Xactly's (XTLY) CEO Chris Cabrera on Q3 2017 Results - Earnings Call Transcript

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Xactly (NYSE:XTLY) Q3 2017 Earnings Conference Call December 9, 2016 4:30 PM ET

Executives

Lisa Laukkanen – Blueshirt-Managing Director

Chris Cabrera – Chief Executive Officer

Joe Consul – Chief Financial Officer

Analysts

Brian Schwartz – Oppenheimer

Ben Jarman – JPMorgan

Nandan Amladi – Deutsche Bank

Robert Mattson – Dougherty & Company

Eric Martinuzzi – Lake Street Capital Markets

Corey Greendale – First Analysis

Ilya Grozovsky – National Securities

Brent Thill – UBS

Scott Berg – Needham & Company

Brian Schwartz – Oppenheimer

Operator

Good day, and welcome to the Xactly Third Quarter Fiscal 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lisa Laukkanen with Blueshirt. Please go ahead.

Lisa Laukkanen

Good afternoon, everyone, and thank you for joining us on Xactly's third quarter fiscal 2017 conference call. On today's call are Chris Cabrera, Chief Executive Officer; and Joe Consul, Chief Financial Officer. We will make certain statements today including with respect to our expected financial results and business strategy. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Please refer to our SEC filings as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website xactlycorp.com and at the SEC's website, SEC.gov.

During our call today, we will discuss non-GAAP financial measures in our press release, investor presentation and our filings with the SEC, which are available on our website. You will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures.

And with that, I will turn the call over to Chris Cabrera.

Chris Cabrera

Thanks, Lisa, and good afternoon, everyone. We are pleased to report another successful quarter. We had broad demand for our cloud-based incentive compensation solutions as our relentless focus on innovation and customer success continue to fuel our growth and leadership in the incentive compensation market. Third quarter total revenue grew by 25% to $23.9 million and subscription revenue grew by 22% to $18.5 million. Our bottom line results were notably ahead of expectations for the quarter and demonstrated our focus on operational excellence and margin expansion.

Our adjusted EBITDA margin improved over 1600 basis points year-over-year. This consistent execution gives us confidence in our ability to achieve positive cash flow from operations in our fourth quarter as planned. While our third quarter results were strong, we did experienced some headwinds including two large customer departures due to M&A. Joe will provide more details in a few minutes. In the quarter, we expanded into new verticals and grew our international presence as Xactly is more relevant in more segments than ever before. Marketing wins included Ellie Mae, the leading software solutions provider for residential mortgage industry, Mannington Commercial a leader in flooring were commercial interiors, Cincinnati Bell, an integrated communications and telephone company, and Johns Manville a global building products manufacturer.

Success in new verticals such as consumer goods resulted in signing new customers like Tuff Shed, Grubhub and American Furniture Rentals. In the health sector, wins included Wilmington Health Care, MCG Health, Baratta and Privia Healthcare. Our international customer base is growing and we're very excited about our wins, which included Comptel Finland, Snow Software, Nexthink and Digital Route in Europe as well as Precision Assay in Chile.

Expansions within our existing customer base continue to be an important part of our growth strategy. More than 100 of our existing customers added subscribers and modules during the quarter examples including Workday, OpenText, Palo Alto Networks, Louis Vuitton and Pandora. Additionally on our last earnings call, we highlighted a competitive replacement with the largest American electric car company. They went live in a matter of weeks and I'm excited to announce that they have already purchased and activated additional seats. These are just a few of the examples of customers, who have turned to Xactly for sales performance management because we have the combination of data, technology and experience that’s unmatched in this space.

Insights is a game changer in our market and is elevating the Xactly solution from a tactical tool to a strategic imperative. We had a 30% attach rate with enterprise customers in the third quarter and Insights is now cited as one of the top three reasons we why we win. Businesses are rapidly embracing sophisticated data analytics and Xactly is extremely well positioned to ride this way. For example IBM's Watson, Salesforce’s Einstein and Microsoft's AI are all highlighting the power of artificial intelligence and we believe our joint customers can benefit from combining Xactly’s dataset with these offerings.

In Q3, we were very excited to announce the partnership with Miller Heiman Group. Miller Heiman is one of the largest sales and service performance companies in the world and our partnership will enable and power their customers with the sales performance programs needed to design and execute more effective impactful sales compensation programs. Further growing our strategic alliances, Xactly and OpenSymmetry have joined forces to enable organizations to outsource their compensation operations through OpenSymmetry’s new business process outsourcing both OS EDGE. This exciting new offering gives us the ability to operate truly comprehensive sales performance management solution and allows companies to outsource their compensation operations enabling them to focus their resources on their core business.

Dreamforce is always an exciting and productive event for Xactly and this year we expanded our presence and hosted nearly a thousand customers partners and prospects at our offsite hospitality venue. Also at Dreamforce we announced Xactly Connect an open platform to offer public APIs to some of our most popular data and features empowering customers and independent software vendors to build richer enterprise applications. In conjunction with this announcement, we launched pre-built integrations with Salesforce through Xactly Connect. These integrations enable a seamless flow of data and extend functionality between Salesforce and Xactly so that customers, partners and systems integrators can create seamless integration on their own.

