Interactive Intelligence's (ININ) CEO Don Brown on Q1 2016 Results - Earnings Call Transcript

Interactive Intelligence, Inc. (NASDAQ:ININ) Q1 2016 Results Earnings Conference Call May 2, 2016 4:30 PM ET

Executives

Ashley Vukovits - Chief Financial Officer

Don Brown - Chairman of the Board, President and CEO

Bill Gildea - COO

Analysts

Dan Bergstrom - RBC Capital Markets

Meta Marshall - Morgan Stanley

Tavis McCourt - Raymond James

Mike Latimore - Northland Capital

Dmitry Netsis - William Blair

Craig Nankervis - First Analysis

Jonathan Kees - WR Hambridge Summit

Jeff Van Rhee - Craig-Hallum

Operator

Good day ladies and gentlemen, and welcome to the Interactive Intelligence First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Miss Ashley Vukovits, Chief Financial Officer, you may begin.

Ashley Vukovits

Thank you, operator. Good afternoon and thank you for joining us today to review Interactive Intelligence’s first quarter 2016 financial results.

With me on the call today is Don Brown, our Chairman of the Board, President and CEO; and Bill Gildea, our COO. Don will begin with an update on our key initiatives. I will then review our first quarter financial results in more detail and provide the financial outlook before turning it back over to Don for closing remarks. We will then open the call for questions.

Please note that over the course of this conference call, we will make predictive statements about our results, performance, plans and objectives in an effort to assist you in understanding our Company. The Enterprise software industry combined with the rapidly evolving uncertainties and the economic environment makes predictions challenging and problematic. These predictive statements are forward-looking statements under Federal Securities Laws.

Our actual results could differ materially from the information presented during this call and you should review the section on forward-looking statements contained in today’s earnings release as well as our 2015 Form 10-K and our other public filings with the SEC which describes factors, risks and uncertainties that could cause our actual results to differ materially. The Company disclaims any obligation or undertaking to update or revise any forward-looking statement.

Also, during this call, we will refer to non-GAAP financial measures. These non-GAAP results eliminate the impact of non-cash stock-based compensation expense, purchase accounting-related adjustments, certain acquisition-related expenses, the amortization of certain intangible assets related to acquisitions by the Company, and the amortization of debt, discount, and issuance costs and include pro forma tax expense. Management uses these non-GAAP financial measures in analyzing the business.

With that, I will turn the call over to Don.

Don Brown

Thanks, Ashley, and thanks to everybody for joining us on the call today. We spoke on last quarter’s call about entering 2016 with an all-in mentality to drive PureCloud sales on a worldwide basis. As you’ll recall, we signed 24 new PureCloud logos in 2015, our hope was to double that number in Q1 with 50 new PureCloud logos. To our delight, we blew even that aggressive target away and booked almost 120 new PureCloud customers, obviously exceeding our expectations.

In total, we booked over 160 new logos in Q1 across all three product lines of PureCloud, CIC and CaaS by far the most we’ve ever booked in the quarter, and as a point of reference more than half of our annual new logo accounts for each over the last two years.

We’ve prepared ourselves to become a velocity based company and PureCloud is now making this a reality. In the quarter, we participated in more deals than we ever have in our history and more than half of our PureCloud business moved from initial lead to close the business within the quarter itself.

We saw a healthy distribution of larger and midsized deals where we normally play as well as a whole new market at the lower end. While most of these PureCloud deals were done in North America, we also booked PureCloud licenses in all our international regions and we expect greater contributions from those geographies in the quarters to come.

Overall, our PureCloud win rate was over 60% in the quarter as we won deals against the traditional legacy inventors as well as our smaller cloud competitors. Finally, in Critical drug, our success our partnered channel booked almost 25% of our new PureCloud business in the quarter, a really positive sign in the first full quarter of our global launch.

Since the first of the year, we’ve signed over 30 new channel partners around the globe including a number of major and national partners like Hero [ph] Cincinnati Bell, Level 3, Mantel [ph] in the U.K. and our first ever master agent in North America, Carrier sales

We are in negotiations with another 20 plus partners and in discussions with half a dozen Telco-Carrier partners around the globe. Partner interest in PureCloud has been excellent with a majority of our newest partners opting to focus exclusively on this offering. Most of these partners sell for the competition, but due to weaknesses or gaps in current offerings they are being forced to consider an alternative. We are that alternative.

As we move into Q2, we expect all of the momentum from Q1 to continue. One reason for our confidence in PureCloud’s continued success is that our reference base is increasing. All the PureCloud business we did in Q1 came with few reference able customers.

As we go up market, the logos we won in Q1 and into Q2 will provide an essential element for increasing our reference space moving forward.

Another reason for our confidence is that our no-risk offer to sign up new PureCloud customers and our ability to get those customers into production within weeks looks like a game changer by disrupting the traditional way business is done in the customer engagement market.

Still another reason for our continued momentum is the sheer power of our AWS spaced PureCloud platform. Including our rapid feature enhancement that has impressed our prospects and guarding the attention of our competitors.

Finally, we continue to see rapid adoption of cloud solutions in the customer engagement space all the way upto the high end and across all verticals and geographies. We are hitting this inflection point at the perfect time with the best solution on the market.

Let me give you two publicly addressable URLs that reflect the degree of disruption embodied by PureCloud. The first is status.mypurecloud.com that lays out our uptrend performance for all to see. The second is help.mypurecloud.com/release notes. This site provides a weekly summary of the various new features being added to PureCloud, as our competitors bore [ph] a comparable public information.

