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CALD > SEC Filings for CALD > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for CALLIDUS SOFTWARE INC

Form 10-Q for CALLIDUS SOFTWARE INC


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of financial condition and results of operations should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K for 2011 and with the unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q . This section of the Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our future plans, objectives, expectations, prospects, intentions and financial performance and the assumptions that underlie these statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will," and similar expressions and the negatives thereof identify forward-looking statements, which generally are not historical in nature. These forward-looking statements include, but are not limited to, statements concerning the following:
levels of recurring revenues, changes in and expectations with respect to revenues and gross margins, future operating expense levels, the impact of quarterly fluctuations of revenue and operating results, staffing and expense levels and the impact of foreign exchange rate and interest rate fluctuations. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may be based on assumptions that do not prove to be accurate. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Many of these trends and uncertainties are described in "Risk Factors" set forth in our Annual Report on Form 10-K for 2011 and elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Overview of the Results for the Three Months Ended September 30, 2012

We are a market and technology leader in cloud-based solutions for sales effectiveness, sold to companies of every size throughout the world. Companies use sales effectiveness solutions to optimize investments in sales planning and performance, specifically in the areas of sales and channel quota, coverage, incentive management, and coaching and training. Callidus solutions enable businesses to achieve new insights into the principal levers that drive salesforce performance so they can repeat sales successes for more sustainable, predictable sales growth. Sales effectiveness programs are key vehicles in aligning sales and channel partner goals with top business objectives.

At the end of 2011, we adopted a new brand identity, "CallidusCloud," to more accurately reflect our cloud-based solutions and technology roadmap. We are currently doing business as "CallidusCloud."

The CallidusCloud solution suite helps businesses drive sales productivity across every stage of the sales talent lifecycle, from making the right sales hire, to making it easier to sell, to motivating sales execution with targeted incentives and rewards, to building a knowledge-based work culture with high frequency coaching and development. The CallidusCloud platform is composed of the Hiring Cloud, the Marketing Cloud, the Selling Cloud, and the Learning Cloud.

Our solution suite has undergone a dramatic expansion since the beginning of 2011 with the acquisition of ForceLogix (sales coaching), Salesforce Assessments (sales hire testing), iCentera (sales enablement), Litmos (learning), Rapid Intake (content authoring), Webcom (configure-price-quote, or CPQ), Leadformix (marketing automation and sales enablement), and 6FigureJobs (job advertisements, recruitment media services and other career-related services) as well as the successful launch of the Monaco Summer 2011 release and Sales Selector, an online sales recruiting solution that brings together video interviewing with online temperament assessments. For every company, regardless of size, geography or vertical, there is now one or more CallidusCloud solutions that enable them to drive productivity in their sales organization.

While we offer our customers a range of purchasing and deployment options, from on-demand subscription to on-premise term license, our business and revenue model is focused on recurring revenue. Recurring revenues consist of Software-as-a-Service (SaaS) revenues and recurring maintenance revenues. SaaS revenues are primarily made up of on-demand hosting revenues, sales operation services and term license revenue.

SaaS Revenue Growth and Customer Expansion

SaaS revenue continued to drive the growth in recurring revenues and total revenues for the three months ended September 30, 2012. SaaS revenues grew to $13.5 million for the quarter ended September 30, 2012 representing a $2.2 million or 19% increase over the same period in 2011. As we expected, our SaaS revenue was down sequentially in the second quarter of 2012 due to attrition. During the third quarter of 2012, we were able to replace the lost revenue through new bookings and feel we have positive momentum going into the fourth quarter. Total recurring revenues for the three months ended September 30, 2012 grew by 9% over


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the same period in 2011, reflecting the strong growth in SaaS revenues partially offset by an expected decline in recurring maintenance revenues as we continue to move away from our legacy license model. Recurring revenues continue to account for over 70% of our total revenues and we expect this trend to continue going forward. Total revenues for the three months ended September 30, 2012 were $23.9 million, up $2.9 million, or 14%, from the same period in 2011.

During the third quarter of 2012, we continued to add subscription based customers at a record rate, adding 158 new customers to the business. Our core SaaS customer retention rates on a dollar and customer count basis recovered at over 92%. We believe our high retention rates are an indication of the quality of service we provide and the quality of our customer base.

Margin Improvement

Recurring revenue gross margins for the quarter ended September 30, 2012 were $10.5 million or 60% of revenue. This is an increase of $2.9 million or 38% over the same period last year. The increase in recurring revenue gross margin is also reflected in the 35% increase in total gross margin to 50% over the same period. These increases reflect our continued efforts to drive margin improvement in our SaaS operations. Over the past year and continuing into this year, we have taken several steps to increase recurring gross margins. These steps include the transfer of hosting operation services from an external provider to an in-house team, the addition of new products, both acquired and developed internally, that have a lower operating cost of operations and the optimization of our on-demand infrastructure that takes place continuously throughout this year.