The entire team at Xactly is passionate about our mission and excited about the large opportunity in front of us. Our exceptional employees and employee centric culture are the key to our success and we were pleased to be recognized for the third straight year as one of the best places to work in the U.S. by Great Place to Work in Fortune Magazine. This is the tenth time Xactly’s strong employee centric culture has been recognized acknowledging the company’s ongoing commitment to our people. I would also like to congratulate Joe Consul for being honored as CFO of the year by Silicon Valley Business Journal.

In summary, we are pleased with our accomplishments in the third quarter and we remain focused on expanding our leadership in this space with continued focus on product innovation and driving customer success, driving strong revenue and billings growth and progressing on our path to profitability.

With that, I will now turn the call over to Joe to provide more color on the financials.

Joe Consul

Thank you, Chris. I'm pleased to review our strong third quarter fiscal 2017 results and to share our outlook for the fourth quarter and full year. In the third quarter, we delivered solid top-line growth and made considerable progress on our path to profitability. We demonstrated leverage in the business model, which was highlighted by a 1600 basis point increase in adjusted EBITDA margin on a year-over-year basis and as Chris mentioned we remain on track for positive cash flow from operations in the current quarter.

While the fundamentals of our business remain strong, we faced some headwinds in the third quarter, which impacted our billings, subscription revenue and subscriber count. These primarily included two large customer departures due to M&A and two large deals that pushed out of the third quarter. Since Q4 began, one of those deals has already closed. While some churn is expected in our business having two seven figure M&A departures in one quarter is unprecedented.

In fact we have never had a seven figure churn event in the history of the company. Outside of these departures, we continue to experience strong overall customer retention rates. We ended the third quarter with approximately 287,000 subscribers representing 22% growth over the third quarter of fiscal 2016. As we've discussed subscriber additions will vary quarter-to-quarter based on factors such as seasonality, deal mix across customer segments and customer retention.

Now, I'll provide more details on our financial results for the fiscal 2017 third quarter. Total revenue for the third quarter of fiscal 2017 increased to $23.9 million, up 25% over the third quarter of fiscal 2016. Subscription services revenue increased $18.5 million, up 22% from the third quarter of fiscal 2016. This was driven by subscriber growth from both new and existing customers across all segments of the business. Professional services revenue is $5.5 million, up 39% from the third quarter of fiscal 2016. Our calculated billings growth rate in Q3 was 20% year-over-year.

For the remainder of my commentary unless otherwise noted, I will discuss non-GAAP results, which exclude the impact of stock-based compensation and other items. Please note that reconciliations of GAAP to non-GAAP results are provided with our earnings press release and investor presentation.

Subscription gross margin improved to 78% for the third quarter, compared to 75% for the same period in fiscal 2016. Although we continue to invest in our datacenter operations infrastructure and customer support staff to enable future growth, we are improving our subscription margin as the business scales. Professional services gross margin increased to 15% compared to 6% a year ago. The improvement in both subscription margin and professional service margin drove total gross margin to 63% for the third quarter, up from 60% in the same period of fiscal 2016.

Going forward while professional services margin may vary quarter-to-quarter, we continue to expect total gross margin to remain above 60%. Total OpEx represented 71% of revenue an improvement from 83% a year ago. Specifically sales and marketing expense for the third quarter of fiscal 2017 was $9.9 million or 41% of revenue, compared to $9.1 million or 47% of revenue for the third quarter of 2016. As a reminder investments in sales and marketing programs are seasonally higher in Q3 due to our participation at Dreamforce.

Adjusted EBITDA loss was $815,000 or 3% of revenue for the third quarter of fiscal 2017, improved from a loss of $3.5 million, or 19% of revenue for the third quarter of fiscal 2016. Net loss for the third quarter of fiscal 2017 was $2 million, or $0.06 per share, improved from a net loss of $5.1 million, or $0.18 per share for the third quarter of fiscal 2016. Cash flow from operations on a GAAP basis was an outflow of $1.8 million for the three months ended October 31, 2016 compared to an outflow of $1.7 million in the third quarter last year.

Our progress toward profitability reflects our continued focus on key drivers including reducing the cost of customer acquisition over time, increasing investment in R&D resources in the lower cost region of Bangalore and reducing our datacenter cost per average subscriber.

Let me close today's prepared remarks with a brief discussion on our guidance for the fourth quarter and full fiscal year of 2017. Our guidance reflects the impact of the Q3 customer dynamics discussed earlier. For the fourth quarter ending January 31, 2017, we expect revenue in the range of $23.6 million to $24.4 million, up 16% at the midpoint compared to Q4 of fiscal 2016. We expect non-GAAP net loss to be in the range of $4 million to $3.2 million, or $0.13 to $0.10 per share.

GAAP net loss is expected to be in the range of $6.5 million to $5.7 million, or $0.21 to $0.18 per share. For the full-year ending January 31, 2017, we are updating our revenue guidance to $94.8 million to $95.6 million, up 25% to 26% compared to fiscal 2016, and improving our full year net loss guidance. Non-GAAP net loss is expected to be in the range of $11.1 million to $10.3 million, or $0.36 to $0.33 per share. We expect GAAP net loss to be in the range of $19.4 million, $18.6 million, or $0.63 to $0.60 per share. Finally for calculating EPS, we expect basic weighted average shares outstanding to be approximately at 31.4 million shares for the fourth quarter and 30.6 million shares for the full fiscal year 2017.