With all this excitement about PureCloud, I want to make sure I speak for the continued important contributions being made by CIC. We’ve continued to book large, CIC orders and win against our biggest competitors. We continue to invest in the enhancement of CIC features and scalability.

In the second half of the year, we’ll also have one more and more PureCloud based subscription services that can be used by our premises based customers to augment the capabilities of CIC in areas like web co-browsing. We believe this approach will continue to make CIC the leading premises based context center product, while also making the power of PureCloud available to our several thousand on-premises customers.

So with that, let me turn it over to Ashley and then I’ll be back before Q&A to talk about our expansion plans for PureCloud.

Ashley Vukovits

Thanks Don. I will first provide more details on the company’s first quarter financial results and then conclude by providing our financial guidance for the second quarter and outlook for the full year.

Let me begin with our first quarter starting with the P&L. Our recurring revenues which includes both maintenance contracts and cloud based revenues were $64.3 million in the quarter, representing 65% of total revenue and up from 61% in the year-ago quarter. This larger percent of revenue continues to be driven by the growth of our cloud based revenues, which were $29.7 million, a year-over-year increase of 41%.

We also saw a 4% increase in premises maintenance revenues, resulting from the increasing install base of premises based customers. License and hardware revenues remained fairly constant in the first quarter of 2016, at $21.4 million, compared to $21.6 million in the year ago quarter. Altogether, services revenues totaled $13.6 million consistent with the same period last year, but down from the last two quarters.

Our first quarter total revenues and non-GAAP operating losses were a bit below our expectations almost entirely due to lower than expected professional services revenues. Given the shift in our business towards PureCloud, which be design requires far less in professional services than CIC or CaaS. Also, while revenues from our on-premises solution came in as expected, more of these contracts along with their associated professional services agreement were done by our partner channel in the fourth quarter of 2015 and the first quarter of 2016. This drop in professional services reduced both our top and bottom line.

The non-GAAP gross margin was 60.2% in the first quarter, similar to the same quarter last year. Let me remind you that the amortization of capitalized software development cost continues to negatively impact our gross margins. We started amortizing previously capitalized R&D cost in the second half of 2015.

In the first quarter of 2016, these costs added $1.7 million of expense to the cost of cloud revenues. Without this non-cash amortization, our non-GAAP gross margin would have been 62.9%.

The non-GAAP services revenue gross margin of 17.2% was consistent with last year but down from 38.8% in Q4 due to the already mentioned increase in our on-premises contracts originated by channel partners as well as our growing PureCloud deployment engagements which are smaller in size and which thus far have lower margins than the on-premises engagement.

We expect our professional services margins to be in the 20% to 23% range in the future and continue to look for ways to gain efficiencies in this area.

Total non-GAAP operating expenses were $66 million, up from $54.9 million in the same quarter last year with approximately half of the increase related to continued reduction of our capitalization of PureCloud development cost as the majority of the planned feature set of Engage, Communicate, and Collaborate is now generally available.

For Q1, we capitalized $900,000 of development cost compared to $4.9 million in the first quarter of last year. Total headcount at the end of the quarter was 2,239 employees compared to 2,309 at the end of 2015 down 3%. Our non-GAAP operating loss which excludes stock based compensation expense and purchase accounting investment was $6.2 million.

Our non-GAAP net loss for the quarter was $4 million or $0.18 per share based on 22 million fully diluted shares outstanding. This compared to non-GAAP net loss of $863,000 or $0.04 per share based on 21.4 million fully diluted shares outstanding in the first quarter of 2015.

Our GAAP operating loss was $10.8 and GAAP net loss was $13.3 million or a loss of $0.60 per diluted share. Before turning to the balance sheet, I want to give a few more PureCloud statistics that we noted during the quarter.

Of the 118 new PureCloud logos during the quarter, about a quarter of those were transitioned to PureCloud from current CaaS and CIC customers and over 30% of the new PureCloud logos came from regions outside of the United States.

Now turning to the balance sheet. As of March 31, 2016 we had $198 million of cash and investments compared to $189.5 million at the end of 2015. This increase was primarily due to the generation of cash from our operations partially offset by capital expenditures. During the first quarter, the Company generated $11.2 million in cash flow from operations. Subtracting $2 million for capital expenditures and $1.3 million in capitalized R&D, we generated free cash flow of $8 million. It was good to see us generate strong cash flow during the quarter given the faster than expected ramp of PureCloud. We did this through strong cash collections of our receivables from last year and control of our expenses including capital expenditures.

Accounts receivable days build outstanding as of March 31, 2016, were 79 days compared to 75 days last year and 89 at the end of the fourth quarter of 2015. Adjusted DSO which takes into account the increase in deferred revenues were 79 days.

Total deferred revenues were $135.1 million up $23.4 million or 21% for the first quarter of 2015. The increase was primarily due to an increase in deferred cloud revenues related to cash received upfront on annual contracts from 2015 which will be recognized in future periods.

Let me finish with some comments regarding the Company’s financial outlook starting with our second quarter. We expect total revenues to range -- in the range of $101 million to $105 million, a non-GAAP operating loss between $4.5 million and $6.5 million and non-GAAP net loss of $0.14 to $0.19 per share. We expect the operating cash flow to be breakeven and free cash flow to be slightly negative after adding back capital expenditures of $3 million and capitalized R&D of $1 million.

