint, we're really proud of the team that we're building and it's really starting to show every day in the progress that we're making with new and existing clients. Frank Suljic rejoined us and he runs our Farmer team. Ryan Swanger joined us about a year ago and he runs it's Hunter team and he is building a scalable engine underneath him with a couple of very strong regional mangers.
Gregg Carman who has been with us and previously and sold our largest every behavioral analytics deal has got a lot of sales management experience. Most recently was the Chief Revenue Officer, Clao has been at SEPC3. He runs one of our regions and Matt Heller, who joined us in the middle of the year runs another one of our regions and they started to scale their teams.
We hired five new hunters and four new farmers and we also added to the leadership that supports them. Brian Study is our Chief Customer Officer, Brian joined us in October. Got a lot of great experience as being in customer success and being a Chief Customer Officer including at SAVO, was at Accenture.
Worked as an undergrad and really to make sure that we have absolutely the right focus in delighting our customers, we're very, very good with the majority of our customers, we're not perfect and that's what we aspire to be.
We aspire to delight every one of our customers that make sure that we operate their infrastructure in a highly reliable manner and we drive significant value for every one of our customers and Brian is on point for that. That's a very critical role as we grow in scale.
Jason Wesbecher, our Chief Marketing Officer and Jason will take the floor here in a couple of minutes, he joined us about a year ago. Most recently he was the CEO of SAAS start-up company and has great experience with Jive, Siebel, TIBCO amongst others also worked as an undergrad and Jason just killed us this year, we're really delighted to have him.
So those investments and the additions that we made are really starting to pay dividends. You saw it in the Q4 numbers and we see it in our pipeline as we're going forward every day.
The next major area where I think it's very important to look back on our progress is routing. That is our key beachhead product. That's the tip of the sword. It is how we're looking to open up a lot of new accounts. So let's talk about the progress we made in many areas in PBR in 2015.
We doubled the amount of sold seats. We more than tripled the amount of calls we routed with our PBR issue as perhaps you remember early last year, we had an issue with about our routing, which we fixed and is no longer an issue.
Our technology eying the routing appliance servers is three times more scalable than it was a year from now and the new algorhythm that we released provide at least a 50% lift over the algorhythm we had a year ago and in many cases over a 100% lift.
So again significant progress in terms of selling it, installing it, scaling it and driving more value; really, really pleased with that.
I think the incredible value and progress we made with routing is a great tie up for Jason Wesbecher to talk about Work Style, which is a powerful new and very complimentary product to PBR. Jason, I am going to turn it over to you.
Thanks Kelly. I am really excited to have the opportunity today to share with you our newest edition of the product portfolio of Work Style. Before we dive into the specifics of the product, allow me to set the table for a moment.
So this is growing movement across customer experience analysts that after years and years of cost cutting, call centers must now begin to invest in creating emotionally connected customer experiences, especially in light of how fecal today's consumers are.
In fact the Antea Group a leading CSE analysts has dubbed 2016 as the year of emotion while CEB has published research that establishes how our customer feels about an interaction matters twice as much that actually what happens on a call.
This trend represents a really nice tailwind for our suite of products as evidenced by the increasing demand for our routing solution, coupled with the enthusiasm coupled with the enthusiasm our perspective clients show around the underlying personality science.
So as Kelly established in the -- previously in the call, we've developed a really clear strategy and product roadmap around our personality based software applications, the sequence with which customers should acquire them and the value that they provide.
Personality has long powered our analytics and coaching and coaching products really helping businesses transform their performance management and quality programs and with routing, we're able to pay our incoming customer calls with agents who are best capable of handling those calls.
Now with the launch of Work Style for customer experience, we're able to take all of that institutional knowledge and package it up into an engaging employee development and training application that will boost personality acuity and drive agent engagement.
As we look towards 2017, Work Style for CRM will extend this functionality to virtually anyone in an organization who touches the customer.