And now, we'd like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question from Brian Schwartz with Oppenheimer.

Brian Schwartz

Yeah, hi, thanks for taking my questions here this afternoon. Chris or Joe, I wonder if you can help quantify for us the two large churns in terms of the impacts to your subscription revenue as well as the impact to the billings?

Chris Cabrera

Yeah, sure, Brian, they were both in the seven figure range in terms of total ARR. So there were certainly some impacts on subscription revenue for Q3. And moreover, it will impact revenue in Q4 and beyond to the extent that we move forward. From a Billings perspective, if we had gotten those renewals done on schedule, our billings growth year-over-year would have been in the upper 20% range consistent with where we've been.

Brian Schwartz

Right. And then I guess follow-up for you, Chris. Maybe you can just talk qualitatively in terms of what you’re seeing out there in the selling environment. There’s been a lot of divergence here in the news since the election. Workday management commentary, they highlighted that they were experiencing some delays in terms of purchasing habits out there in the market for certain reasons. You highlighted you had a couple deals that pushed, one closed here in Q4. Can you maybe just share on what you're seeing in terms of sales cycles whether they’re shifting in timing or what you're seeing in terms of your pipeline expansion momentum if there's any changes to that over the last couple months here?

Chris Cabrera

Yeah, thanks, Brian. To be honest we haven't seen a lot of change. I mean we haven’t seen anything with respect to the election that [indiscernible]. We are seeing great momentum. I mean, as Joe said, if we hadn't had these pretty large, we've never lost a single seven figure deals to have two happen. I wouldn’t say out of blue with pretty much our control. These are M&A kinds of things that we just literally can’t control these were not – these were very happy customers. These were customers that went to a competitor or intellect what we were doing. And so we kind of got hit by that. If we were for that just about every number across the board would have been right in line with what we – with what you would have expected.

So, yes, we did have a couple push out. We had in fact one of the world’s largest food companies with one of the deals that closed right at the beginning of the quarter that had pushed out from last quarter was over 5,000 subscribers. That kind of stuff happens and as you know Brain we’ve talked about especially at our size, a single deal can really move the needle. So, we’ve tried to say over these many quarters that not to get too worked up over timing of a given deal like that, but for a week would have been in these numbers.

So we feel very good. I think the pipelines in fact the pipelines are growing at a faster clip than the businesses, which is always a good sign. I am encouraged by the new markets that we’re playing in. I mean you heard some of those names in my prepared remarks, we’re really continuing to expand outside of those sorts of traditional verticals like I mean deals like Tuff Shed and Grubhub and Cincinnati Bell and Johns Manville. I mean really, really good accounts for us to get, we mentioned the Ellie Mae deal. I mean, so now we feel very positive. I think pipelines are full of more of those kinds of deals and I wouldn't say there's anything here that speaks to a slowdown in our space or any change competitively or in like that at all.

Brian Schwartz

Chris, let me follow up with the company’s specific question and then I do have a follow-up for Joe. And I was wondering if you can comment on the win rates in the quarter here because I am noticing with the press release you have highlighted, you’re starting to signup some high quality large technology logos. We signed Ellie Mae. You have talked about [indiscernible] in the past. And we're also starting to see the business broaden into these new markets that you just talked about in the last answer. The question I want to ask you is on the differentiation for the business. We've always heard that it's the Insights and it’s the data analytics capabilities of Xactly. And that’s the big differentiator in the market. I am just wondering if that’s still true with you Insights offering, is it still the only thing of its kind that you’re seeing in the market today. And then I have follow up for, Joe. Thanks.

Chris Cabrera

Yeah, Brain, it really is. I mean, there is literally nothing like whatsoever and I think we just more excited about and we’re seeing grate traction. In my prepared remarks, I talked about the 30% attach rate; again it was 30% last quarter. So we were very pleased with that. I think we might even see a better attach rate here in Q4 as we’re seeing real adoption especially at our SMB levels as lots of these smaller companies that are waking up and realizing that they can get some real compensation benchmarking data that sits and available to them anywhere.

So, we think that that is really the biggest differentiator. Our customers are sighting that as biggest differentiator. We’re still seeing the very high win rates against our competitors. We’re still seeing that we’re commanding two, three times the price value from our competitors. And I got to say anytime that the CEO of the largest competitors is calling us dumb and stupid on their call, I think we’re doing something right. So, I think we’re on the right track.

Brian Schwartz

And then the question I had for Joe, you know, I too add my congratulations on the CFO of the year award from the Silicon Valley Business comp. So, that's a really nice credit, Joe congratulations. So one question I want to ask you is just how we should be thinking about the positive operating cash flow inflexion that’s going to happen next quarter, you guided to it again today, the sustainability of that over the next 12 months. Is there any reason that we should expect the operating cash flow at least on an annual basis to reverse and go back to becoming a use of cash thinking on an annual basis?

Joe Consul

Yeah, thanks, Brian. And with respect to the operating cash flow, we've structured our plan and operating plan this year to achieve positive cash flow from operations in Q4. We stuck with that and as the business is partnered we’ve adjusted and stay true to that commitment. The other thing that we talked about is kind of following year we would be cash flow positive from operations for the year although it would bounce around quarter-to-quarter from positive to negative. And we still believe that to be the case and we are anticipating at least a breakeven to positive cash flow year from operations in our fiscal 2018.

