Demandware (DWRE) Thomas D. Ebling on Q1 2016 Results - Earnings Call Transcript

| About: Demandware, Inc. (DWRE)

Demandware, Inc. (NYSE:DWRE) Q1 2016 Earnings Call April 27, 2016 5:00 PM ET

Executives

James F. Hillier - Vice President-Investor Relations

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Analysts

Jesse Hulsing - Goldman Sachs & Co.

Ross MacMillan - RBC Capital Markets LLC

Kenneth Wong - Citigroup Global Markets, Inc. (Broker)

Justin A. Furby - William Blair & Co. LLC

Brian Peterson - Raymond James & Associates, Inc.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Raimo Lenschow - Barclays Capital, Inc.

Samad S. Samana - FBR Capital Markets & Co.

Koji Ikeda - Oppenheimer & Co., Inc. (Broker)

Brad Sills - Bank of America Merrill Lynch

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Monika Garg - Pacific Crest Securities-KeyBanc Capital Markets, Inc.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q1 2016 Demandware, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded for replay purposes.

Now, I will hand the call over to James Hillier, Vice President of Investor Relations. Please proceed, sir.

James F. Hillier - Vice President-Investor Relations

Good evening and thank you for joining today's call to discuss our results for the first quarter 2016. Here with me today are Tom Ebling, our CEO, and Tim Adams, our CFO. Tom will provide highlights for the quarter and outline some of our accomplishments, and Tim will talk about financials in more detail. We'll wrap up with a Q&A session.

Before we begin, let me remind you that during the call, we will discuss both GAAP and non-GAAP results to supplement investor understanding of the company's financials. A GAAP to non-GAAP reconciliation schedule is provided in the press release that we issued this evening and posted to our website. We also posted an Excel based trended financial data file to Investor website which includes our historic balance sheet, income statement and cash flow data, as well as key metrics to help in the understanding of our business. We hope that you will find this helpful as you build your model.

Also, today's discussion contains forward-looking statements such as statements regarding the market acceptance of cloud solutions, the growth of digital commerce and retail, our business strategy, demand for our solutions, the growth of our customer's businesses, seasonality of our business, our pipeline and our projected financial results.

Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those projected in our forward-looking statements. The company assumes no obligation to update the information provided during today's call, revise any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in forward-looking statements. These risks and uncertainties include risks relating to Demandware's future financial performance, market growth, demand for Demandware's solutions, and general business conditions, as well as other risk factors that could adversely affect our results as set forth in our most recent annual report on Form 10-K filed with the SEC.

With that, I'll now turn the call over to Tom.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Thank you, Jim, and thank you for joining us on today's call. Entering the year, we had four key objectives. First, continue to take market share while also expanding up-market, signing larger retail customers. Second, bring our new solutions in predictive intelligence and point of sale to market, capturing the benefits from our R&D investments and M&A activity. Third, continue to grow and retain our existing customers by helping them achieve comparable growth above industry averages and maintain a churn rate less than 5%. And fourth, demonstrate the leverage opportunity in our business model.

During the first quarter we made excellent progress against all of our 2016 goals, delivering on key customer, technology and financial objectives. Specifically, we continued to win in the market including an increasing number of larger customers, while driving above market growth in our customer base.

From a technology perspective, we rolled out meaningful enhancements to our platform, including enabling predictive recommendations for all digital customers, and remain on track to launch additional innovations including the release of Demandware Store to U.S. customers in the fourth quarter.

Our existing customers once again grew GMV on our platform at above market rates. And from a financial perspective, we hit the midpoint of our subscription revenue guidance and delivered $2 million of non-GAAP net income to shareholders versus a non-GAAP loss a year ago.

Focusing first on new customers, average ACV across new digital commerce customer signings was over $700,000 in Q1 2016, up from $460,000 in Q1 2015. We won business with leading retail brands including Belk, BoConcept, Duluth Trading, Figleaves, Fragrance Direct, Mitchell Gold + Bob Williams, Sonos, Timex and Wolford.

Based on our new customer bookings in the quarter, we are maintaining our guidance for yearly growth in new customer ACV of 25% to 35% on a constant currency basis. As a reminder, we will report our annual growth in new customer bookings at the end of the year.

During our Q4 earnings call, we noted that two large multi-million dollar U.S. orders pushed into 2016, one of which had closed in early February. I'm pleased to report that the second deal, which was the larger of the two, closed in early April.

During the first quarter, our comparable customers increased their GMV by 23% on a constant currency basis, driven by solid growth in comparable site GMV, and the continued launch of new sites and brands. This comparable GMV growth is above industry projections for 14% growth for worldwide commerce this year, and 10% growth for e-commerce in North America, Europe, Japan, and Australia, despite what remains a more challenging retail economy.