In terms of the full year of 2016, given the faster than expected adoption of PureCloud and potential effect on professional services in non-premise revenues we are widening the range of our guidance for total revenues to between $430 million and $440 million. The real revenue effect of our PureCloud increase will be felt in 2017 and beyond. We are still maintaining our guidance for recurring cloud revenues of $142 million to $148 million. With operating efficiencies throughout the business, we are reiterating our full year non-GAAP operating income of breakeven to slightly above and non-GAAP net loss of $0.07 to $0.09 per share.

We continue to believe both of our operating cash flow and free cash will be positive in 2016. We will of course be closely monitoring the effects of our PureCloud performance on our product and professional services revenues throughout the year.

I shared our financial goals with you on the last call. As a reminder, they are that we plan to grow cloud subscription revenues led by PureCloud from the leads we bring in to the sales and partner incentives we offer all the way through the business through our delivery and back end processes. Our first quarter 2016 recurring cloud revenues came in right on mark. The 180 new PureCloud logos we generated in the first quarter set us up nicely to meet our targets for the entire year.

Our second goal is generating cash. Although we completed the $150 million convertible debt offering in May 2015, generating cash shows the growing strength of our business. We will do this by continuing to build our base of recurring, paying customers through PureCloud customers that pay annually to receive discounts through our on-premises sales and with cost controls.

We generated 11.2 million in operating cash flow in the first quarter of 2016 and $8 million of free cash flow. This puts us on the way to our target in this area. Finally, we will focus on further developing operating efficiencies throughout the business to create more leverage on the bottom line. Although our expenses did increase compared to the same quarter of 2015, nearly $6 million of that increase came from not capitalizing as much R&D cost related to PureCloud and the additional expenses related to amortizing this capitalized asset.

We believe there are more efficiencies that are possible throughout the business that we are working to implement. As a reminder, the order of these goals is very important because they can have an impact on our short term financial performance. Clearly, we are focussed first and foremost on growing our cloud subscription revenues given the rollout of PureCloud and the encouraging results we saw in the first quarter of 2016. Any potential variation to our fiscal year total revenue and profitability guidance will be associated with our premises and related professional services business.

And with that, let me turn the call back over to Don for closing comments.

Don Brown

Thanks, Ashley. Before we open it up for Q&A, I want to provide you an update on our PureCloud initiatives for Q2 and the impact we’ll have on our business for the remainder of the year. First, our functionality is rapidly increasing. We achieved our Q1 sales for the feature set that will be vastly enhancing Q2 with agent scheduling, social media routing, call backs, web co-browsing, advanced WebRTC-based Softphone, screen recording and much more. Actually several of these features have already been released.

Secondly, our PureCloud voice offering is improving and expanding rapidly. PureCloud voice is a critical enabler that was only available in the U.S. for part of the first quarter it will be available in Canada in Q2, EMEA in Q3 and worldwide in Q4.

Finally, let me stress how our PureCloud geographic coverage is increasing. Many of our Q1 PureCloud deals were done in North America. We expect the same rant [ph] to occur in EMEA, Australia, New Zealand, Latin America and Japan in Q2 as we have more recently opened our PureCloud operations in these regions and enabled our sales teams and partnered channels.

In summary, I want to reiterate how well we are positioned for the future. With nearly 150 PureCloud customers in just two quarters and the technology like none other in the industry, I continue to believe we are seeing an inflection point for the entire customer engagement space. From SMBs to large enterprises and across all verticals, cloud adoption is here. We are in early stages of disrupting the customer engagement market place with PureCloud by one, making the traditional procurement and contracting process and afterthought, two, providing low cost, quick installation packages to get customers up in running and three, continuing to add new PureCloud features at a rapid clip.

As a result, customers can easily consume PureCloud services, expand usage and add services at their own pace. The positive feedback we’ve received from prospects and customers smaller and large is proving that PureCloud is a game changer for our industry and we are excited for 2016 and beyond.

With the success of Q1 under our belt, we are ready to drive this opportunity home and dominate our industry. And although it was a bit jump to go from 24 new PureCloud customers in 2015 to 118 in Q1, we look to improve upon that Q1 number in Q2 and continue to grow from there. We also believe that no other cloud company in the industry can match this sort of 40 plus percent growth rate that we're putting up.

Before I handed over to the operator for Q&A, I just wanted to remind everyone that we are hosting our Analyst Day on June 6th at Interactions, our Global Customer and Partner Showcase event in Indianapolis. We'll be sending out reminders to the investment community with more details.

And with that we'll turn the call over to the operator to start the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. [Operator Instructions]. And our first question comes from the line of Dan Bergstrom with RBC Capital Markets. Your line is now open.

Dan Bergstrom

Yes. Thanks for taking my questions. Could you talk a little bit about the new features pending for the CIC release, I think that's due in May here, I think the goal was to help, build the bridge to PureCloud. And then, are you still seeing demand from CIC customers for PureCloud demos and information?

Don Brown

Yes. We certainly are, I guess the first point I wanted to make is that we're certainly continuing to see demand for CIC itself is that we booked just recently a large multimillion dollar order to update retailers, so the CIC deals are still out there, but yes, yes, CIC customers are very much interested in PureCloud and how they can leverage it.

We have an update of CIC called R3 and the long name is CIC 2016 R3. They'll be release this month that has our initially integration to the PureCloud with click of button as CIC customer and provision a PureCloud organization and synchronize all their CIC users with PureCloud and then from there we'll allowing customers to get more and more PureCloud functionality right into CIC fairly transparent manner and as I mentioned one of the big features is co-browsing.