Brian Schwartz

Thank you again for taking my questions this afternoon.

Chris Cabrera

Thanks, Brian.

Operator

Our next question comes from Pinjalim Bora with JPMorgan.

Ben Jarman

Hi. This is Ben Jarman for Mark. Can you talk about the OpenSymmetry partnership that you spoke about? It seems like it's a managed services offering. Can you talk about the scope of it, how many people are committing to this relationship et cetera? And does anybody else also do this kind of managed services offering in the industry?

Chris Cabrera

Yes, thanks Ben Jarman. I'm not aware of anybody else doing it. It is exactly as you said managed service offering. I can't give you too much of the details. It's fairly new, but it is where – they're using our software and then selling new customers themselves that would not even have the software, not even have necessarily access to this software or we designing plan or creating plans. All that work would be done by OpenSymmetry. And so, it’s a really interesting opportunity for us to build the reseller. Occasionally, we get into the companies where one of the drawbacks is they don’t really have a team and they don’t really want to manage even that’s something as simple as our software coming out of excel.

They don’t have the resources to do that. And so, this is a really nice avenue to be able to push them to that they can completely hands off have the entire thing, managed and outsourced, but still get the best-in-class software, get all the best-in-class reporting, get the benchmarking data, get the great analytics. And so, I think it’s really a neat opportunity that could turn into a kind of nice revenue avenue that has very low tack for us because we don’t have to necessarily go chase it down.

Ben Jarman

Following up on that how does the economics work in that kind of a deal? And is there are any revenue commitments in the contract stuff?

Chris Cabrera

Is there any revenue, what?

Ben Jarman

Is there any commitments, revenue commitments from OpenSymmetry to Xactly? Is there any contracts?

Chris Cabrera

Yeah, I am not going to get into the specifics of the deal, but suffice to say, they’re like a reseller. So every time they add customers, they have to add seats and every time they add seats then of course we additional ARR revenue from that.

Ben Jarman

Got it, okay. And Joe, can you – is it possible to quantify the impact of the churn and the deals that were pushed on the subscriber account side. I mean the subscriber count was growing in the 30s right, high 30s last year and in the low 30s this year and now it’s 22%. So if there were none of those have the thing that – the headwind that you face is normalizing for that. What would have been the subscriber count growth?

Joe Consul

Yeah, good question, Ben Jarman. In general when you look at subscriber growth subscription revenue and billings, all of those metrics would have been right in line with what we have normally been reporting had we not had the departures and close the deal, but I can tell you that with just the M&A departure, our seat growth would have been up about 25% or 28%. And you know hard to say on the scribes related to the new deals after [indiscernible] is not finalized, but the other deal was between 3,000 and 5,000 feet.

Ben Jarman

Okay, perfect. And one more if I can the expansions with Workday and some of the others, you’re saying – and typical, what kind of a jump are you seeing in terms of the total ARR in those cases, I mean, is there an average that you could share?

Joe Consul

Oh boy. So, Ben Jarman, it’s allover the map. It could be 10% ad and it could be 50%. We take it on account like OpenText where – in fact we will put text as a great example of M&A, it’s the flip side of the M&A story that we talked about where they’re buying companies and increasing their ARR to add those payees and I think we had a 25% to their ARR just in the order. But there is really no metric I could give you, it’s very much is all over the map and it depends if we’re just adding organic growth from a customer or if it’s inorganic in the case of OpenText or it might be a whole different division or a different department. And so it can range pretty greatly. But as I said in the prepared remarks, we had over a 100 of our customers just in the quarter coming back and buying more payees and adding modules, adding insights and things like that.

Ben Jarman

Perfect. Okay, thanks a lot. That’s all for me.

Chris Cabrera

Thanks.

Joe Consul

Thanks, Ben Jarman.

Operator

We will hear next from Nandan Amladi with Deutsche Bank.

Nandan Amladi

Hi, good afternoon. Thanks for taking my question. So, Chris, you know, the ecosystem of partners that you began to engage with much more meaningfully in the last couple of quarters, how has that changed relative to say a year ago or maybe even two years when it where smaller and private?

Chris Cabrera

Well, great question. I mean it has changed dramatically, every year it’s been changing quite a bit. I mean two years ago as you said, we have signed so many important critical partnerships over the last two years and you know all of them contributing in different ways. You know we talked about the Wipro one last quarter and then training up quite a number of people, they implementations for us. And so, we’re starting to see results from that. We talked about the Willis Towers Watson last quarter, again, a lot of these partnerships will take a while, maybe a quarter or so to kind of get going and get everyone educated on how it’s going to work and how we all make money out of it, but we’re very encouraged by the early returns on these things, especially these partners that are basic and around insights, because they’re recognizing that the insights is the game changers, the market for compensation is dramatically changing as we speak, and it’s really – dramatically changing as we speak.