Demandware grows by creating value for our customers, because our platform allows us to deliver faster time to value, continuous innovation at the leading edge of change in the commerce market, and peace of mind, driving more traffic, better conversion rates, and higher average order value for our customers. We saw this reflected again this quarter in the GMV numbers. In addition, we continue to expect customer churn will be less than 5% in 2016.

Translating this GMV growth to revenue, our subscription revenue in the quarter grew 33% on a constant currency basis. Adjusting for currency versus the spot rates at the time we provided Q1 guidance in early February, subscription revenue was at the midpoint of our guidance.

We added 18 net new live customers during the first quarter, bringing our total live customers to 349, up 25% year-over-year. Retailers that went live on the platform included Acushnet, Avenue 32, Charles Tyrwhitt, Christopher & Banks, Ivyrevel, Pret A Manger, Stonewall Kitchen, Trimtex Sport, TTS Group, and W. Atlee Burpee.

As we've discussed in the past, our platform provides customers with a unique competitive advantage, by allowing them to quickly launch new sites and new brands with minimal to no involvement from Demandware. As proof of this advantage, a number of leading brands on our platform launched new sites in the quarter, including BabyOne, TSI Holdings, Warehouse Fashions, Williamson-Dickie, Wolverine Worldwide, and World Wrestling Entertainment. Jarden Corp, L'Oreal, and Samsonite each launched multiple sites across multiple brands during the quarter. Including these new additions, we ended the first quarter with 1,590 sites, up 28% from Q1 2015.

Our recent XChange customer conference was outstanding, and we were pleased to have many of you in the investment community join us again this year. We (07:10) over 1,400 attendees, including a record number of customers, partners, and prospects. General and breakout session presentations included customer insights from Carter's, Charles Tyrwhitt, Cole Haan, The Limited, True Religion, Vineyard Vines and others. We discussed important development efforts around our unified commerce platform.

Unlike our competition or many other technology companies, for that matter, we have consistently invited our prospective customers to these conferences. We do this because, quite simply, it works. Prospective customers speak to our customers candidly and hear great things abound Demandware and how our capabilities contributed to our customers' success. As a result, many prospective customer attendees become customers. I suspect this year will be no different as the prospects I spoke with were extremely impressed and quite positive about moving forward with us.

From an innovation standpoint, we delivered a number of enhancements to our platform during the first quarter, including predictive recommendations, a new development environment leveraging JavaScript controllers, and improvements in our merchandising, search and search engine optimization capabilities. We believe predictive intelligence will be a game changer. With Demandware, customers can now leverage the consumer data for personalized predictive site recommendations and email personalization.

Predictive site recommendations are available to all Demandware digital customers as part of their subscription. And in some initial use cases, customers have experienced a 5% to 10% GMV uplift. We plan to roll out predictive sort later this year with future plans to combine predictive intelligent capabilities with the power of our network data, something that cannot be replicated by our on premise or cloud-based managed service competitors that lack our multi-tenant cloud environment.

Furthermore, the launch of a new standard space development environment leveraging JavaScript controllers represents an important innovation in our development model.

A unique Demandware differentiator has always been the ability for customers and partners to customize the platform without disrupting Demandware's ability to deliver ongoing version updates. The introduction of this new development model will help our customers and partners build sites faster and improve their ability to recruit, onboard and retain developer talent. This development environment will be utilized across all elements of our unified platform, including order management and point of sale and is an important step in our drive towards a truly unified platform offering. Partners and customers at XChange were very excited by this change and by predictive recommendations, proof points that Demandware continuously delivers real innovation benefiting our customers and partners.

Over the next 12 months we plan to deliver even more platform enhancements, including a mobile first version of our reference storefront, a common customization framework across all solutions, embedded content delivery network capabilities, and the United States release of Demandware Store, the first of its kind, cloud-based point of sale and store operations solution.

In addition to the platform enhancements delivered by Demandware, we have over 200 technology partners in our LINK program delivering innovation around online payments, reviews, content, social media, mobile apps and other value-added features that integrate with and complement our Demandware Commerce Cloud.

In the past year, we have also dramatically increased our traction with systems integrators. We have 77 LINK Services partners today, up 48% year-over-year. In addition to skilled regional providers, our LINK Services Partner Program includes many of the world's leading commerce consultants and we are very pleased that Accenture is a Platinum sponsor for both our recent XChange event in Florida and our upcoming XChange European event in Berlin this June.

The market continues to evolve and shift over time and we are forming strategic partnerships to capitalize on these new opportunities. A great example of this is Radial, formerly known as eBay Enterprise and GSI Commerce before that. We partnered with Radial in January to create an option for retailers who want an end-to-end outsourced model that is closely aligned from the e-commerce front-end to the fulfillment of orders.