In terms of features for CIC itself we've been having enough on the call to go over all of them, but they really fall into in addition with the sort of integration with PureCloud I mentioned, improvements in compliance, we saw CIC drew a lot of very large mission critical environment, so outbound compliance, PCI, those sorts of things are paramount and we always have to keep up with those.

Another big area of development with CIC is its web interface. We've have a traditional native desktop clients. We introduced our web client few years again and have been working seriously to bring that up to parity and its rapidly getting there. And then we'll be taking some of the features that we've developed for PureCloud like stereo recording and moving those back in the CIC. So that gives a flavour.

Dan Bergstrom

Great. Thanks. When I'm PureCloud, it sounds like partners are accounting for better quarter of the deals now? How is that tracking versus expectations? And then maybe if we look at a year, what would you expect partners to be leading year from now?

Don Brown

Well, it's certainly ahead of our expectation, as we shared in the past with CaaS our initial single tenant cloud offering. Most of our partners kind of elected to spit out the dance. I think they were – for many of them it was just a brutal change in business model and they won't really show where this whole cloud movement was going to go.

With PureCloud we've sweetened the economics for our partners, so we were hopeful that we would get a better reception, but to get – 25% of PureCloud deals come in from our partners this quarter was maybe close a shock rather than a surprise, so that was a very pleasant one indeed. With one quarters worth of data there's no way we can project where we'll ultimately end up, but I'll just reiterate the points that we have a lot of partners now signing up expressly to sell PureCloud out of recognition that this cloud thing is not a fade, and that PureCloud represents the best opinion that they're going to find. So we are pretty optimistic that their partner participation and PureCloud is going to continue to grow.

Dan Bergstrom

Great. Thanks for taking my questions.

Don Brown

You bet.

Operator

And our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshal

Hi. Just a couple of questions. The first is I guess on the recurring gross margins, I was surprised that if you guys hit your kind of targets for total recurring revenue, PureCloud was ahead of expectations that was kind of seem to indicate that CaaS was a little under expectation when considering that carries a lower or at least a lower gross margins. I just wanted more insight into kind of what you've spoke to as to like lower gross margin on to the cloud than expected?

And then, just the second question, it seems like there'll be a pretty steep brands and possibility, but the business in the second half I just want to get a sense of was that gross margins event or operating service? Thanks.

Ashley Vukovits

Sure. So…

Don Brown

I’ll let you handle it while I’m listening.

Ashley Vukovits

Yes. That's fine. So, on the total recurring margins, CaaS actually had quite a nice improvement over the fourth quarter of last year, if you remember we were just over 50% gross margins in CaaS and we were actually in Q1 right around 55%, and we see that continuing throughout the year up to close to 60% by the end of the year.

So, we saw some nice improvements there. PureVoice, PureCloud just had some costs there that as we've said we expect that to be profitable towards the end of the year. And as far as the ramp up in profitability, yes, we do expect that as I said on the call we have operating efficiencies, that we've either already implemented over that and haven't recognized the full potential of and also some that we're putting into play in the back half for the year that we think will improve particularly the operating margins as well. So we do see those ramping up in the back half for the year.

Meta Marshal

Great. And then just one last question on the lower services, that seemed thus if that work kind of two contributors and one was more coming in through the channel and then also PureCloud just having a lower service component and just want to get a expense the rating of those two?

Ashley Vukovits

Certainly the first was the larger impact, so the fact that we had a higher percentage of contracts coming in through partners for our CIC sales in Q4 and then in to Q1, that has a biggest impact on the decrease in the services revenues in Q1. And then, just in general we made the comment about PureCloud services, because PureCloud is setup to implement pretty easily and there's a lot of automation around it that those services are smaller in dollar amounts. And so, therefore, we will see some impact of that in future quarters.

Meta Marshal

Great. Thanks guys.

Operator

And our next question comes from the line of Tavis McCourt with Raymond James. Your line is now open.

Tavis McCourt

Hey, guys. This is Tavis. Just one on the recognized revenues on cloud, they were pretty flattish sequentially, forget if there's nothing unusual in the fourth quarter, but obviously that trend needs to change for you to get to even the low end of your full year cloud revenue guidance. So, can you give us some insight into kind of the choppiness in the growth on the recognized cloud revenues? And what gives you the confidence that they're going to start ramping it $4 million, $5 million of incremental growth to get to the full year number? Thanks.

Ashley Vukovits

Yes. Well, definitely the – although the impact of PureCloud in total – the total revenues is not significant for this year. The impact of recurring cloud revenues is impactful, so we see that ramping up in Q3 and Q4, both for PureCloud as well as PureCloud voice.

And I would just reiterate statistics that dance around on the call is just our guidance range for recurring cloud revenues for 2016 put us in the 45% to 50%, rough percentage for 2016 and that's well above anything we're seeing out of our competitors in this market. So, we believe that that percentage is pretty impressive and we think we'll hit it given the ramp-up in PureCloud and PureVoice revenues in Q3 and Q4.

Tavis McCourt

Okay. Thanks very much.

Operator

And our next question comes from the line of Mike Latimore with Northland Capital. Your line is now open.

Mike Latimore

Great. Thanks for that. On the new PureCloud customers in the quarter, can you give some sense of just how many seats they represent and then maybe a little bit of mix between Engage and Communicate?

Don Brown

I'll just give you kind of a qualitative sense. We really were delighted that we had customers kind of up and down the range. We had one characteristic customer, a spin-off of a large publicly traded software company with 400 agents that signed up and went into production during the quarter, so that was a nice one.