Challenges and Risks

In response to market demand, over the past few years we have shifted our primary business focus from providing perpetual software licenses to providing on-demand software as a service. Toward the end of 2009 we also began offering our on-premise products under term license arrangements. We believe that these offerings better addresses the needs of our customers, and at the same time, provides more predictable revenue streams. On the other hand, for customers that prefer to purchase software on a perpetual basis, we continue to offer such licenses, and in the quarter ended September 30, 2012, we generated over $2.0 million in perpetual license revenue. We expect perpetual license revenue to remain a relatively small component of total revenues and to fluctuate from period to period.

While we have a number of sales opportunities in process and additional opportunities coming from our sales pipeline, we continue to experience wide variances in the timing and size of our transactions. We believe one of our major challenges continues to be increasing prospective customers' prioritization of purchasing our solutions over competing projects. As part of our effort to address this challenge, we have set goals that include expanding our sales efforts, promoting our on-demand services and continuing to develop new products and enhancements to our suite of products. Since the beginning of 2011, in order to expand our product offerings and customer base we have completed eight acquisitions. In addition, in 2012 we have invested and expect to continue to invest, in the expansion of our salesforce to better exploit the opportunities presented by our solutions. These investments have adversely affected our current operating results and will continue to affect our operating results in the near term as we invest ahead of anticipated growth. Our long term success will depend in part on our ability to realize return on these investments through increased revenue.

In addition to these risks, our future operating performance is subject to the risks and uncertainties described in "Risk Factors" in Item 1A of our 2011 Form 10-K.

Application of Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations which follows is based upon our consolidated financial statements prepared in accordance with GAAP. The application of GAAP requires management to make assumptions, judgments and estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures regarding these items. We base our assumptions, judgments and estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial condition or results of operations will be affected. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with our Audit Committee of the Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, allowance for doubtful accounts and service remediation reserve, stock-based compensation, valuation of acquired intangible assets, goodwill impairment, long-lived asset impairment, contingent consideration and income taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. There were no significant changes in our critical accounting policies and estimates during the three months ended September 30, 2012 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.


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Recent Accounting Pronouncements

We did not adopt any new accounting pronouncements during the quarter ended September 30, 2012.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2012 and 2011

Revenues, Cost of Revenues and Gross Profit

The table below sets forth the changes in revenues, cost of revenues and gross profit for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 (in thousands, except for percentage data):

                              Three                           Three
                             Months                          Months
                              Ended        Percentage         Ended        Percentage
                          September 30,     of Total      September 30,     of Total       Increase     Percentage
                              2012          Revenues          2011          Revenues      (Decrease)      Change

Revenues:
Recurring                $        17,533           73 %  $        16,015           76 %  $      1,518            9 %
Services and other                 6,393           27 %            5,044           24 %         1,349           27 %

Total revenues           $        23,926          100 %  $        21,059          100 %  $      2,867           14 %

Cost of revenues:
Recurring                $         6,989           40 %  $         8,363           52 %  $     (1,374 )        (16 )%
Services and other                 5,079           79 %            3,937           78 %         1,142           29 %

Total cost of revenues   $        12,068           50 %  $        12,300           58 %  $       (232 )         (2 )%

Gross profit:
Recurring                $        10,544           60 %  $         7,652           48 %  $      2,892           38 %
Services and other                 1,314           21 %            1,107           22 %           207           19 %

Total gross profit       $        11,858           50 %  $         8,759           42 %  $      3,099           35 %


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                        Nine                             Nine
                       Months                           Months
                        Ended        Percentage          Ended        Percentage
                    September 30,     of Total       September 30,     of Total       Increase     Percentage
                        2012          Revenues           2011          Revenues      (Decrease)      Change

Revenues:
Recurring          $        52,446           75 %   $        46,067           75 %  $      6,379           14 %
Services and
other                       17,274           25 %            15,158           25 %         2,116           14 %

Total revenues     $        69,720          100 %   $        61,225          100 %  $      8,495           14 %

Cost of
revenues:
Recurring          $        22,449           43 %   $        24,860           54 %  $     (2,411 )        (10 )%
Services and
other                       14,292           83 %            11,952           79 %         2,340           20 %

Total cost of
revenues           $        36,741           53 %   $        36,812           60 %  $        (71 )         (0 )%

Gross profit:
Recurring          $        29,997           57 %   $        21,207           46 %  $      8,790           41 %
Services and
other                        2,982           17 %             3,206           21 %          (224 )         (7 )%

Total gross
profit             $        32,979           47 %   $        24,413           40 %  $      8,566           35 %

Total Revenues. Total revenues for the three months ended September 30, 2012 were $23.9 million, an increase of 14% compared to the same period in 2011. Total revenues for the nine months ended September 30, 2012 were $69.7 million, an increase of 14% compared to the same period in 2011. The increases were primarily due to higher volume of recurring revenue generated by our SaaS business due to our continued emphasis and focus on recurring revenues.