With the recent announcement that Radial will no longer operate e-commerce sites, there is an opportunity to build an even tighter relationship between the companies. Demandware provides an excellent option for Radial customers that will need to migrate from the existing Radial commerce platform over time. We look forward to engaging with retailers in how Demandware can provide Radial customers with an easy transition onto the Demandware Commerce Cloud while maintaining the advantages that they see from Radial's back office capabilities. We think that this combination is going to be powerful for omni-channel retailers for some time to come.

In addition, we announced an integration with Adobe Experience Manager. We believe many large enterprise customers would prefer to have a good technical path to integrating their investments in content management systems with Demandware Commerce. The partnership provides a path to using these platforms together with better integrated solution capabilities than were previously available, leveraging the strengths of both platforms.

Demandware's leading edge technology permits a unique level of customization while retaining the innovation benefits of a multi-tenant cloud environment. We believe combining this technology advantage with our high customer satisfaction and shared success model uniquely positions Demandware to emerge as the enterprise class leader for retail commerce.

Our success among leading retailers has not gone unnoticed among the industry analyst community. In March, Demandware was named as a leader in the Gartner Magic Quadrant for Digital Commerce. This accomplishment is particularly notable as Demandware is the only cloud-based provider to be placed in this category.

We have made strong early progress against our objectives for this year. The general (12:56) release of Demandware Store planned in Q4 will further enhance our value proposition and effectively double our customer wallet share opportunity. I continue to believe we are uniquely positioned to dominate the market for enterprise class retail commerce, delivering value for shareholders by creating value for our customers.

With that, I'm going to turn the call over to Tim.

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Thanks, Tom, and thank you, all for joining us today. For the first quarter 2016 our total revenue was $67.1 million, increasing 33% year-over-year. Total revenue exceeded our guidance range, driven by strength in our services business and a one-time LINK partner commission payment of approximately $1 million. Excluding this one-time payment, total revenue was still above our guidance range.

Subscription revenue in the quarter reached $56.8 million, representing a 31% increase over Q1 2015 and a 33% increase on a constant currency basis. Adjusting for currency versus the spot rates at the time we provided Q1 guidance in early February, our subscription revenue was at the mid-point of our guidance.

As Tom noted, our comparable customer GMV increased 23% year-over-year. The spread between comparable customer GMV growth and comparable customer revenue growth was wider this quarter than our historical average of approximately 3 percentage points. Because of variations in timing of revenue recognition related to specific customer contract structures, this comparable GMV to comparable revenue spread can vary from quarter to quarter. However, on a trailing 12 month basis, the spread has been consistently at 3 points and was at this level for the 12-month period ended Q1 2016.

We continue to expect our spread between comparable GMV growth and comparable revenue growth for the full year 2016 to be in line with our historic average. We continue to expect growth in comparable customer GMV of 17% to 19% this year. And this guidance does take into account the timing of customer contract cycles.

You may recall that comparable customer GMV is driven by two components, comparable site growth and customer site expansion. Our median identical site growth has been consistently above the market growth rate of 10% to 14%, which we believe is due to the advantages of our platform versus competing on-premises and in-house solutions.

As for site expansion, our platform more easily enables customers to launch new sites and new brands. Customers tend to launch their biggest brands in regions, but then the first year is on Demandware. And with our low churn rate, these large brands are now a bigger part of our base. Because of this larger base, you may expect to see less impact on GMV as additional sites are added.

Recall that our three-year to five-year outlook for 30% plus subscription growth is based on, among other factors, mid-teens growth in comparable customer GMV. This outlook assumes a continued slowing in contribution from customer site expansion with comparable customer GMV growth approaching the identical site growth rate over time.

Based on our success signing larger retailers, we have a strong pipeline of customers going live in 2016. As we expand up market and our mix of large enterprise retailers increases, our average time to implement and launch an initial digital commerce site for new customers has been approximately seven months.

Average revenue per customer reached a record $632,000 for the trailing 12-month ended March 31, 2016. This is up from $623,000 in Q4 2015 and $591,000 in Q1 2015. Our ARPU has increased every quarter since the end of 2008, driven by our land-and-expand strategy and large customers going live on the platform.

Q1 2016 GAAP subscription gross margin was 79.1%, down 40 basis points year-over-year. Non-GAAP subscription gross margin, which excludes stock compensation and the amortization of intangible assets related to acquisitions, was 81.5%, down 100 basis points year-over-year.

As a reminder, we are seeing a modest headwind in our subscription cost of goods sold, driven primarily by the roll out of new solutions that carry a slightly lower margin than our commerce platform, which is the primary driver of the 100 basis point decline in subscription gross margin.

Total GAAP gross margin for the quarter was 69.4%, down 70 basis points year-over-year. Our non-GAAP total gross margin was 72.8% for the quarter, down 110 basis points year-over-year. A higher mix of services revenue and the lower subscription gross margin contributed to the decline in total gross margin.