We had another one that's a division of one of the world's largest technology companies that sign at the end of the quarter and we'll go in production this quarter with something a closer to a 1000 agents. And then we had a lot of companies in between as we set into the script, really a lot of company that part of the market where we never been able to effectively participate before.

So that kind of gives you a flavour of the range. Now, we're not going to give out our whole lot of statistics to tip off our competitors, but turnover to Ashley for anything she cares to share.

Ashley Vukovits

I think the most important thing is just we're able to generate some of those higher end customers that you mentioned on, as well as the lower end is really incremental to any business we've ever done before. So, we're thrilled to see the acceptance that we got at the low end of the market with a product that we've never been able to offer to that into the market before.

Don Brown

I think the other really big thing to understand is how quickly we get these customers into production and the time to revenue, how short it is, certainly compared to our [Indiscernible] we're talking a fraction of the time that it took us on average previously to get these customers into production. We've had customer go into production in a matter of just a few days, even good size customers. So I think that's an important price to appreciate.

Mike Latimore

And just last question, how much of the expected cloud growth for the year sort of effectively in backlog at this point versus how much you need to kind of you know man [ph] throughout the year?

Ashley Vukovits

Sure. So, I think that – I said on the last call we had something around 90% of that business already in. And so I think the remaining is just what we see as add-on orders from our existing CaaS customers. We certainly had a few new CaaS customers in the quarter, as well as couple of things on the PureCloud side. So, one thing we did see in addition to just small customers, we had larger customers that were buying small portion of licenses for their agents trying us out, and we're keeping our eye on the adoption rate that we see those PureCloud customers placing large orders, some of them were fairly large company. So I think between all of that added together that's where we feel those additional revenues and additional adoption is coming from.

Mike Latimore

Okay. Thanks.

Operator

And our next question comes from the line of Dmitry Netsis with William Blair. You line is now open.

Dmitry Netsis

Yes. Thank you. I wanted to sort of dig in on that 118 number Don and Ashley. And just sort of get a sense how you guys are thinking about the churn and perhaps this could be the effect of getting out there, showing a new product. But what's the level of confidence in maintaining that initial burst of activity and something obviously you may be watching very closely and you know maybe you'll come back and say you need at six, nine months to kind of see the performance, see those customers come back for reorders and that will give you the confidence. But how you're thinking about the churn? What are you doing in terms of the levers to control that churn and add initial sort of personal activity that you're seeing in PureCloud?

Don Brown

Yes. We're really shepherding all those customers very carefully. And we actually are able to do that in large part because PureCloud goes in so quickly. It means that we can get a lot of care and attention to each customer and frankly just handle the volume of implementations that we've got in a way that we would not have been able to do with our previous cloud service. Now it just took too long to go in. We were preoccupied just we're getting it up and running.

So, we're able to really spin a lot more time just kind of nurturing these customers, it is very important to us that these initial customers be happy and that they become reference poll and continue to expand and just kind of along the same lines. One of the surprising finding we've had is that despite this flurry of activity, our support burden has not increased over the course, I mean, specifically around PureCloud over the course of the quarter. We've made a big investment in a non-line resource centre, but we have a lot of self help materials and so this really makes us confident that what we claim that along about ultimately on getting to a very high operating margin with PureCloud that is really going to come about.

Dmitry Netsis

Okay.

Ashley Vukovits

The thing I would add to that is just the large majority of those 118 were month to month quarters, and I think that is part of the reason we where to get those inns, so quickly in Q1 is because of the east to do business with us, not only on the contracting side, but also just the ease of getting into in and like Don said the time to revenues fade up considerably. So, I think that's the great thing. We'll continue to monitor those month-to month contracts but I think that's been a key to getting the new business into quickly.

Dmitry Netsis

And would be fair to expect the churn to be a little higher on that base of customers given that it’s a more of SMB base, customer versus your cash product or obviously CIC, but other there I think the most comparable would be the cash to the PureCloud here from the churn?

Don Brown

We still have enough history to really know. I think intuitively one would expect that at the lower end, there's going to be more companies going out business, there's going to be more changed in general, so we might well see more churns there, but we are pretty happy with what we've seen so far.

The other thing that in becoming this higher volume business dealing with larger number we're able to effectively track things in ways that we couldn't before. Now we're able to track the number of PureCloud proposals that go out each week, abstract that for sales person, we're setting volume expectations per sales person for those proposals for the number PureCloud deals they book each quarter.

And so, its just – having these larger number to deals with let us run our business in a far more quantitative way, from a predictable way than we could before and that's part of the reason that we're pretty confident that even though that we were little bit shut by that 118 number right now it’s looking like we're going to turn around and do that or maybe better in Q2.

Dmitry Netsis

And that's I was going to actually verify, you did say that Q2 might actually bring more logos that you just did in the Q1 time?

Don Brown

Yes. Kind of amazingly is that seems, that's the way we are – again its early days and we still going to do it, but at this point the degree of the activity level, the proposal level, all those indicators lead us to believe that we may well turnaround and do that number better in the second quarter.

Dmitry Netsis

Okay, great, Don. Maybe if I may just two quick ones. On the conversion from CIC to PureCloud, is there a specific effort on a part of the sales force and your channel partners to begin that conversion over or are you just taking and as you see it. Are you incentivizing your salesforce channel partners to go ahead and kind of tap into the installed base or not quite yet?

Don Brown

Well, I don't want to pre announced anything. I would just say that we've got our customer conference coming up here in about a month and we're going to have -- you know our customers fall into two groups. We've had some customers who are just very happy with CIC, its running like Sherman Tank, just doing a great job for them. They don't want to change it. They just want us to continue to refine it and for those customers we won't emphasize as that's what we're going to do or what we are doing.