And it’s really going to this more strategic web-in – from just selling excel replacements and it’s all about the data. And so, a lot of these partnerships are recognizing that and starting to wake up to that and looking for ways to use that data. We had a young exciting pre-IPO company that’s planning their IPO that was eager to get on to insights because they wanted to make sure A) that they were benchmarking and paying appropriately for where their size of stages, but also to make sure that they could have the right performance and tract the performance to make sure that once they became public they were able to do that. So, we’re seeing insights being used in so many different ways that I think it’s opening up opportunities even with our partners as well as directly to do more business.

We have seen a kind of neat change away – number of companies are buying our software where even before they get into the cycle of doing a sales cycle, they are engaging with our strategic services group to use insights to kind of figure out how they should be paying before they even go pick a vendor. And so as you can imagine, if we’re in there, and we’re helping them on a project like that, we certainly have a pretty big leg up when it comes to the evaluation because we are again already in there and we’d help design the comp plans. So these partnerships are very important and again especially the ones around insights.

Nandan Amladi

Thank you.

Operator

Our next question comes from Robert Mattson with Dougherty & Company.

Robert Mattson

Yeah why don’t you talk a little bit about the M&A losses and to try to understand that. I guess I am trying to figure out why the speed with which it is impacting the results, one is it would seem to me it's a little – it seems a little faster that they're working off the books for you than I would have anticipated. I would have thought that there would have been a little more lead-time and kind of a work down than this.

And I guess part of question also is on the front-end how much lead time was there. I mean it was as a literally an inter quarter event and if it was why it doesn't work off some more slowly. I guess I am trying to understand the surprise factor here.

Chris Cabrera

Yeah Robert it is a good question and I think it's not a complete surprise in the sense that in both cases these are big companies that were acquired by big companies. One we can’t talk about who they are, obviously and in many cases, at least in one case we probably intend and hope that we can re-engage with them over time. And so we don't want to say or do anything that will upset that in the future. But what ends up happening is like I said I gave you the example of OpenText, we've had a lot of different examples where we had a leading legal software company that – a big customer for a couple of years. They got acquired and whenever that happens we're kind of on pins and needles because we don't actually know what's going to happen. And yet they don't even know the customer often doesn’t even know. And it goes both ways very often they in the case of this legal software company, they – once the acquirer got to know how they were using us and see how much they loved it we ended up getting a 200 K early renewal on that deal.

So you never quite know what's going to happen and we were certainly working assumption that we were at risk but we thought we could keep these. In the case of one of them it was a very large customer that was divesting their whole, this whole division. So it literally wasn't, they sold it into many different pieces and so it was just nothing we could do to avoid it. The reason it impacts so quickly is because of that renewal right, so that you lose that seven figure billings right out, right immediately in the quarter.

So that's why it has a dramatic impact on the billings. Similarly it hits the subscriber count immediately in the quarter so. So you're right, we didn’t get the full impact of all the revenue in the quarter and that's why we had to adjust the Q4 number for it but it does have some impacts on some of those optical things right away because you don't get to send that bill out for over a $1 million in each case.

Robert Mattson

So I guess to paraphrase – to paraphrase that once the decision is made they can move off fairly quickly. I guess that is the other part I'm hung up on it would – given the kind of a lead time it takes to get somebody implemented that I would expect something of a similar lag time to defer off but I guess the latter part is faster than anticipated.

Chris Cabrera

Yeah I mean I think what tends to end up happening is we’re the last to know usually that they're going to do it. And so they're making arrangements internally and they don't, it's not – nothing to do about Xactly, this is just common in the industry. They're afraid if they tell the vendor, hey we're going to kick you out in six months that you're going to somehow give them that service or not care about them. And so it's not a typical at all for them to sort of not surprise you but keep you thinking that you might have a chance of getting this renewal and then all of a sudden, hey guys, guess what we're going a different direction. That was certainly the case in one of these. The other one was a divestiture that we knew was coming. We just weren't sure what the impact was going to be, how fast it was going to be.

Robert Mattson

Okay, so I guess to help handicap the risk profile going forward, in the current pipeline their material customers like this that you're working through.

Chris Cabrera

Great question. No we don't have anything on the horizon, there's nothing we have no reason to believe. As I said before that's why we made a point of saying we've never ever lost a seven figure customer. And so to lose two in a quarter is kind of a unique event. The other thing worth mentioning is, I think you know this, our top 20 customers represent 20% of our revenue. And so and we have no customer that's more than 5%. So while we have a lot of great and big customers, it's not like we have 50 seven figure customers and this could happen again. I mean the likelihood of this happening would be very pretty darn low.

Robert Mattson

Okay great and I guess a final question, dealing on to pricing, you had commented the pricing in the quarter, we see some demand expire. I guess there are two fold question on pricing. One is you commented how you – get significant higher price in some of the competition. As I guess trying to understand the dynamics of how you're able to do that in the face of some of these pretty significantly different or lower pricing dynamics. And then two if I look at the calculation in the quarter, it looks to be down quarter on quarter.

Assuming some of this has to do with the lost customers, as I guess they won’t come up with it some around 65 for the quarter. Should we expect that to churn back up to the 67 or 60’s upper 60’s or is this kind of a new flat line here.

Chris Cabrera

No I mean I think you know again this is, I’ll deal with the second question first. I think 65, 66, 67 you're going to see it bounce around like that. That is not uncommon at all, I do not think that there's a trend here. I think that there's no question and I think you've been reporting on it that because of our innovation and differentiation in this space. We are forcing some of the other folks out there to do some dramatic pricing and it's not effective.