Q1 2016 GAAP operating expenses increased 25% year-over-year to $58.1 million. Stock-based compensation, intangible amortization, and contingent compensation within operating expenses were approximately $12 million in the quarter, an increase from about $9 million a year ago. Excluding these items, our non-GAAP operating expenses increased by $9 million, or 25% year-over-year, with a $7.5 million increase in salaries, facilities and other spending related to our larger employee base and a $1.5 million increase related to higher sales commissions.

At March 31, 2016, we had 1,024 employees, a 25% increase from a year ago. We increased sales and marketing head count 26% year-over-year, with sales related head count also up 26% year-over-year. Research and development head count increased 27% year-over-year.

Moving on to guidance, as Jim outlined at the beginning of the call, all forward-looking statements fall under the safe harbor provisions. The non-GAAP metrics I will discuss exclude stock-based compensation, amortization of purchased intangibles, as well as contingent compensation related to acquisitions.

We continue to expect subscription revenue for the full year 2016 to be in the range of $260 million to $270 million, consistent with the guidance we provided last quarter. This guidance assumes current foreign exchange rates, which on average are generally consistent with the spot rates a quarter ago.

We expect total revenue for 2016 to be in the range of $298 million to $308 million, up $3 million from our prior guidance range due to the services revenue out-performance in Q1 2016.

We continue to expect 2016 subscription non-GAAP gross margin of 81% and total non-GAAP gross margin of 74%. Based on our higher services revenue guidance for the year, we now expect operating income and net income to be approximately $2 million higher than the guidance we provided a quarter ago.

We expect our GAAP net operating loss for 2016 to be between $48 million and $50 million and our non-GAAP net operating income to be between $10 million and $12 million. We anticipate our weighted average basic and fully diluted shares outstanding will be approximately 37 million and 40 million shares, respectively, in 2016.

For the second quarter of 2016 we expect subscription revenue to be in the range of $58 million to $60 million, which represents a 34% year-over-year growth at the mid-point. We expect total revenue to be between $67.5 million and $69.5 million, representing a 27% year-over-year growth at the mid-point.

For the second quarter we anticipate our weighted average basic and fully diluted shares outstanding will be approximately 37 million and 39 million shares, respectively.

On the Demandware platform, our goal is to help retailers reach consumers wherever, whenever, and however they shop, and more quickly adapt to changing preferences, thanks to the power of a customizable versionless cloud offering, both online and in the store. We had a strong start to the year, and we believe that our growth investments this year will strengthen our leadership position and deliver more value to our shareholders.

And with that, we will now open the call up for questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Jesse Hulsing with Goldman Sachs. Your line is now open. Please go ahead.

Jesse Hulsing - Goldman Sachs & Co.

Yeah. Thanks for taking my question. Tom, the uplift in new signing ASP from I think the high $400,000s to $700,000 in the quarter, is that something that you expect to be sustained throughout the year? And can you give us a sense of I guess the volume of signings versus your expectation? Are you giving up some volume in order to drive bigger customers?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So, I think the primary factor driving that up in any particular quarter is the number of large deals. And we've certainly seen a general long-term trend to more large deals, and we're continuing to see that trend. Having said that, there's going to be volatility in that number quarter-to-quarter. In one quarter we might have literally twice as many large deals as the next quarter, and that's in the realm of normal volatility. So, I think the long-term trend of that number will continue to be up. I certainly don't necessarily expect the number to be $700,000 every quarter, but we are having a lot of success with large prospective customers, and I expect us to continue to do that.

Jesse Hulsing - Goldman Sachs & Co.

Great. And on the GSI Commerce or eBay Enterprise renamed Radial I guess kind of blurb that you put out there, is there a timeline for the renewals of those customers? And do you expect that to be a tailwind to signings for 2016?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So the way, as I understand it – every one of those customers has a contractual relationship as it exists right now. And so in that sense, there's a timeline on when those contracts expire. But since Radial is now moving away from that, I think they're going to be much more flexible about somebody moving out earlier than their contract. So there's probably a timeline inherent in that, that people are going to move – Radial's not forcing them to move immediately. So there's a bit of a tailwind, but I don't know that it's significant. I mean, the number of potential Radial customers to be closed in any given year is probably in single digits, so it's helpful. But it probably doesn't dramatically change our bookings projections.

Jesse Hulsing - Goldman Sachs & Co.

Got it. Thank you.

Operator

Thank you. Our next question comes from Ross MacMillan with RBC Capital Markets. Your line is now open. Please go ahead.