So what is Work Style? Well it is a light weight SaaS application that sits in front of call center employees and teaches them how do identify, understand and connect with the personalities they speak with every day. With a really elegant user experience and strong elements of gain mechanics, Work Style can deliver engagement in a way that traditional call center applications typically do not.
So some of the key features of the application are, number one, a brief personality assessment for each agent, which concludes with a customized readout of their personality strengths, their needs, their preferences, hundreds of which media gains and quizzes, which really serve the deep end user's knowledge in a fun and engaging way.
Team analytics and leader boards and in-app rewards to help drive continuous engagement and reinforce the concepts and dynamic email badges that help users advertise their work styles for the world. We believe that Work Style will serve as a natural bridge from our routing suite of products to our performance management products.
So I would like to give you a brief tour of the product right now. The first thing that a user does when they come into the system for the first time is they complete a very brief personality assessment that based on their results take them to a customized video readout.
Now this is where the user learns about their strengths, their psychological needs and their commutation preferences. There is a lot of deep reference content available here that helps users understand the personality dynamics that play during conflict resolution and persuasion.
But really two of the most important skills that a call center agent must master. One thing that Work Style also highlight is that as you see here each of the personality styles has its own icon, font, color scheme and super power.
Our objective here is really for users to want to celebrate and promote their unique personality strengths. So as the user begins to engage in the game aspect of the system and again they're close to a 1,000 questions throughout the application that help them gain personality acuity, they begin to earn points.
Now these points are really important for a couple of reasons as they show how users are growing versus their team mates and where they stack in the organization. The team analytics dashboard that you're looking at right now services a couple of really important features.
The first is KPI by personality style. So what we've done is we've integrated Work Style into our routing engine and we're passing back how each call center agent performs against each of the six personality styles that they talk to everyday on the phone.
And this particular example we've integrated average talk time for each agent by customer personality style. In a sales center, you could imagine we would pass close rate. In a collection center, we would pass cure rate and so forth.
The other key feature here is the notion of in-app reward. The reward feature is really important to motivating continual user engagement. Our customer success team will collaborate with the client to find the employee development opportunities that are most critical to them.
So for instance Jason has a really long talk time and a low point accumulation for the original personality, then I would receive a notification that says, hey the next time I answer the tenth original question correctly, I'll win a $10 Starbucks Gift Card.
So the only feedback that we're receiving from our clients has been really positive. I can tell you anecdotally that when we show this for the first time, many of our prospects comment that they've never seen an application like this in the CX industry.
We're really encouraged by the response and we believe that Work Style can have a strategic impact on the business long term. For one, it will help us extract more value from a routing clients and make those relationships stickier.
It also helps us credentialize personality within the analyst's community, the press and the broader market. This will be helpful in our campaign to educate the market on the importance of personality the customer experience. And the lightweight nature of the tool being able to turn on a pilot user in a single day will help us with inbound lead generation.
And finally as we look towards expanding Work Style in the CRM this will serve as a strategic lever to increase our addressable market.
So with that, I would like to hand it back over to Kelly to conclude the call with our 2016 guidance.
Great. Thank you, Jason and we're all really excited about Work Style and the progress we're seeing.
So let me first provide a general commentary on our 2016, share with you our financial roles and then give our guidance. The large deals and we sold a number of these large deals in Q3 and attend to Q4 we believe will really start to show significant impact in Q2.
I'll also want to -- like to share with you our Q1, Q2 pipeline remained strong even after the very strong Q4 we're continuing to pursue a number of very significant deals and we expect that to drive further growth in the back half of 2016.
I think there in a nuance in kind of the mix of our revenue that's important that I’d like to comment on. Our subscription revenues have ended the year at approximately 90% of our overall revenues. We expect to see a material meaningful increase in that mix of revenues from subscriptions and that’s obviously very positive that as we go forward to higher percentage of subscription revenues the better.
