Below is transcript of the E2open Inc (NASDAQ:EOPN)’s Third Quarter Fiscal 2015 Financial Results Conference Call, held on January 8, 2015, at 5:00 p.m. EST. Archon Capital Management, Invesco Private Capital (Wl Ross) and Trellus Management Company was among E2open Inc (NASDAQ:EOPN) shareholders at the end of the second quarter.
E2open Inc (NASDAQ:EOPN) E2open, Inc. is a provider of cloud-based, on-demand software solutions. The Company’s software applications allow network participants to input access and share data and execute business processes across internal operating units and external entities.
Host:
Greg Cliner– Investor relations for E2 Open.
Company Representatives:
Mark Woodward– E2 Open’s and CEO
Peter Baloney, E2 Open’s Chief Financial Officer
Analyst:
Bavan Suri – William Blare
Scott Childs – Bank of America Merrill Lynch
Brendan Barnacle – Pacific Crest Securities
Richard Davis – Canacord
Michael Hang – Neeham & Company
Scott Burg – Northland Capital Markets
Alex Zukin – Stephens.
Operator
Greetings and welcome to the E2 open third-quarter fiscal 2015 earnings conference call. At this time all participants are on a listen only mode. Every question and answer will follow the former presentation. If anyone requires operator assistance during the conference please press *0 on your telephone keypad. As a reminder this conference is being recorded.
I would now attend the conference over to host, Greg Cliner, investor relations for E2 Open. Thank you, you may begin.
Host: Greg Cliner
Thank you. Good afternoon and welcome to E2 open third quarter fiscal 2015 earnings conference call. Joining me today are Mark Woodward, E2 Open’s President and CEO and Peter Baloney, E2 Open’s Chief Financial Officer. Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics were reported, results can be found in earnings press release. Non-GAAP financial measures exclude the impact of stock-based compensation, non-cash income taxes, certain accelerated revenue recognized in connection with the contract amendment, amortization of intangibles, acquisition expenses and the impact of purchase accounting adjustments to deferred revenue.
At times in our prepared comments or responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business for quarterly results. Please be advised, that this additional detail may be one time in nature and we may or may not provide an update on the future on these metrics. The primary purpose of today’s call is to provide you with information regarding our third quarter fiscal 2015 performance, in addition to our financial outlook for our fourth-quarter and full fiscal year 2015.
Some of our discussion responses to your question may contain forward-looking statements. These statements are subject to risks, uncertainties and assumptions. A discussion of the risks or uncertainties related to our business is contained in our filings, with the Securities and Exchange Commission. Should any of these risks or uncertainties materialize, for sure that our assumptions as outlined in our earnings release and the documentary referred to in that release, proved to be incorrect. Actual company results could differ materially from these forward-looking statements. I encourage you to visit our investor relations website, investor.E2open.com to access our third-quarter press release, periodic SEC reports or webcast replay of today’s call or to learn more about E2open.
Finally, before I turn the call over to Mark, please be advised that during today’s discussion, we may reference certain unreleased services or features, not yet currently available. We cannot guarantee the future timing or availability of these services or features, must recommend the customers who purchase our services, make their purchase decisions based on services and features that are currently available.
With that, let me turn the call over to Mark.
Mark Woodward, E2Open’s President and CEO
Thanks Greg. Welcome everyone and thanks for joining us today. As we will describe in more detail in a moment our revenue for the third quarter came in at the high end of our guidance range. In addition the bottom line results were well above my guidance, as we continue to focus on identifying ways to be more efficient in our operations, which we’ll talk more about in a bit.
Looking more broadly at the business, our pipeline deals remain healthy, continues to grow. However, some recent sales execution challenges have caused us to reduce our guidance, for both revenue and bookings, for the balance of the year. As a typical in our business and enterprise sales, we were expecting a significant push of our bookings to fall later in the fiscal year. Bookings in Q3 were below our expectations. We’re forecasting a solid quarter for bookings in Q4. Little shy of what we had previously anticipated. This has largely been an issue of sales execution, some of this was caused by extended sales cycles and some of this had to do with support forecasting wind covered inter pipeline manager process, after the recent transition enter sales leadership. We have worked diligently to further scrub the pipeline and feel comfortable with this composition, expected contribution and timeline. We’ve also made a few other changes within our sales organization to improve on our execution. As mentioned a moment ago, this is largely an issue of pipeline management and not a macro issue as we continue to see more new logos in our pipelines, across all verticals.
We’re confident we’ve addressed these issues, however, it will most likely take a quarter to fully realize the positive impact and the changes that we’ve implemented. Additionally we’ve taken steps to lower our expense profiling Q4 and into fiscal 2016, as evidenced in both our results today and the guidance provided in an earlier press release.
While we’re not providing detailed guidance for fiscal 2016 on this call, it’s our intention to pull in our breakeven point forward in the latter part of fiscal 2016. Let me transition back to some of the highlights from the third quarter. We added five new customers in the quarter along with the number of expanses with existing customers. In terms of new logos we have particular success in CBG and retail quarters. Building our momentum, we’ve seen in these particles over the past several years.