We have some customers though who have cooperated initiative to move the cloud than they already be running workloads up in AWS. And so we will be coming up with both incentives as well as technical programs to help them, if they want to make that migration to PureCloud and we are seeing good degree of interest in that possible already.

Dmitry Netsis

Okay, great. And my last question and I understand the story lines really PureCloud here, but as you go through this migration or as you go all in on PureCloud, and as you have taken your guide, midpoint of the guidance for the full year down. Does that give you better visibility for the CIC side of the business? I mean do you feel a lot better maybe as you versus where you were at the end of last year, at the end of Q4. It has the visibility, a little bit improve. Do you feel the order growth profile of the CIC is solid to kind of give you that were used profile of the revenue base for the full year where you can actually hit it?

Don Brown

Well, I think maybe you asking a couple of different things, one is about the revenue profile for the year, and I know they are related, the CIC sales, I guess where we are is that we see good strong interest in CIC especially in the second quarter and the third quarter, but we see only because of just the increasing adoption of the cloud in general. And partly out of delighted surprise with both existing customers and prospects in the capabilities of PureCloud we got a lot more company a year or two ago would have been looking at CIC now looking at PureCloud.

And so, by the fourth quarter by 2017 the exact ramifications of that we don't know. And so that’s why we did introduce this range, because especially with professional service that is particularly related areas. For us it’s a least valuable part of our business in many respects if profession services just badly tailed off because our cloud business was going like demon like Ashley says, 40 plus percent more than any other competitor in this space.

We think that's a great thing. We're going to be happy about it. So, we feel like we've decent visibility in the CIC for the next couple of quarters. It certainly gets crazy here from there and that whole situation is exacerbated in this kind of paradisiacal way. The better we would make PureCloud the more scalable, the more function will make PureCloud, the more attractive it is for organizations that otherwise I would have been looking at CIC. And so, if we're winning more deals because of that, we think that's a good thing because we're going to take a cloud business in this space that's already out growing everybody else, and we're going to grow it at even faster.

Dmitry Netsis

Great. Thank you, Don and Ashley, appreciated.

Operator

[Operator Instructions] And our next question comes from the line of Craig Nankervis with First Analysis. Your line is now open.

Craig Nankervis

Yes. Thanks. Good afternoon. I just wondering on the pricing participation of partners in your PureCloud deals, as this adds particular pockets in terms of market segment or the partners participating sort of all over the map, is it relates to the segments that you sold into those 118 new logos.

Don Brown

They really extend across the range. We have some short term partners, partners that are coming from the low end that are little bit frustrated by the lack of innovation they're seeing there and whether even more focused on unified communications couple of more balance focus. And then certainly we're seeing partners at the upper end who are looking to do big deals with PureCloud.

Craig Nankervis

Rightly in that latter [ph] is being done, I know when CaaS came out and I think for a lot of time CaaS was the so cloud offering that you had. Interactive was pretty focused or intent on implementing the largest deals that you had for CaaS you wanted to control that into customer satisfaction and the like, is there a different orientation this time around on that front or what can you comment on that?

Don Brown

Yes. It’s a good question and yes, there is. CIC is a great product but one of its virtues as well as one of it curses is that it's highly customizable. And so it means has a great deal of more complexity there. So, it means that especially with the single-tenant cloud offering it was very difficult to make it easy for our partners to do what they needed to do to install CaaS using CIC. But PureCloud is a totally different piece. We can confidently turn it over to partners even in very large customer environments. There is easy to use Rest API that provides clear line of demarcation where they can go off and do all sort of expensive integration and customization without jeopardizing the core service.

So, it is a totally different world and we're much more comfortable in having partners go off and do large deals with PureCloud as we've send several times what we want is the subscription revenue, and we'd be occupied with growing that subscription revenue offering additional subscription services and we are more than happy for our partner to take the complex professional services. And I take out that revenue, god bless them, they have in the headache that come with it, but for us our core competence is as a cloud software company building that subscription base.

Craig Nankervis

And not believe, but it’s a new, there is a fair amount of training for partners on PureCloud, I mean it’s different code and what not, can you just comment a couple senses on that and that doesn't sound like is even underpinning that as hurdle for partners?

Don Brown

No, I'm not – and I guess it’s a little bit articulated very well, there are some specific reasons, it’s not hand waving that its easier for partners, for one thing we have the benefit of 20 years of experience in designing PureCloud. So several things that would require extensive customization in CIC or CaaS are checkbox items in PureCloud, things like bulls eye routing, lot of complex routing schemes, best practices that we knew, we've done this for a long time, so we build these right in, we take them into to PureCloud, another big area of professional services is integration and so with PureCloud we set out for the beginning a build in integration, a software appliance that we call the bridge that takes the 90% that's in common across different integrations reduces those two just a turnkey of clients and tremendously vitals down the effort and complexity around integration with CRMs or other types of systems.

So, just comes down a lot of stuff would have taken a lot of training and a lot of work on the part of partners with CIC or CaaS is much, ,much easier and in sometimes almost with PureCloud.

Craig Nankervis

Very interesting. Thank you. And then, just secondly, I may have missed if you discuss today. I apologize I might have missed it. What are you saying about your sales had add this year relative to what you added last year or the recent past, if you comment if just can you summarize your mindset on that please?

Ashley Vukovits

I'm sorry, could you say our sales.