The reason that is, is that we're seeing increased routing revenue and the renewal revenues and neither of those revenue sources have deployment fees associated with them and of course as those revenues grow, the mix of our subscription revenues will grow with them.
Having provided that general commentary, let me share with you our financial goals. We look to end 2016 and exiting the year at a $60 million plus annualized revenue run rate. So again Q4 of next year we look to be exciting at in excess of $60 million run rate.
We're committed to get to EBITDA breakeven in Q3 and we're -- we aspire to be cash flow breakeven or positive in Q4 and EBITDA breakeven or positive for the whole year.
In terms of our specific guidance right and that's down to our guidance, we expect our book of business to grow in the range of 30% to 35%. We expect our subscription revenues will grow approximately in the same range as they grew in 2015.
In 2015 our subscription revenues grew 37% and our guidance for 2016 is 35% to 40% growth in our subscription revenues. Our total revenues will grow again at approximately the same rate as 2015 and again probably the meaningful -- the fact we had less of the non-subscription revenue is probably impacting that slightly.
But again very consistent with the strong growth that we saw in 2015 and finally and importantly we expect to continue to withstand our gross margins. We expect for the year our gross margins will increase to in the range of 74% to 76% for 2016.
With that, we’d now like to open up the call to question.
[Operator Instructions] Your first question is from George Sutton from Craig-Hallum.
Thank you and very nice metrics. So the challenge that I think we all have relates to the annualized total revenue sequential number and you mentioned the large non-subscription roll off. Can you give us a better sense of what exactly occurred there? What’s causing that and then I’ll go from there.
Yeah, so the non-subscription revenues were roughly $4 million last year. We think that they will be approximately $1.5 million less and that really relates just to the when contracts most of that George is related to the amortization of deployments. When those deployments are fully amortized because the contracts are rolled over after their initial subscription period, there is no more annualized fees subscript -- there is no more amortized deployment.
In addition as routing is becoming a larger and larger percentage of our revenues and as we saw and again I think this is a real positive in our fourth quarter 70% of our bookings came from routing. None of those contacts by intent have a deployment fee.
Our model is to make it easy for our clients to deploy, friction less from a contacting standpoint and frankly in most cases the deployments are pretty lightweight. So there is no deployment on that.
So as a result of those factors George, our deployment revenues are going from roughly $4 million to $2.5 million. That ends up having a material impact on total revenues although I think in the medium term it’s quite positive that our revenue quality is higher.
I think that some of that we just got more in control of our modeling around those George as we got into our plan this year, but that’s really what happened and I’m happy to answer any follow-up question you would like to ask on that.
Okay, no that’s very helpful perspective and obviously it's more an optical challenge than a business challenge, the business side is great.
So relative to -- David walked through a few examples of why we're seeing the growth that we're seeing in revenues and deployment which is obviously a good statistic, but the reason it's slow in some cases I am curious on the third point you made, you signed the largest routing deal in your history, but that deployment gets staggered a little bit.
Can you just -- I think that aligns with Kelly what you were saying as you start to see Q2 revenue impact, I think those statements are aligned, is that correct.
Yes, let me take a -- let me start with that and David you can jump in to add if I miss anything. Let me talk about that deal specifically. It was a -- and just stop of recognize the magnitude of it. It was about a $2.5 million routing deal. It was with a customer that signed their -- it was an add-on.
It was a customer that signed their first deal at the end of September and they added on another $2.5 million to it because the power of routing, that's incredibly impressive. Obviously it's a very, very, very large customer that in their first essentially 90 days of our relationship with them they contracted for $3.5 million with the routing seats. We're delighted about that.
It turns out that that order as many orders do at the end of the year, it got tapered, finally got their procurement. We thought it would done early in December, but because of the way the large companies work in getting all of the buttons pushed, it didn't end up getting signed until I think about the 28 December.