One of our new wins was with L-Brands, working in conjunction with our partner KPMG. L-Brands is a $10 billion apparel and personal care products manufacturer and retailer. For those not familiar with L-Brand, they are the parent company of leading brands such as Victoria’s Secret, Pink and Bath and Body Works.
L-Brand corporate goals are speed and agility via increased visibility and alignment to demand signals across the supply-chain. Aspects are platform as uniquely suited to address. We started out as logistics project, quickly morphed into transformation leper for raw materials and collaboration and 600 to 2 suppliers. The initial habilitation will touch processes across symmetry and logistics visibility, order lifecycle, contract management as well as finished goods and raw material projections.
One of our existing customers is The Gap. That brand gives us another significant brand-name in the Pearland Street that we believe we can leverage to expand deep and further into the space.
We also signed a deal with McCormick and Company, a global leader in spices, herbs and seasonings. We’ve been working with them to fill strategic initiative across supplier collaboration and better managed inventory that projected to result in significant savings driven by a reduction in inventory and associate carrying cause. This is a highly competitive deal, but the power platform along with the success that we’ve driven for other consumer goods companies and the fact that a large number of McCormick players are always active in our network, helps pictures a day.
Final win I want to discuss, is our latest win with the Coca-Cola family. Coke has a network of independent bottlers worldwide, they need to open as a recommended vendor at the corporate level, task of helping to improve supply-chain visibility and collaboration across as a footprint. Our lighthouse project with coke was a large bottling operation for the juice division in Mexico. That deployment has been quite successful. Last quarter we were selective for the bottling operations across Europe and North Africa. We’re quite pleased with our partnership with Coca-Cola and we are currently in discussions with them regarding deployment within other bottling divisions around the world.
We continue to experience good traction in our go to market activities with our side partners. This quarter, 2 out of 5 new customers we added involved in our side partners. To properly support the pipeline deal that we are managing with our side partners we’ve increased the capacity with the sales organization dedicated to managing partner activity.
As part of our marketing activities we are very active in the industry conference circuit in the recent periods. Speaking of events like the 2014 Consumer Goods Business and Technology Leadership Conference, The Oracle Open Applications Blue Plenary Meeting and American Supply Chain and Logistics Summit. To wrap up, we are obviously disappointed by the inconsistency in our execution. However, we feel these issues are temporary and well within our ability to control. We’ve taken the necessary steps to address these matters and remain confident in the opportunity in front of us.
With that, let me turn the call over to Peter for more detail on the financials.
Peter Baloney, E2Opens, Chief Executive Officer
Thanks Mark. Please note, I will be reviewing non-GAAP results in my discussion of our third fiscal quarter financials. A full reconciliation between GAAP and non-GAAP results can be found in our earnings press release. For the third quarter non-GAAP total revenue was 20.8 million. At the upper end of our guidance of 20.1 to 20.9 million. This compares to the 18.9 million for Q3 of last year. Non-GAAP subscriptions and support revenue was 16.9 million, up 15% year-over-year, but down 1% sequentially. The growth in our non-GAAP subscription system for revenue was impacted by the three non-renewals and one delayed deal, discussed in our Q2 call. Non-GAAP professional services and other revenue was 3.9 million, up sequentially but down year-over-year.
Non-GAAP gross margin for the quarter was 68%, this is up from 65% for Q3 of last year and flat sequentially.
Our subscriptions and support gross margin was 81%, comparable to the prior quarter and down slightly from 82% for Q3 of last year. Professional sGAAP operating loss is $4 million, for the quarter. Ahead of our guidance of the loss of 6 to 5.2 million. The upside was driven by continued actions to restrain the growth of our cost structure, as we work through the lost and delayed deals from Q2, and the sales execution issues Mark discussed, a moment ago. This compares to a loss of 3.9 million for Q3 of last year and 3.3 million for Q2. Non-GAAP EPS was negative 15 cents ahead of our guidance of negative $.20-$.17 this compares the $-.16 for Q3 of last year and $-.11 for Q2 of this year. Just beneath that was a loss of 3.3 million. Ahead of our guidance of a loss of 5.4 to 4.6 million, this compares to a loss of 3.3 million for Q3 of last year at a loss of 2.7 million for Q2. Cash pay operation was -9.2 million for the quarter. After taking into account capital expenditures and the cash pay for acquisition expenses, free cash flow was -9 million.
We ended the quarter with $25.1 million of cash and investments. We remain confident that we can maintain an adequate level of cash, based on our current operating model. We are providing guidance for Q4 and updating fiscal year guidance as follows, all of which is non-GAAP. For the fourth quarter of fiscal 2015 we expect revenue of 19.3 to 19.8 million. As you consider this figure, please recall that we have reached the end of the original adjustment period for the room contract amendment, from Q2 of fiscal 2013 and therefore will no longer be adding any revenue related to this event, to our non-GAAP revenue.