Craig Nankervis

Yes, sales has/

Ashley Vukovits

Yes. Those are really consistent with last year. We were – I think we're at 141 now and we were at a 143 same quarter last year, quarter carrying sales.

Craig Nankervis

Are you saying where you want to end up this year or…?

Ashley Vukovits

I think we'll be probably slightly higher than that, but I think the mix of the sales team has shifted a little, we talk from previous calls about we have a velocity team in place that is purely inside calling out to customers at a small end to the market than we have a mid market sales team that does the next size and then we have our traditional TM, so we have as we've had some attrition we've added some employees more at the lower of the market on that insight sales teams.

Don Brown

I think it is a real strategy point that overall what we're trying to do be more efficient with our sales team and that happens partly with building the partner channel and having more sales go through partners and then doing more insight where we have more reach that starts with the low end, it will kind of move up a little bit over time, so overall we just trying to push efficiencies there as in other parts of the organization is, would become this more high velocity organization.

Craig Nankervis

Thank you very much.

Don Brown

You bet.

Operator

And our next question comes from the line of Jonathan Kees with WR Hambridge Summit. Your line is now open.

Jonathan Kees

Great. Thank you for taking my questions. If I may, I just wanted to ask some quick housekeeping questions first and then I'll launch my general broad level question. Regards to the PureCloud customers, last quarter you gave detail in terms of how many were a $1 million customer? How many can you highlight these all for this quarter?

Ashley Vukovits

Well, given that the majority of our PureCloud customers are on month-to-month contracts, we don't really have that same metric. So as Don said, we had two, we had several larger I think you gave two specific examples but several customers at the large end of size but certainly with those month-to-month contracts we don't really have an annual contracted amount to give those out.

Jonathan Kees

Okay. All right. And then you mentioned that win rate was over 60%, last quarter you mentioned it was over two-thirds, is that just semantics there or is there a little bit of particularly different between the chambers, the win rate?

Don Brown

Last quarter we were talking about 24 deals and this quarter we're talking about a big larger numbers, so those numbers should be accurate as statistical base gets a little bit larger over time. So now that's just noise there in my estimation.

Jonathan Kees

Got you. And then, you gave the number of new cloud customers, feedback in terms of the new premise customers. So you're not giving out percentage change in terms of contracted annual revenue for cloud contracts or can you provide any color on that?

Ashley Vukovits

Contracted annual, I’m sorry.

Jonathan Kees

In the past, -- year-over-year change in terms of your contracted annual recurring revenue for cloud contracts, so…

Ashley Vukovits

Yes, we stopped that a couple of quarters ago.

Jonathan Kees

Okay.

Ashley Vukovits

Because again, those are the month to month contracts we don’t really -- we don’t have a contracted amount. We have estimated amounts but again, it’s month to month usage.

Jonathan Kees

Okay. Fair enough. And that’s what I thought. So moving onto my main question. Because a lot of these customers are month to month and they can just drop off anytime they want they are not logged into your contract, guess what do you see as a stickiness, is it just mainly the new features that you are adding on? Are you still being the price leader in terms of the charges that you are offering? How many of these customers are actually signing up for voice, PureCloud voice and collaborating?

Don Brown

We have the vast [Indiscernible] and so signing up for PureCloud voice even some of the larger ones. So that’s certainly one point of stickiness, but ultimately we are betting that we’ve got the best and the highest value solution on the market. I met -- I was in Australia last week, met with a large outsourcer there. I have several thousand agents currently on [Indiscernible] they are looking at moving to the cloud and they were stunned that we could come in and offer them a solution with no commitment that would let them first up, scale down in order to meet their business in a way that I was totally aligned with their needs. And so we think that’s going to be extremely attractive, it’s going to be difficult for competitors to match. We’ve engineered PureCloud to be highly efficient and profitable for us that’s allowed us to be fairly aggressive with the pricing that we’ve offered this three seat levels and no hidden fees or anything like that. We think that we can out execute anybody in terms of the rate of new feature addition and new capabilities and that’s what we are betting on.

So yes, it’s definitely a risk. In some respects we are safer back in the old days to tread a lot of customers into five year contracts but we believe that this is the way cloud should be done and will be done and we are confident enough to lead the way.

Ashley Vukovits

And John the other thing I would just add to that is the reliability. I mean Don gave a website [ph] out on the call of where you can go and see what the uptime is. I think customers you know they want a reliable product that meets their needs and has a timeline that’s going to fit their future needs as well and I think we believe that PureCloud can do that, can do all those things and we believe it’s going to be sticky.

Jonathan Kees

It sounds like it. Thanks, that was helpful.

Operator

[Operator Instructions] And our next question comes from the line of Jeff Van Rhee with Craig-Hallum. Your line is now open.

Jeff Van Rhee

Great, thank you. Couple of questions from me. First, just as it relates to the quarter. Just clarify from me; you said you were surprised by the services deals driving that short fall. I would assume most of the deals were in flight you know whenever we had last quarter call I guess February, so what changed from then to the end of the quarter, just a little more color there would be great.

Ashley Vukovits

Yes I think it’s just I mean a couple of things. One, it’s just the services that came in, in Q4 as we said which we did have some insight into. And then also the services related to PureCloud and just that those have been smaller than we anticipated and you know despite of the sheer fact of how quickly and easily PureCloud goes in. So I think it was the combination of just the partner channel stepping up really in Q4 of 2015 and Q1 of 2016 coupled with the PureCloud services as well.

Jeff Van Rhee

So the service is tied to PureCloud sales were smaller than expected, is that what you are saying?