Recurring Revenues. Recurring revenues, which consists of SaaS revenues and maintenance revenues, increased by $1.5 million, or 9% in the three months ended September 30, 2012, compared to the same period in 2011. Recurring revenues increased by $6.4 million, or 14% in the nine months ended September 30, 2012, compared to the same period in 2011. The increases were primarily attributable to growth in our SaaS revenues which increased by 19% in the three months ended September 30, 2012 and 26% in the nine months ended September 30, 2012, compared to the same periods in 2011. SaaS revenue growth is mainly driven by an increase in new business, revenues generated from our acquired companies contributing to the increase in new business and revenues from customers going live during the period. Our investment in expanding the salesforce this year also positively impacted the revenue growth. The increases in total recurring revenues were partially offset by maintenance revenues associated with perpetual licenses which decreased by $0.5 million or 10% in the three months ended September 30, 2012 and $1.4 million or 11% in the nine months ended September 30, 2012, compared to the same periods in 2011. The decreases were primarily driven by customers converting from on-premise perpetual license to on-demand subscription service.

Services and Other Revenues. Services and other revenues, which consist of integration and configuration services, training and perpetual licenses, increased by $1.3 million or 27% in the three months ended September 30, 2012 and $2.1 million or 14% in the nine months ended September 30, 2012, compared to the same periods in 2011. The increase in the three months ended September 30, 2012, as compared to the same period in 2011, was primarily due to the increase in our perpetual license revenue from $1.0 million in 2011 to $2.0 million in 2012, a $1.0 million or 102% increase. Additionally, our revenue generated from integration and configuration services increased by $0.3 million or 7%, from $4.0 million in the three months ended September 30, 2011 to $4.3 million in the three months ended September 30, 2012. The increase in the nine months ended September 30, 2012, as compared to the same period in 2011, was primarily due to $1.6 million or 12% increase in our revenue generated from integration and configuration services, from $12.6 million in the nine months ended September 30, 2011 to $14.2 million in the nine months ended September 30, 2012. Additionally, our perpetual license revenues also increased by $0.5 million or 20%, from $2.6 million in the nine months ended September 30, 2011 to $3.1 million in the nine months ended September 30, 2012. The increases in our revenue generated from integration and configuration services were primarily related to additional services revenue from our recently acquired businesses, Webcom CPQ and Rapid Intake. The increases in our perpetual license revenue were primarily due to certain existing perpetual license customers continuing to purchase additional licenses in compliance with their license rights under the contract. We expect our perpetual license revenue to continue to fluctuate from period to period as our primary business focus has shifted to our recurring revenue model.


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Cost of Revenues and Gross Profit

Cost of Recurring Revenues. Cost of recurring revenues decreased by $1.4 million or 16%, in the three months ended September 30, 2012 and $2.4 million or 10% in the nine months ended September 30, 2012, compared to the same periods in 2011. The decrease was primarily due to lower third-party data center costs of $0.5 million in the three months ended September 30, 2012 and $1.8 million in the nine months ended September 30, 2012, lower personnel cost of $0.4 million in the three months ended September 30, 2012, and lower professional fees of $0.3 million in the three months ended September 30, 2012 and $0.5 million in the nine months ended September 30, 2012. Our third-party data center costs decreased as we transitioned certain functions from external to internal resources. Our personnel-related costs decreased in the three months ended September 30, 2012 due to decreased cost of support personnel attributed to the centralization of support function to our headquarters in Pleasanton. Our professional fees decreased due to a reduction in the number of contractors used to support certain customers.

Cost of Services and Other Revenues. Cost of services and other revenues increased by $1.1 million or 29% in the three months ended September 30, 2012 and $2.3 million or 20% in the nine months ended September 30, 2012, compared to the same periods in 2011. The increases were primarily due to higher personnel-related costs, including stock-based compensation, and consulting fees. Personnel-related costs increased by $0.4 million in the three months ended September 30, 2012 and $1.0 million in the nine months ended September 30, 2012 primarily due to increased headcount as a result of the 2011 and 2012 acquisitions and new hires in our core business. The increase was also driven by an increase in stock-based compensation expense of $0.2 million in the three months ended September 30, 2012 and $0.6 million for the nine months ended September 30, 2012 primarily due to vesting of stock grants, as well as new hire, merit and retention stock grants. Additionally, consulting fees increased by $0.5 million in the three months and nine months ended September 30, 2012 primarily due to increase in third party consulting services used to support the business.