Ross MacMillan - RBC Capital Markets LLC

Thanks so much, and congratulations. Tom, I know you're not giving bookings, but I couldn't help but notice that your live customers were obviously up more in Q1 of this year than last year, and you obviously commented on that new HTD (24:49) booking. Maybe you could just characterize it, the new bookings in the quarter? Were you pleased with them? Did they come in better than you expected? And then just one follow-up for Tim, just on the $1 million commission payment from the partner. Did that flow all through services, or was there any of that into subscription? Thank you.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So Ross, we have this year said we're not going to get too explicit on commentary on quarterly bookings but I think certainly our progress to-date – forgetting the quarter, it's April 27, our progress to-date from January 1 gives me confidence in the bookings guidance range we gave of 25% to 35%, and in our success in moving up-market to larger prospects. And those were the key strategic initiatives with respect to bookings. So we're very comfortable with where we are and how we're progressing against our yearly plan.

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Ross, this is Tim. On this LINK partner commission that we talked about, the payment true-up from some back years. It was approximately $1 million. It was 100% in services, and it does fall to the bottom line in the (26:02).

Ross MacMillan - RBC Capital Markets LLC

Thank you so much.

Operator

Thank you. Our next question comes from the line of Kenneth Wong with Citi. Your line is now open. Please go ahead.

Kenneth Wong - Citigroup Global Markets, Inc. (Broker)

Hey, guys. I was wondering, Tom, if you could perhaps give us just a little more granularity on that $700,000 number. Was this multiple big deals, one super big deal? Since that number is well above what we've seen from you guys historically.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I think it would take multiple big deals to make a jump like that happen. And so, yeah, we're very comfortable that we're – it's not just one success. We're having significant success with large accounts.

Kenneth Wong - Citigroup Global Markets, Inc. (Broker)

Great. And Tim, in terms of the $2 million in earnings uplift that you guys are forecasting for 2016, and I think the commentary was that that was all due to the $3 million in service revenue that you guys are adding to the guide. And that seems like a pretty nice return for services. I'm just wondering, are we missing something there or anything on the expense side of the equation that might have factored into the higher earnings target?

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

No. For the most part, it's driven by our services revenue came in very strong in the quarter, so that allowed us to raise full year revenue guidance by the beat in Q1 on services, roughly $3 million in revenue. And a lot of that, based on my previous comment on the true-up payment, falls to the bottom line. G&A was a little favorable in the quarter, so we are seeing some nice efficiencies there. That contributes a little bit as well, but for the most part, the services revenue is going to drive the $2 million plus increase in guidance on profit for the year.

Kenneth Wong - Citigroup Global Markets, Inc. (Broker)

Okay. So the boost was really more the true-ups and that's kind of pure profit versus the incremental services revenue that you guys are projecting?

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

No. The true-up is half of it, so that was about $1 million and that does fall dollar for dollar to the bottom line, and the rest of it is primarily the services revenue and then a little bit of efficiency that we saw in the quarter in G&A spend.

Kenneth Wong - Citigroup Global Markets, Inc. (Broker)

Okay. Perfect. Thanks a lot, guys.

Operator

Thank you. Our next question comes from the line of Justin Furby with William Blair & Co. Your line is now open. Please go ahead.

Justin A. Furby - William Blair & Co. LLC

Thanks very much, guys, and congrats on a really strong bookings quarter. Tom, can you give a sense for pipeline? You talked about it last quarter as nearly 40% growth exiting December. What does that look like in March? Are there still a lot of big deals that are sitting out there? And then I was curious on Europe, and if you saw any changes in the new business environment over there in Q1? And for the full year, the 25% to 35% target, do you need that market to improve versus what you saw in Q1? And then I've got one follow-up for Tim. Thanks.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So, with respect to pipeline, we're probably not going to disclose the exact percentage every quarter. But it's still up significantly over last year. So we're happy with that. And still have lots of large account prospects in the pipeline. So we're happy about that too.

In terms of Europe, yeah, we would need Europe to be significantly above 2015 in 2016 in order to achieve our bookings targets. And we're happy with what we're seeing so far in terms of some of the changes in account signings and other things we talked about that we made in Europe. And I was actually on the sales calls with a couple of those reps who have different territories in Q1. And so, we believe Europe is heading in the right direction, and we're confident it can make its contribution necessary to get that 25% to 35% bookings growth.

Justin A. Furby - William Blair & Co. LLC

Got it. That's helpful. And then, Tim, on the sub revs, just curious in Q1 if there was anything in particular that drove that spread to widen? And when you look to Q2 for the guidance, it looks like you're expecting growth to accelerate a little bit. Is that a function of the spread narrowing? Is it more a function of new customer deployments that are stronger in Q2 versus Q1? What would drive the confidence in the acceleration? Thanks very much.

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Yeah. So, Justin, the dynamic that happened in Q1, first of all, we are very pleased with our comparable customer GMV growth of 23%. That's above the guidance range for the full year. The comparable customer revenue growth did not grow as fast. And historically we have seen about a 3-point spread between the GMV growth and the revenue growth. It was 3 points in all of 2015, 3 points in all of 2014. And I mentioned earlier on the call for the trailing 12 months going into Q1, it was 3 points. It's the dynamic that happens in Q1, and I'm going to give you a specific example to help clarify that, but when customers have not met their annual minimum in the period, we do not recognize any overage in revenue. So GMV could be growing at a very high rate of growth and the revenue growth is going to come in at the minimum and is going to be slower.