So you really look and say gosh, we don't, even though it's a Q4 deal it happened really near the end of Q4 and it's a big deal and it's many thousands of seats as David said across a number of call centers and importantly it's across multiple divisions and multiple application areas.
There it is in service, sales and retention. So you have a number of elements there George. You have a very large deal with an enormous corporation. You have a deal covers two new divisions that we haven't worked in before and across all the major business functions that we serve with routing; service, sales and retention.
Therein really lies the complexity and the deployment schedule accordingly George. But again I would just step back and say this customer that we first started contracting, our first order in September we've now taken down $3.5 million of orders in 90 days with them. It's incredibly impressive.
No, that's great. One thing or maybe, you had mentioned that you signed a PBR deal with a third party cloud provider, can you give us a little bit better sense of what that deal is and what kind of opportunities might come from that type of deployment.
Yes, it's great. It's early in that building alternative channels, but we would really get other people working for us and two things. One, we would like to get other people working for us and selling our application and two, because of the size of our sales force and because of the size of the opportunities we pursue, frankly we just generally don't pursue a lot of deals that are under 200 or 300 seats.
Most of those -- a lot of those call center applications that are 100, 200 seats, which would in many causes get just as much benefit from routing as a larger company, we don't have an economical way to get to them.
So in this case a company that has a large call center ACD cloud had two customers that they're deploying to and we're putting our routing appliance in their cloud. If the deployments go as successfully as we expect they will, I think that will open up more opportunities with that third party cloud provider and furthermore George as you probably know there are three or four or five significant companies that serve that space and it will give us a great story to go talk to them and say why don't you go put our routing in your cloud as well and create more customer value and more differentiation through your product stack.
Did that give you the detail you were looking for George?
No, that's great. That's great Thank you very much.
Your next question is from Matt Blazei from Lake Street Capital Markets.
I have a couple questions for you, curious as to why the gross margin was lower this quarter than they have been over the course of the year. Was that part of the deployment on the other revenue line or what did that come from?
Sure I can address that. So we mentioned last quarter we had a lag in hiring related cost of service in which we now have caught up, but additionally we have some accelerate deployment fees and also have less consulting revenue, which generally has higher margins.
And as Kelly already mentioned, we do anticipate our gross margins to continue to improve through 2016 and so we have our revenue --our gross margin guidance at 74% to 76%. So we view Q4 as an anomaly.
Got it. And then the other question that I had was obviously with your high retention rates, your incremental ACD is pretty much added out to your book of business and yet this quarter, you had a wonderful $7 million incremental ACD in each of your book for business only $3 million from Q3. Can you give us any color on that?
Sure. As we mentioned we had the higher than expected run off in non-subscription revenue and then we also had a slightly increased subscription revenue roll off. So we were at 95% in Q4 and 97% in Q3.
So, as we mentioned in previous calls we wanted to caution against assuming that we would maintain such a high subscription retention rate give high especially when you compare us to our other stock peers. So it’s a combination of both subscription and non-subscription roll off.
I see, okay. Thank you.
The next question is from Patrick Walravens from JMP Securities.
Hi, everybody this is actually Matt on for Pat. Thank you for taking my question and congratulations on the excellent metrics in the quarter. I guess one question I have is in terms of the revenue and deployment as you guys get more and more penetration with larger and larger customers, would we see that timeline to convert to regular revenue increase, decrease and changed and when do you think that inflection point might happen? Thanks.
Yeah, so it’s a great question the -- generally add on revenues at an existing account go faster because we have gone through all of the IT issues and we know how to navigate those challenges. Any Work Style bookings should go to revenue quite quickly because it is a very lightweight SaaS application.
The items that probably create -- and of course the timing in your quarter when you get the bookings matters too. If you get those bookings at the beginning of the quarter versus the end of the quarter, that makes the difference and frankly in Q4, our bookings were a little bit more back weighted than they have been in some of the previous quarters.