It's not working against us and then as a result because it doesn't matter how much you drop the price, if you don't have the insights, you don't have the benchmarking, you don't have that data, you don't have the relationships with sales force and these other SaaS vendors like Workday, people are willing to pay more. And that's why we don't compete on price and that's why you find that we will walk away from a deal if the customer is only thinking about price. I'll give you an example we had a customer that did exactly that they walked from us.

And we’re able to get a price that was in a low single, or high single-digits and we said well, good luck and if it doesn’t work out please come back to us. And sure enough, four months later didn’t work out and they came back to us. And they paid 2.5 times more for our offering. But at sometimes, people have to go through that hard experience to make the right decision. But the point is I think our pricing is holding up strong we had kind of done that map that you did I thought it was 66 but the way you calculated them 65. You're right in the money.

So no, we feel very good about it and I really do keep coming back to it’s the data and the insights in the benchmarking that's allowing us to change the conversation from this tactical excel replacement to a true strategic weapon and how it change the way people compensate and how – and understanding how they benchmark against their peers.

Robert Mattson

Okay. And I guess final question, Joe, just trying to clarify some of the earlier questions on the impact of lot of customers, for getting the deferred customers, the two that slipped and the one that closed. Is it fair to say or is it correct to say that – have the two customers not been lost that maybe full year guidance would have at least been maintained, is that the magnitude of the impact?

Joe Consul

Yes, the guidance we have been made, when we set the guidance now for the rest of the year we took into account. Obviously the two M&A losses and the two large deals that slipped and trying to use kind of the mindful approach and how we set guidance. And make sure we continue our track record of delivering what we say, we can do. So we would maintain guidance if the quarter turned out as we thought without the two M&A departures and with the two deals, yes, we would have maintained it.

Robert Mattson

Okay, great. Thanks for taking the questions. Thanks guys.

Joe Consul

You bet.

Chris Cabrera

Thanks, Robert.

Operator

Our next question comes from Eric Martinuzzi with Lake Street Capital markets.

Eric Martinuzzi

The two loss customers do they go on to kind of have an in-house homemade system or are they going on to a competitor product in your case?

Chris Cabrera

Yes, we do we know that they're not going to competitor products. In fact, as I mentioned one of them was a recent divestiture in the financial services vertical. And so it was kind of split into a number of different pieces and they just got absorbed into the different companies that they sold off to. In the other case, they – our understanding is they are putting them on their internal homegrown system.

Eric Martinuzzi

Okay. And then I know you don't have a ton of cash on the balance sheet but if the stock is weak and its looks like its weak after hours here. Can you refresh my memory, do you guys have any kind of repurchase program or is there the potential to put one in place?

Chris Cabrera

Yes, Eric, we do not have a repurchase program in place right now. We again like you mentioned we don't have a huge wad of cash. We’ve always intended to use our cash for operations and growing the company. Of course, you can always reconsider things as situation dictates but right now that isn't in the cards.

Eric Martinuzzi

Okay. And then you obviously are making good progress on the path to profitability. There's also if what you're saying is true about had we not lost these its still at 25% plus growth opportunity in the market. What about the idea of doubling down on a sales and marketing it really maybe pushing out the path to profitability with that entertained at the board level and any more active discussion perhaps and then quarters passed?

Chris Cabrera

Eric, we continue to resource the company with the objective of growing billings on an annual basis of 25% year-over-year. And we're going to continue to do that our FQBR hiring is right on pace with what we anticipated for the year we're going to continue to hire strongly going into the next fiscal year because yes, we still believe in the opportunity. That said we've made a pretty firm commitment to our shareholders and investors of we're going to get this thing they are in a breakeven. And then operate from there and we're going to stay along that path. But again, we've got this thing on a model been resource continue to grow in the mid-20s and plan to continue to do so.

Eric Martinuzzi

Okay. And then just to be clear the first clean comp on this, next two departures is going to be Q4 of fiscal 2018 is that correct?

Chris Cabrera

First clean comp would be fiscal, yes, because they would have been in through the first three quarters.

Eric Martinuzzi

Got you. All right, thanks for taking my questions.

Chris Cabrera

You bet.

Operator

We’ll be able to hear next from Corey Greendale with First Analysis.

Corey Greendale

Hey, good afternoon. Thanks for taking my questions. Really following up on those last couple of things, so given your comments about what billings growth would have been in Q3 X – the two M&A losses. It sounds like the pipeline is strong does that suggest, I’ll seek we should expect that Q4 billings growth to be back up in that upper 20% range.

Chris Cabrera

We don't – Corey, thanks for the question. We don't normally give guidance on billings. I think it's pretty safe to say we will uptick from where we came in this quarter and try to get it back in the mid-20s we'll see how things go. And we anticipate getting back to that level for the full year next year for sure.

Corey Greendale

Okay. That speaks to my next question which is, I think, although you haven't talked about it specifically, at least not that I recall recently, about your growth in your sales force this year. Can you just talk about did – ultimately did – is the sales force this year growing in that mid-20%s range and should we expect similar growth in fiscal 2018?