So, the example in Q1, there are a couple of customers in the top 10, but one in particular jumps out. One of our top customers has a contract year that is the calendar year. And so, they're in Q1 of their commitment with us for this year. They have an annual minimum. Their GMV grew greater than 50% in Q1, so their business is doing great on the platform. They're off to a great start. The revenue that we recognized, the subscription revenue related to that GMV, grew 15% in the quarter. So, when we model this customer out for the balance of the year, our anticipation is that they will hit their minimum in the fourth quarter. Holiday certainly helps them. And that's when we will begin to recognize the overage in the back half of the year.

And there were a couple of customers in the top 10, where we saw the same dynamic, where we had a pretty significant spread. And again, it does come down to the structure of the contract and the timing of where the customer is in the lifecycle of that contract. So, I hope that's helpful.

Justin A. Furby - William Blair & Co. LLC

Yes. Okay.

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

And then for Q2, we do see the spread narrowing and for Q2, it should get more in line with that historical average. And to your comment, we certainly have some great customers that are in WIP that will go live in the second quarter, and that certainly is going to help as well.

Justin A. Furby - William Blair & Co. LLC

Got it. Thank you very much. Thanks for a good quarter.

Operator

Thank you. Our next question comes from Brian Peterson with Raymond James. Your line is now open. Please go ahead.

Brian Peterson - Raymond James & Associates, Inc.

Thanks, guys. And congratulations on a solid bookings quarter. Tim, I wanted to follow up on Justin's question, specifically as it relates to the subscription guidance for the year. So it sounds as though you have more visibility into I guess what you guys used to call overages in the back half of the year. And it looks like the guidance doesn't imply any meaningful acceleration in revenue growth in the back half, and specifically, in the fourth quarter. So, is that just conservatism on your part? I'm curious why we wouldn't see that number moving higher.

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Right. So, when you look at the high end of the range, the $270 million that we put out there that is unchanged, that is going to correlate more to the high end of the GMV comparable customer growth rate, which was 19%. So, we do see strength in the back half of the year based on what we've seen already with some of these large customers and the timing of when we think they will hit their minimums, which in many cases is in the back half of the year, namely in Q4.

Brian Peterson - Raymond James & Associates, Inc.

Okay. Got it. And Tom, this is probably for you, but any sense on linearity of bookings over the course of the year? Typically, how much of your bookings are delivered in the first quarter; any sense for that? I know it's volatile, but just curious there.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

At this point, based on the size of our business and the fact that we're dealing with larger customers who are not focused on the short implications usually, there's no fundamental seasonality to our bookings. The overall trend in our bookings, overlaid with a lot of volatility, as you mentioned, is towards just steady growth regardless of quarter due to the growing size of our sales investment and marketing investment in getting new customers. But that overwhelms any seasonality or anything else, other than the volatility.

Brian Peterson - Raymond James & Associates, Inc.

Great. Thank you.

Operator

Thank you. Our next question comes from Nandan Amladi with Deutsche Bank. Your line is now open. Please go ahead.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Hi. Good afternoon. Thanks for taking my question. So, Tom, this is a two-part question. Both parts are related to the same – the $700,000 ACV metric that you gave. How do we get a sense for how much of this is the core product versus some of the new enhancements that you're in the process of launching?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So, actually that's simple. The $700,000 number is for the e-commerce platform itself. In using that number to make us comparable to our history, we're not including (35:44) order management, predictive intelligence because that would distort the comparison.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Okay. And then for Tim. You talked about the GMV spread. As you turn on these larger sites, clearly there's some lumpiness inherent in this. But should we expect that the spread either increases or shrinks systematically over time?

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Nandan, what I can tell you for the full year, we expect the spread to be more in line with those historical averages of about 3 points. You do see fluctuations from quarter to quarter. For example, last year there were two quarters where the spread had widened greater than the 3%. And again, I think that is just the timing of where a customer is relative to their contract cycle and where that minimum hits.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

There was also a quarter in 2014 where the spread was very large. So we see this quarter to quarter.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

So you would say is that we look at the trailing 12-month number?

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Yeah. The trailing 12-month, which I mentioned earlier, coming through the end of Q1 was in line with the 3-point spread and full year 2015 and 2014. I think that's a better way to look at it than – there's a little variability from quarter to quarter.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Right. Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open. Please go ahead.

Raimo Lenschow - Barclays Capital, Inc.