On the other side things that make them go slower is if you get these mega deals and particularly a mega new deal where you don’t have all of the navigation of the IT and the business process of the client and there is some learning going on both sides that will take longer.
So those are kind of the -- its a little bit difficult to model map because you have to make assumption of kind of what is the mix of all of the that. So those are the kind of the qualitative description I would give you that the factors that affect that revenue and deployment.
I would say in general as we look at our plan, we look at that the percentage of our revenues and deployments as a percentage of our book of business, we would be expecting that to go down Q3 and Q4, reflecting that we've got this the pig has moved the python so to speak and that’s kind of the issue that we have right now.
The pig is a little bit stuck in the python, which impacted our revenues, but I think if that pig moves through the python, we'll see both more revenue acceleration and you will see that the amount of revenue and deployment as a percentage of a raw of book of business will go down.
That’s very helpful. Thank you very much.
[Operator Instructions] The next question is from Mark Gomes from Pipeline data.
Hi, thank you. Good progress guys. Wondering what you can say about the ROI that the customers have been seeing particularly with the new algorithms that you've been putting in place you made some comments about that several months ago.
My specific question is around that what kind of response is that from some of the customers and what’s that doing in terms of your ability to up-sell into those accounts both in renewal situation and renewal products?
Well, I’m going to turn that over to David, I think David Gustafson overseas the -- our data analytics teams that build the algorithms. David do you want to handle that?
Sure, thanks Kelly. Hey Mark, the ROI we're typically seeing is generally I’d say 2X to .3X on the lower end. So in some cases if it's more of the cost cutting, so you're reducing the length of the calls and it taking time out of system.
We're seeing a 2X to .3X return. So for every dollar that they're paying us on a monthly basis for routing between $2 to $3 back in return. When you look at some of the revenue applications we have where we’re driving improvements in retention rates or sales rates, typically in those environments we’re seeing 4X and 5X plus, in some cases up to 10X returns where for every dollar that they paying us they gain $4, $5 and even $10 back in return.
And in fact the case that Kelley mentioned of the larger deal that’s happened in September of $1 million booking followed by the $2.5 million booking in December that was the one that was focused on more on the revenue side in retention. And so a really strong return there, which then really is what is able to drive a follow-on booking across all those divisions and seats, but $2.5 million in a very short period of time to expand.
So we continue to see really strong returns in ROIs for our clients within the routing side. That’s what's really driving these additional add-ons that are coming very quickly after those initial deals. Is that helpful Mark?
Got it. Yeah absolutely. So that’s helping with up-sell customers taking a chance on additional products and expanding deployments.
Yeah, and I think Mark that’s where we really see Work Style really as a nice fit what I would say is Work Style would be approximately 25% to 30% add on to the original routing orders.
So it's certainly meaningful to us, but if we had established that creditability and we really establish the power of the concept of personality through routing going in with Work Style we found so far that we have a very engaged audience that's very willing to listen and talk about how do I add that on to the routing order because they've really bought the power of personality.
Okay. Okay, And final question in situations where you have non-renewals coming up, what tends to be the one, two or three reasons why those will come up given the ROI metric that you get from most customers?
Yeah. So we have not -- it's generally where we -- there is a couple of things that happened. One is we had a couple of situations last year where there were significant changes in the company's business. One of our customers is a private sector university, which has been an incredibly tough segment. So this is I think had to really downsize their basically sales function if you will.
Another which is an insurance company where they are moving more of their business to direct versus agencies and we're in the agency part of the business. So those things happened, which are really exogenous.
And then sometimes we are not perfect on our account management and delivery execution. I think in general we're really good in the best metric to underscore that market and the fact that our net renewal rate, which is subtracting the attrition or run offs and adding the up sells is over 110%, which is best-in-class across any SaaS company.