Gross Profit. Overall gross margin percentage was 50% for the three months ended September 30, 2012, compared to 42% during the same period in 2011, resulting in $3.1 million or 35% increase in gross margin. Overall gross margin percentage was 47% for the nine months ended September 30, 2012, compared to 40% during the same period in 2011, resulting in an increase of $8.6 million or 35% in gross profit dollar value. Our gross margins improved substantially as a result of higher recurring revenues which were driven by a 19% increase in SaaS revenues for the three months ended September 30, 2012 and 26% for the nine months ended September 30, 2012, compared to the same periods in 2011.

Our recurring revenue gross margin percentage increased to 60% for the three months ended September 30, 2012, from 48% in the same period in 2011, while the gross profit dollar value increased by 38% or $2.9 million. The recurring revenue gross margin percentage increased to 57% for the nine months ended September 30, 2012, from 46% in the same period in 2011, while the gross profit dollar value increased by 41% or $8.8 million. The increases in recurring revenue gross margin were primarily the result of improved SaaS margins driven by lower third-party data center and personnel costs as we moved away from outsourcing our data center resources to third-party and used our own internal resources.

Services and other revenue gross margin percentage was 21% for the three months ended September 30, 2012, a decrease from 22% in the same period of 2011, while the gross profit dollar value increased by 19% or $0.2 million. The increase in gross profit dollar value was primarily due to an increase in perpetual license gross profit by $1.0 million. This was partially offset by lower gross profit generated from services and other revenues generated from integration and configuration services for the three months ended September 30, 2012, which negatively impacted the overall services and other revenue gross profit by $0.8 million. Services and other revenue gross margin was 17% for the nine months ended September 30, 2012, a decrease from 21% in the same period of 2011, while the gross profit dollar value decreased by 7% or $0.2 million. The decrease in gross margin was primarily due to lower gross margin generated from services and other revenues generated from integration and configuration service for the nine months ended September 30, 2012. This had a negative impact on the overall services and other revenue gross profit by $0.6 million, partially offset by the increase in perpetual license gross profit by $0.4 million.


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Operating Expense



The table below sets forth the changes in operating expenses for the three and
nine months ended September 30, 2012, compared to the same periods in 2011 (in
thousands, except percentage data):



                              Three                             Three
                             Months                            Months
                              Ended         Percentage          Ended         Percentage
                          September 30,      of Total       September 30,      of Total        Increase      Percentage
                              2012           Revenues           2011           Revenues       (Decrease)       Change

Operating expenses:
Sales and marketing      $         8,322            35 %   $         5,253            25 %   $      3,069            58 %
Research and
development                        3,947            16 %             3,145            15 %            802            26 %
General and
administrative                     4,785            20 %             4,673            22 %            112             2 %
Acquisition-related
contingent
consideration                         50             - %                 -             - %             50
Restructuring                        (53 )           - %                99             - %           (152 )        (154 )%

Total operating
expenses                 $        17,051            71 %   $        13,170            63 %   $      3,881            29 %




                               Nine                             Nine
                              Months                           Months
                               Ended         Percentage         Ended         Percentage
                           September 30,      of Total      September 30,      of Total        Increase      Percentage
                               2012           Revenues          2011           Revenues       (Decrease)       Change

Operating expenses:
Sales and marketing       $        23,518            34 %  $        14,303            23 %   $      9,215            64 %
Research and
development                        12,023            17 %            8,416            14 %          3,607            43 %
General and
administrative                     14,639            21 %           12,500            20 %          2,139            17 %
Acquisition-related
contingent
consideration                      (1,787 )          (3 )%               -             - %         (1,787 )
Restructuring                         561             1 %              136             - %            425           313 %

Total operating
expenses                  $        48,954            70 %  $        35,355            58 %   $     13,599            38 %

Sales and Marketing. Sales and marketing expenses increased by $3.1 million or 58%, in the three months ended September 30, 2012 and $9.2 million or 64% in the nine months ended September 30, 2012, compared to the same periods in 2011. The increases were primarily driven by the increase in personnel-related costs, stock-based compensation, marketing events and programs, and professional fees. The increase in personnel-related costs of $1.9 million in the three months ended September 30, 2012 and $5.3 million in the nine months ended September 30, 2012 was due to increased headcount from our 2011 and 2012 acquisitions as well as our continued salesforce build-out in our core business in 2012. The increase . . .

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