Chris Cabrera

Again what we had told folks and what we've operated to is growing our FQBR count faster than the overall growth rate in the company. We've achieved that so far this year we look to be on track again achieve it through Q4. And as I just mentioned we're going to continue to hire in what we see is a good market opportunity. And that would include continuing to hire FQBR with that same rate going into FY2018.

Corey Greendale

But the concept is continue to resource that in order to grow billings mid-20% range for next year as well?

Chris Cabrera

That's right.

Corey Greendale

Good. Just one last quick housekeeping thing. You said professional services gross margin, I think you've said in the past that the range you achieved this quarter is not the sustained rate. Is that where we should expect the professional services gross margin to be down from this level?

Chris Cabrera

It is tough to pin that down every quarter because of a mix of professional services. I would suspect this is a relatively high watermark. I've previously spoken of high single, the low double-digit growth margins and I think that's a pretty safe assumption.

Corey Greendale

All right. I will turn it over. Thank you.

Chris Cabrera

Thank you.

Operator

Our next question comes from Ilya Grozovsky with National Securities.

Ilya Grozovsky

Thanks, guys. I just had a question on the adjusted EBITDA in the fourth quarter. You guys have made a lot of progress over the last four quarters or so on improving the adjusted EBITDA. Looks like the January quarter it's going to go in the wrong direction and get a little bit worse. Given that the top line essentially stays the same, where is the delta from this quarter to next quarter?

Chris Cabrera

Yes. So the delta is pretty much going to be where we anticipate a strong fourth quarter in terms of compensation on the sale side which is typical for us on our seasonal pattern. We also have other year-end activities including our fiscal year audit expense that goes into that quarter. Both of those items will be the kind of key drivers to move EBITDA back into a little higher – little more of a loss range than we had just anticipated.

Ilya Grozovsky

Okay. And do you anticipate that moving forward into first quarter it goes back to the trend you've been on?

Chris Cabrera

We haven't guided yet for first quarter, I think as we look ahead in the next year the objective is to try to drive EBITDA at least to breakeven in the fourth quarter or thereabout next year. Other that I would suspect it will be bouncing around quarter-to-quarter there is expense seasonality in Q2 and Q3 due to events and things that come into play, certainly compensation comes into play. And that drives some of the variability quarter-to-quarter.

Ilya Grozovsky

Okay, great. Thank you.

Chris Cabrera

Welcome.

Operator

Next is Brent Thill with UBS.

Brent Thill

Hi Chris, on the sales productivity, can you just bring us up to speed in terms of what you're seeing, same ramp time, are you seeing anything different from that perspective?

Chris Cabrera

Hi Brent, no nothing different. We're still seeing – as you know the team is kind of trifurcated, so on the SMB side it’s still about three months to get them up to fully quarter bearing in the mid range. Our CSRs are robably closer to six months. And then on the RSM side the big enterprise guys it's typically nine months maybe can certainly be 12 months before they're on full quota. So we aren’t seeing anything really change there at all.

Brent Thill

Okay. If you could actually talk to some of the new products that you've been launching and the impact that you're seeing from those new solutions and if maybe not seeing it right now, when you would expect an inflection to hit.

Chris Cabrera

Yes so I still call insights new because even though as we’re in the 30% attach rate it's holding that out just about a year, year and a half. So I think, I’ve talked a little bit about already in the call that certainly the fastest growing the hottest thing in terms of our products. But we have this new inspired product that's our coaching and on-boarding app that we recently announced. We had a lot of action on that at Dreamforce. I mentioned on the prepared marks that we had over a 1,000 people, we had a off site location in addition to the big move we had at Dreamforce on the floor, where we had about a 1,000 different customers and prospects come over and we were giving out just tons and tons of these Inspire demos.

What's need about the Inspire early returns is that demo is very easily, people get it very quickly and it just seems like it's going to be an easier sale. I would expect we're going to see some nice sales even in this quarter in Q4 that we’re currently in from Inspire. Also Connect was a new product that I talked about in the prepared remarks this was something that we launched at the Dreamforce event, as well. We announced it and last year there was some pre-build stuff. We've had APIs for many years which have allowed our real technical customers to use those APIs and even our people to build connectivity within products. With Xactly Connect allows for is a much better, deeper automated integration using APIs than before. And before a lot of our customers had to come to us to get us to do a lot of the integration work and Connect really allows them to do it.

We're seeing some really cool stuff happening with our customers in fact we already have over 23 customers just since Dreamforce that are either live or on Connect or in the process of going live on Connect, so really nice traction there, as well.

So kind of across the board all the new things that we've been coming out with seem to be having some pretty good traction, I think Inspire is the next one up to start contributing more from a revenue standpoint, but the others are doing great.

Brent Thill

Okay. And just to clarify to Rob's point, you take those two deals out, and I know you mentioned there was one deal that shifted, but if you take that away, there's nothing else that you see that's changed in the business. This was an anomaly and your perspective is that the business remains on a pretty good trajectory?

Chris Cabrera

It really is Brent and that's why I know people will do what they're going to do. And may be react to it but I'm not the least bit worried about there’s any sleep, the business is strong, pipelines are strong, the market is strong for us. This is a blip on something that really is out of our control. And these M&A happen I mean we can't force them to force a company that doesn't have a relationship with us to embrace a seven-figure bill.