So I think in general we're very, very good. We're not perfect and we're not as consistent as we need to be across all of our accounts. It's a significant focus. It is very strategic to us that we get better and better at that. So sometimes if we’re not perfect, we create our problems, but it general it's exiguous.
Great. Thanks keep in working folks.
The next question is from Jon Schwartz from Clare Valley Capital.
Yeah, hi guys thanks for taking the question. So couple questions, the new ACD bookings were obviously nicely sequentially, well up slightly sequentially, but just flat year-over-year despite sales and marketing spending up over 50%. Could you may be just for time for a moment?
Well, the way we have always and consistently commented on our bookings as we look at the rolling four quarters and the reason that we do is because of the size and potential lumpiness of the orders.
So the way we look at our bookings is a rolling four quarter basis and just to recount the actual numbers, so that we're on a common baseline, our bookings for the rolling four quarters which ended in Q4 were $22.7 million and the comparable year was $17.4 million and I believe Sheau-ming that’s about a 30% increase.
So a pretty healthy increase in our bookings, we’re very proud of that. What I would say -- I think that’s one part of your question. So we really look at it as a 30% increase on a rolling four quarter basis which is how we've always described it.
As it relates to expense side, we made very, very significant investments, which we would not have expected to impact the bookings in 2015. We outlined some of those. So during the year, we added four senior sales managers. We talked about that as Frank Suljic, Ryan Swanger, Matt Heler actually Gregg Carman came out in January.
So that would have impacted that Jason Wesbecher came down as our CMO significantly ramped up the marketing expenses really with an intensity to create more leads and frankly more awareness. We're pleased with the progress on both of those. We added Brian Study, our Chief Customer Officer.
All of those things really built I think the necessary infrastructure that we now think and can see that we have a saleable sales model and scalable sales engine. They added to expense last year but would not materially impacted our bookings capacity last year.
And in fact what I would say is we oversold our quota capacity last year in a pretty significant way and so we're very pleased with the bookings and intentionally made the commitment to invest. So that we could build a scalable sales model and sales engine given the wonderful product set we have and the great market opportunity we have.
So that’s really how we approach that. I’m happy if there is a follow-up, I’m happy to answer that for you.
Okay. That's fair. It just sounds like a lot of the sales and marketing spend it just being spend investing ahead of the expected growth and that's kind of what we’re seeing in the incremental ACD bookings only being flat year-over-year.
I’m sorry I can’t allow you to say that they’re flat year-over-year because again we measure them on a rolling four quarter basis due to the size and lumpiness of their orders. And I don’t need to be quick about this, but I think it’s a point of definition of how we look at our order book.
Our order book is lumpy. We're dealing with million and in some times, some cases multimillion dollar orders. So those are inherently lumpy. That is why we have consistently said that we measure them on a rolling four quarter basis.
But to your earlier point is absolutely true, we did intentionally invest ahead because we had to. It’s the only way that we can see that we could build a scalable sales engine and consistently in the earnings calls and the discussions that we've had on these calls and with investors, the pivotal issue has been what are you guys doing to build a scalable sales engine?
And we think the steps that we took and the investments we made last year specifically address that in very, very successful ways and we're really -- we’re pleased with the outcome of the investments that we’ve seen so far and frankly really pleased that we grew our bookings 30% on a year-over-year basis.
Okay. Okay. Yes, no that’s fair and I obviously look on a year-over-year quarterly comparison which was very difficult. You guys had a great Q4 in terms of ACD booking last Q4 so, that’s probably a bit of a hard compare and I think that way you guys you look at it is solely fair.
Yes and its fair -- it's enough and by the way it continues to be lumpy. We have a very strong pipeline, but there are -- we see in our pipeline this year three or four deals that are in excess of $3 million in ACD. Those are phenomenal deals obviously with the best of the best companies in America predicting the time that it went up $3 million or $4 million or $5 million ACDs dealer that's going to come in as to which quarter, how you are going to navigate the procurement cycles.