Hey. Thanks for taking my question. Tom, can you talk a little bit about your progress in the new territories? We had like Italy out and Asia obviously something. What's the progress there? And a question for Tim on services. If I look at your guidance, then services growth is going to slow down quite a bit in Q2 and also for the full year. How do I kind of link that up with the high growth we saw last year? And even if I take out the $1 million good growth in Q1, why is that coming off so much? Thank you.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So in terms of the new geographies, in general – we're not going to get too specific on quarters – but certainly in the case of new geographies, we're talking about doing zero, one, or two deals in a new geography in a quarter. So I think I'll just talk generally. The two newest geographies we talked about last year were Italy and Japan. I was in Japan in March, and we had a great gathering of prospective customers and our team continues to grow and the activity continues to grow, so certainly feeling that that's a great long-term opportunity.

And I was not in Italy, although I wish I was. I always wish I was in Italy. I wasn't in Italy in Q1, but we're still very happy there, and we're seeing a lot of engagement of the kind of Italian brands that have that worldwide cachet. So I'm very happy with our progress in both those markets.

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Raimo, on the services side, there's two answers to your question. In our core services, which is implementation work and training work, site readiness type work, et cetera, we expect that number to grow modestly year-over-year. Bear in mind that most of the implementations are performed by our LINK partners. We do 5% to 10% of the implementations in a given year.

And the beauty of the model is that we have this very strong network of partners, and I think Tom mentioned it earlier on the call, that the amount of partners we – increased about 50%. So we want to have more certified partners doing that work. And then the second piece of it is with the services revenue that came with the Tomax acquisition. That'll be flat to down modestly year-over-year, but again, I think that is by design overall.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Samad Samana with FBR Capital Markets. Your line is now open. Please go ahead.

Samad S. Samana - FBR Capital Markets & Co.

Hi. Couple of questions. The company mentioned earlier at the XChange conference this year that they'd more flexible on pricing for some of their larger potential customers, I was curious if this increased flexibility has had any impact in deal closings or on accelerating sales cycles? And then I have a follow-up.

Thomas D. Ebling - Chairman, President & Chief Executive Officer

I think that when I was answering that question at the investor Q&A at XChange, I wasn't really referring to any kind of radical change. We've been of that mind for a couple years with larger customers. And we certainly think since we've been doing that, being willing to have those discussions, it's helped. Still at the end of the day, almost every single one of our customers is on revenue share, which we think is the best model. But we've been sort of doing the same approach of being willing to engage in those discussions for purposes of moving forward and participating in the sales process with large accounts if we needed to for a few years. And it's been a positive experience.

Samad S. Samana - FBR Capital Markets & Co.

Great. And then with the average go live now at seven months due to the mix shift of larger customers, have you seen any change within the different customer segments to mid-market and large in terms of the implementation time? So generally what are the averages within those groups?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I would say that if you held customer size constant, there's been no change in implementation time. There's always been a range for any given group of size customers. I'd say the range of larger customers is larger and it centers on a longer number just because of the size of the organization and size of the sites. But if you hold size constant, I think the range has been similar and the average has been similar throughout our history.

Samad S. Samana - FBR Capital Markets & Co.

Great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Brian Schwartz with Oppenheimer & Co. Your line is now open. Please go ahead.

Koji Ikeda - Oppenheimer & Co., Inc. (Broker)

Hi. This is Koji Ikeda for Brian Schwartz. Thank you for taking my question. I think in 2015 Tomax contributed about $6 million in revenue towards subscription. And now that Tomax has been integrated into the platform, as now Store, has there been any attrition of legacy Tomax customers? And once Store goes live, will they seamlessly transition into Store? Or will there have to be a fresh implementation on their end?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So, let me try a little bit, and then maybe Tim can fine tune (42:23). So one, is the subscription revenue number from Tomax was not $6 million. It was more like $2 million net. But now let me answer your question about what we call the retail net business, or the non-Demandware Store business. So I can't say for sure, and I don't know if Tim knows whether we lost any customers, but let me talk about the transition, the other aspect of your question. We certainly haven't lost many. I'm not even sure, maybe none, one, two, very small number.

But certainly the intent, the long-term intent is as Demandware Store becomes a robust offering and as it has full functions and references and everything else, that we would then look to transition those customers to Demandware Store. So that's certainly in our long-term plans. We have no immediate plans to do that. We're certainly not in a mind of forcing those customers to move in any kind of timeframe, but certainly in the long run, we think they will want to move and we want to support that.

Operator

Thank you. Our next question comes from Brad Sills with Bank of America. Your line is now open. Please go ahead.

Brad Sills - Bank of America Merrill Lynch

Hey, guys. Thanks for taking my question. Just one on competition. At the conference we definitely picked up some incrementally more positive tone, if you will, on your competitive position relative to Magento given some of the effort involved in migrating. Could you comment a little bit about, one, how you're doing, how your win rates are against Magento? And then also SAP hybrids, given that they've been progressing on integrating their offering?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. I think we tend to look at win rates over a much longer period of time. So, certainly within a quarter there haven't been any dramatic changes. With Magento, we have seen some prospective customers who are considering moving to another – we've actually have seen for years Magento customers that outgrow it or straining its capabilities. But we're seeing a little bit more of that due to the forced migration to 2.0 and some of the turmoil in (44:40) organization. But I don't know that there's enough data, enough of a sample size to really say that that's dramatically changed the win rate yet at this point.