Ashley Vukovits

Yes they are -- they are certainly in the smaller end we have different packages and we also have more of complex engagements that we do and I think those certainly were with the ease that the PureCloud is installed and how quickly that turnaround time is, yeah those services were down a little as well.

Jeff Van Rhee

Okay and so….

Don Brown

Most of the bigger picture here that -- the other thing is we just sold more PureCloud than we thought we were going to. So, we thought a few more of those deals will go to CaaS, a few more of those deals will go to CIC, but even some of these larger deals went to PureCloud. We were confident that that would happen; we just weren’t quite expecting that in the first quarter.

Jeff Van Rhee

And just one more point of clarification on that with respect to the annual going from the prior guide to now like a range -- Don, I think you were saying, you were tweaking at lower end, if I’m paraphrasing it, I took you to be saying that you are now thinking more CIC than you had previously expected was going to go to PureCloud, is that the basis of the reduction.

Don Brown

We think there’s more possibilities, I would call it risk. But you know to us, risk implied something negative. There is a greater probability that in the back half of the year we will see more deals that originally might have gone with CIC go with PureCloud. And that if that happens, then that will impact us both in terms of professional services as is explained, but obviously because of the revenue recognition and so we just want to introduce that caution, that could very well happen but all the while emphasizing that if it does, we think -- if it does because of the growth in PureCloud we think that’s a very good thing.

Jeff Van Rhee

Okay. Last one from me, and then the -- last quarter when you were talking through your goals, one of the key goals was to invest in lead gen. Wonder if you could just quantify and define what you’ve done there?

Don Brown

Yes, we certainly have raised up our lead gen team. We are and that’s kind of an ongoing effort but we are investing more in revamping our website to drive more traffic. We’ve enhancing our lead generation efforts around the world working with Amazon. I mentioned I was in Australia last week. I was just speaking in AWS event. So we’ve got a number of those sorts of efforts going on and I think you can see the success just in the number of PureCloud deals that we did in the first quarter.

Jeff Van Rhee

Okay. That’s all. Thank you.

Operator

And we do have a follow up question from Dmitry Netis with William Blair. Your line is now open.

Dmitry Netis

Yes thanks for taking a quick follow up here. On the -- I think you guys said that some of the CaaS guys were converting over to PC, the PureCloud and you were starting to see that happen. I was just trying to get a sense if what percentage of maybe the base or anyway you want to define it, have converted over to PureCloud in the quarter. And what’s the main reason, I mean if this is the installation time from CaaS have been pretty long, right. So if they are switching they must be seeing something, is it the lower prices the feature set that’s driving them to PureCloud, any update on that front would be great.

And then Don, maybe just kind of philosophically speaking on the AWS side of things, what -- you know it’s your stance with the PureCloud voice for example versus guys that actually use the wrong caller facilities and their own infrastructure, what gives you confidence you are going to achieve the same voice quality in AWS, is the infrastructure robust enough from session board controller point of view and anything else but to give you the QOS and the mass course to get the voice in the same quality category as the rest of the folks that use their own infrastructure.

Don Brown

Sure. So the first one, CaaS customers, you know CaaS is not as profitable for us as PureCloud obviously. We’ve gotten more overhead there and so with CaaS we are actively going out especially to our smaller customers and encouraging them to move over to PureCloud.

For many of them it’s a much better fit, it’s what they wanted in the first place just a simple web based interface with very easy to use features. CIC which is at the heart of CaaS was really over killed for our smaller customers. So we’ve seen a number of them gladly move over to PureCloud because it’s better fit, in many cases they save a little bit of money, but they end up with what they want especially the ability to scale up, scale down no long term contracts, all those sorts of things.

So we started off with lower end with CaaS but as the PureClouds functionality has grown, has expanded you know we do have more and will have more and more CaaS and CIC customers looking at PureCloud and wanting to migrate there. So we think that we’ll continue.

In terms of AWS, we don’t run the voice out of AWS today. So our PureCloud voice, we have one instance of PureCloud voice in the U.S. where we have the Edge devices, the Telco trends come in there and so the voice traffic isn’t going to AWS. However, one very exciting technical development that we had over the quarter is that we’ve made good progress on a Linux version of our Edge device and we’ve gotten into successfully in AWS.

So as we roll our PureCloud voice, we actually made the decision just a few weeks ago, that we are not going to replicate the more hardware based approach that we’ve got for PureCloud voice in North America as we go next to EMEA we are doing all of that up in AWS and we’ve seen excellent performance, no latency problems, good mass scores which are critical, those things are critical for us because we want to make sure that those voice services are good enough to support our speech recognition, text to speech, real time word spotting [ph] you know those very strong speech capabilities that are an important differentiator for us.

So the shorter answer is, AWS it looks like you can do everything we need with servicing the voice traffic.

Dmitry Netis

Very good. Excellent. Thank you so much.

You bet.

Operator

I’m not showing any further questions at this time. I would now like to turn the call back over to Mr. Don Brown, CEO for closing remarks.

Don Brown

Well I’ll just make one final point that may not have come through in our remarks. We are outgrowing anybody else in this space in terms of cloud context center at a 40 plus percent clip that’s accelerating as we move on through the year. And we are just really excited about the start we’ve gotten off to with PureCloud and what it means for that growth rate and the competitive position that it puts us in. So if nothing else, I know we’ve thrown out a lot of numbers, and you can come away with a lot of things but those are the two things that we think are most important to understand than appreciated about our business. But thank you all for attending.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.