As you can imagine it's really, really hard to forecast and that’s why we continue to emphasize let’s look at this on a rolling four quarter basis when it's good or when it’s not good. I think it’s the right way to look at it.
Okay. Okay. Fair enough. And then just quickly on cash flow it was -- cash was down quite a bit in the quarter, can you just talk about the puts and takes there?
Sure I think we can talk about, we had a larger EBITDA loss than we originally had protected. There is also timing of our receivables that's factored into that as well as increased capital and capital lease payment.
Okay. And I apologize, I miss the first piece of the call, what sort of balance that you get for 2016 for the full year just overall I apologize for making, I had to be on another call?
Yeah we’ll put that slide back up to remind people of our goals and our guidance. Our financial goals as we look to exit 2016 with a $60 million plus annual revenue run rate. We look to be EBITDA breakeven or slightly positive in Q3. Operating cash flow breakeven or positive in Q4 and EBITDA breakeven or positive for the whole year.
Our guidance specifically is 30% to 35% growth in our book of business. 35% to 40% growth in our subscription revenue and just to recall, last year it was 37% growth in subscription revenues, 30% growth in total revenues and an expansion of our gross margins to 74% to 76%.
Okay. Thank you and then my last question is just on the incremental book of business the sequential increase and this was asked earlier, but I just want to make sure I understand currently the sequential increase in the book of business first is the ACD in the quarter that was added implies a larger churn than you've seen in recent quarters by a meaningful amount.
It sounds like it’s a combination of non-subscription based business as well as you did see a pickup in churn. Am I understanding that correctly?
Yes, that is correct. It was a meaningful amount of non-subscription revenue roll-off and we had slightly higher churn than we historically had over the last few -- eight quarters or so, but again I think on an overall basis, our net retention is quite high, but that is correct.
Okay. And sorry did you guide for a full year revenue number?
We gave you the number of the growth rate and revenue. So you should be able to build your model from the guidance that we gave on the call.
So that’s 30% to 35% subscription revenue growth base…
I’m sorry that -- I’m sorry, that's not what we said. What we said was and I will go back to repeat it and if you're looking at the WebEx it's on there, 30% to 35% growth in our book of business.
35% to 40% growth in subscription revenues and by the way subscription revenues will grow into the low and perhaps as high as 95% of our total revenues. So that’s very positive. 30% growth in total revenues and gross margin of 74% to 76% and with the comments that we made above on our financial goals relative to when we aspire to get to EBITDA breakeven, what our aspirations are for EBITDA profitability for the whole year, I think hopefully that's enough -- enough guidepost for you to build your model.
Okay. That’s very helpful and apologize if I missed it that earlier. Thanks very much. That’s all I have.
And the next question is from Mark Gomes with Pipeline Data.
Hey guys, just a follow-up. Wondering if there is anymore color you could provide with regards to your progress on Avaya integration?
Yes Mark I’m going to turn that over -- we did fix that problem, but -- and we don’t have that issue, but David you want to underscore that further.
Sure. Yes Mark we solved the Avaya issue. We've rolled out our largest PBR plant today to a Avaya customer. Our largest PBR new logo in the last quarter is also a major Avaya count. So we've been selling to them. We have been deploying to them. We have expanding the Avaya account. So it really is no longer an issue.
Yeah and even probably a footnote Mark, our three largest routing customers by steep size, are all Avaya.
Fantastic. Thanks guys.
There are no further questions at this time. I will turn the call back over to the presenters.
Well great, thank you and thank you particularly for your questions and the very rich dialog we had after the text recall.
Again we're really pleased with the progress we made and the results of our Q4 quarter. Looking back the significant progress we made building our sales engine and enhancing PBR, we’re delighted with the Work Style product launch that we have and look forward to being very focused and driving a good 2016.
So thanks again for your time, attention and interest. We look forward to talk to you again.
This concludes today’s conference call. You may now disconnect.
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