Brad Sills - Bank of America Merrill Lynch

Okay. Great. And then last one for me is just on, as customers start rolling out the new predictive intelligence engine and technology that you're launching here, do you expect to see comparable GMV potentially accelerate given the effectiveness that you should see from that technology?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

Yeah. We certainly strongly believe that if you could run sort of a parallel universe experiment, the customer using the PI versus not using PI, that the first example would be higher GMV. And when we did the acquisition, we talked about 2% to 3%. Our first customers were 5% to 10%. Even some of them were higher than that. But that might've been a self-selecting sample too, who wanted to get in early in the program.

So we're trying to be modest about it. And we're not sure that will – customers have to roll out this year and they're going to roll out on various time scales, so we're not necessarily banking on huge GMV increases this year because we want to be prudent about it, but in the long run we definitely think it's going to have a GMV positive impact on all customers who adopt it.

Brad Sills - Bank of America Merrill Lynch

Great. Thanks, Tom.

Operator

Thank you. Our next question comes from Abhey Lamba with Mizuho Securities. Your line is now open. Please go ahead.

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Hi. Thanks. This is Parthiv sitting in for Abhey. We've come across reports of an uptick in retail companies sort of going through financial distress recently, including a couple of bankruptcy filings in the last month. Can you give us some insight on how you think about the potential effect, if any, on your business?

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

Yeah. This is Tim. So if you noticed in the cash flow statement our bad debt expense was up a little bit this quarter, certainly compared to a year ago. So, there were a couple of bankruptcies in the quarter. We factored it into our numbers for the year as a whole. We started to see this last year. I think we said there were maybe five bankruptcies in terms of customers ultimately that left the platform. So, I believe we have it factored into our guidance for the year, but we did see a couple in the quarter.

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Great. Thanks. And as a follow-up, are you guys evaluating any initiatives to diversify your exposure away from consumer end markets towards perhaps the B2B market?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So, we're still sort of in the position we've been for a while, which is that we have a number of customers who have B2B capabilities within in a primary B2C business. So we're still supporting that, enhancing that, but in terms of going after pure B2B, (47:40) that type of thing, that's something that we believe is a potential long-term opportunity for us, but it's nothing we're executing on today.

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Good. Thank you.

Operator

Thank you. Our next question comes from the line of Monika Garg with Pacific Crest Securities. Your line is now open. Please go ahead.

Monika Garg - Pacific Crest Securities-KeyBanc Capital Markets, Inc.

Hi. Thanks for taking my question. You know first new customer additions were quite high sequentially in Q1 compared historically. So do you expect new customers this year much higher than previous years? And is there any number you are targeting?

Thomas D. Ebling - Chairman, President & Chief Executive Officer

So generally since a few years ago when we had this program to sell to really small customers that sort of distorted our numbers a few years ago. But generally we've been having more new customers every year and we expect that's sort of our general trend. Where we're selling more large accounts, but we're also selling more accounts in general and we would expect that to continue.

Monika Garg - Pacific Crest Securities-KeyBanc Capital Markets, Inc.

Okay. Then just to follow-up from the last question regarding bankruptcies. So if any of your customers file bankruptcies do they just fall off completely from your platform or you see them eventually going down? And then last year you had five of the customers file bankruptcies and you said that was a high number. Given what you see in the market would you expect it to be similar numbers this year?

Timothy M. Adams - Chief Financial Officer, Treasurer & Executive VP

What happens many times in bankruptcy if the court orders that the vendors continue to supply services to the customers, so e-commerce is very important to them, it's generating revenue, they want to keep the site up and running, so we would keep that site up and running and they would not terminate. They would now be reorganizing under bankruptcy. If they don't pay us, then we recognize that the bad debt expense. So it depends on the circumstances. They don't always terminate immediately. If they ultimately fail, then they would shut down. And then some do shut down and terminate.

It's hard to predict how the bankruptcies are going to play out over time. We do a lot of credit work on the front end when we select new customers. The accounts receivable team does a great job in collections. That's helped our working capital over the past couple of quarters because we pay a lot of attention to the aging of the receivable. You try to stay in front of this just as much as you can, but we have factored in some terminations and expenses related to bankruptcies. That's baked into the guidance for the full year.

Monika Garg - Pacific Crest Securities-KeyBanc Capital Markets, Inc.

Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude our question-and-answer session for today. Thank you for your participation on today's conference. This does conclude today's program. And you may all disconnect. Everybody have a wonderful day.

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