And by the way,12-year history, it's never happened. So it’s super unusual that you have this thing happen and which is why I truly do think it's an anomaly. If it had happened five other times, we probably would have not be saying that. But a) it's never happened and b) we don't see anything in the future in the pipeline that would indicate anything like this happening again.

So it's just part of the SAS world where these things do happen and you don't get that big renewal. And the way the numbers work out optically makes things look not great right in the short run.

Brent Thill

Thanks for the color.

Chris Cabrera

Thanks Brent.

Operator

The next question comes from Scott Berg with Needham & Company.

Scott Berg

Hey, Chris and Joe. Thanks for taking my questions. I just have one brief one here. Chris, can you talk about pipeline composition a little bit? You guys seem pretty positive on business and you made some real brief comments earlier, but as you look to the pipelines today exiting – I guess we're almost exiting 2016 versus where you were exiting 2015, can you help give us a sense on maybe how deal sizes look on a year-over-year basis? I think it's growing faster than the overall business but I'm just trying to see if there's any color there.

Chris Cabrera

Yes actually the pipeline is definitely growing faster than the overall business I mentioned that earlier as you said. We're seeing some nice traction internationally you’ve heard me talk about that we're seeing some nice build up with our partners throughout Latin America. In Europe we're seeing some nice buildup in our pipelines. What's interesting over there is it seems to be we're getting more traction in the mid and lower part of the market. And it feels like some of the larger deals over there are stagnating a little bit, but because we're doing some nice volume stuff on the mid to low we’re making up for it.

Here are the area of the states which remember is 90% of our revenue, it's just – the pipelines are great. And what's really exciting about it is we're seeing it across all these different industries. I mentioned some of these new ones like Tuff Shed and Grubhub, I mean these are kind of deals that in my 20 years in this space we just weren't doing those kind of deals. And so it's exciting to see the variety of deals, the variety of verticals still continue to see more traction in retail.

As far as the deal sizes, I mean we definitely still see – we have a lots of 1,000, 5,000, 8,000 kind of seat deals in our pipeline. We still sort of take – shy away from the 20,000, 30,000, 50,000 seat deals, partly because there's still few of them. And they become like lifetime achievement awards. The real meat of this market is kind of in that sub 10,000 seat range. And so you'll not surprisingly you’d see that our pipelines are very, very full with deals in that sub 10,000 seat range which is again the majority of the market.

Scott Berg

Great. Thanks. That's all I have. Thanks for taking my question.

Joe Consul

Thanks Scott.

Chris Cabrera

Okay thanks Scott.

Operator

And our final question comes from Brian Schwartz with Oppenheimer.

Brian Schwartz

Hi. Chris, I just had one end of the call question here for you, just taking a step back here, moving beyond the quarter. I know for your business here that this month you are celebrating the anniversary, the 12th anniversary of the business. Congratulations on all the amazing achievements. You got $100 million business, practically. You've got about a $75 million current revenue business, all the value-added services that you've created for your customers. Just wanted to ask you as you look out into that crystal ball and you think about the next decade of the business, Joe has talked about that you've built this business to be a sustainable 25% billings growth type business. Is that what you're thinking?

Do you think over a 10-year period do you think that the model could be sustainable at that type of growth rate? I'm not looking for set guidance, put anything into stone, but you really think this could be a $0.5 billion revenue basis here when you look on your 20th-plus anniversary the future? Thanks again for taking that question and sharing your thoughts on the business.

Joe Consul

Yes, thanks Brian, thanks for the question, I really appreciate it. And I appreciate the comments of twelve years it’s been absolutely a [indiscernible] and I think it's too personal. But I think you might know I turned 50 last – on Monday this week. And I’ve been told that your 50s is the most productive years. So I’m thinking these next ten years are really where we’re going to make things that happen. And I really think that is absolutely a very real chance to make this $0.5 billion business or more.

There's nothing stopping us from a market share point. It is completely greenfield, we’re seeing it before eyes wake up to the things that we’re doing. I think data piece is what’s getting a lot of companies, kind of their – kind of sitting on the sidelines and getting hacked and something. So I just couldn't be more excited as we as we go into these next eight years were toward our 20 anniversary.

I just, I really think that through some great partnerships. I think the companies really think that through some great partnerships. I think the company needs to get some you – that's why I was excited about this reseller I think that’s just one or two of the beginning kind of opportunities where we can really begin to leverage other people sales forces to grow this company faster. We believe wholeheartedly that we can maintain that mid-20s growth rate and we can get this company profitable and be in a situation where we're doubling the company every three or four years.

I also think that while we've only done one acquisition over the years, there's no question over time. And the time horizon that you're talking about in the next eight years then we could – there are some things we could tuck in over time and get there even faster. So no question we're committed to space, it's a great space, it's a fun space to be, it's great to be selling what we're selling and have the unique things that we have in our space.

So thanks for the question Brian.

Brian Schwartz

Thanks for sharing those thoughts.

Operator

That concludes today's question-and-answer session at this time I'll turn the conference back to management for any additional or closing remarks.

Chris Cabrera

Well thanks everybody for attending the call today. I appreciate all the good questions and look forward to seeing you guys as usual on the road and on the phone. And we're going to get back to having a great Q4 and look forward to sharing those data with you in a few months. Thank you.

Operator

This does conclude today's conference. We thank you for your participation. You may now disconnect.

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