Operating loss is expected to be 6.6 to 6.1 million dollars. Leading to a non-GAAP EPS loss of $.22 to $.20, based on a diluted share count of 31.6 million. Adjusted EBITDA is expected to be a loss of 6.1 to 5.6 million. For the full fiscal year 2015, we now expect new and up sale subscriptions in support bookings of 71 to 75 million. We expect revenue of 80.5 to 81 million. Operating loss is expected to be 18.1 to 17.6 million, leading to a non-GAAP EPS loss of $.63 to $.61, based on a diluted share count of 30.5 million. We also expect adjusted EBITDA to be a loss of 15.7 to 15.2 million. Finally our free cash flow is expected to be -15.5 to $-14.5 million. I also wanted to provide a few high-level comments, on our fiscal 2016 plans.
We’re still finalizing our operating plan for next year, but the extended timing of the bookings discussed early, will impact the revenue growth in fiscal 2016. Also as Mark mentioned earlier we’re pulling for the estimated adjusted EBITDA breakeven point, into the fourth quarter of fiscal 2016. We will be making further cost adjustments in the beginning of the fiscal year, to support this target. In summary while our reported numbers came in at or above our prior guidance, recent sales execution challenges are driving lower projections for the balance of the year. We’ve taken steps to address these issues will be working diligently to capitalize on our large market opportunity in the coming periods.
And now we’ll be happy to take your questions.
Mark Woodward
This is Mark. Before we get into the Q&A, I would like to expand on a few things first. We’re clearly not satisfied by with our performance, and I am personally not used to it and everyone on the E2 investors’ team considers it to be unacceptable. We need to be more consistent and more predictable with our results. At the end of the day, it’s all about results. We’ve had a number of things affect the results this year, some that are out of our control such that the abnormal number of customers that were required. Some things were clearly within our control, such as sales execution. In terms of bookings, we started the year with the Q1 that was right in line with expectations. Q2 wasn’t far off, though this is always our season’s lowest quarter. We expect to, in the past, always have made up for that in Q3 and Q4.
Well Q3 wasn’t a bad booking quarter it wasn’t good enough to make up for Q2 and Q4 forecast doesn’t fill the gaps. That being said this won’t be a bad bookings year. The midpoint booking guide to 73 million print doing up self-description support we weren’t paying 30% over last year where we experienced explosive growth of 79%. If you look at our booking growth rates last two years without shelling it growth rates would have been 47% for last year, and the mid-20s for this year.
I pointed that out, because we look vacation for bookings growth will not meet our original projections. This is by no means a dramatic slowdown in our business. Lastly, but very importantly, we’ve been diligent about being more operationally efficient, across the board. While revenue expectations have been reduced for Q4, we have not materially changed our aspects of bottom line. In addition, right now, charging to pull in our breakeven point and planning to be adjusted breakeven by Q4 of fiscal 2016, even on a reduced revenue outlook.
Our market opportunity and competitive position remain unchanged. We just need to execute much better. We’ve already made the changes that we feel necessary. To get our bookings back on track, we made the changes in sales leadership; we’ve also restructured North American finance organization. Might make it leaner and flatter; we’ve modified or still forecasting process; and dedicate more resources to our partner managerial organization. We’re still planning to invest in the area, to continue to ensure leadership position through our technology development effort; it will also we dedicated more resources to further penetrating our large and growing in stall face. I thank you all for your patience during this process, I will now be happy to take any questions.
Operator
Thank you we will now be conducting a question and answer session. If you like to ask a question please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Press *2 to remove your question from the queue. Professional speaker and equipment maybe necessary. To text use your handset, for the sake of star keys.
Our first question comes from Bavan Suri with William Blare. Please proceed with your question.
Bavan Suri – William Blare
Hey guys, can you hear me okay?
Mark Woodward
Yes Bavan.
Bavan Suri
So I guess I will just dive into the clearly the topic De Jour here on the bookings front. If you look at the five deals, new customers you signed this quarter, were the deal sizes your typical size or were they smaller giving you sort of that concern or given part of the reason for the bookings decline or downgrade on the bookings growth number.
Mark Woodward
I’d say it was mixed. If you look at — if you kind of average them all together, it’s probably a bit lower than what we have seen in the past, but not dramatically. I mean it wasn’t significantly different.
Bavan Suri
And so you’ve added typically — you typically add say two, three, four customers, you’ve added one extra and if the deal size is around that different, and sort of the upsell seems to be going along, it is just the Q4 net new that concerns you or is it the Q4 upsell that concerns you? And then just a follow-on too; there was sort of a forecast was added. Then did you lose a customer or this is just a continuation of one of the ones that was acquired?
Mark Woodward
Yes, so working backwards, we lost one that was a serious Cirrus customer, it was literally about $5,000 a year. So we were –
Unidentified Company Representative
5,000 a quarter just to be clear.
Mark Woodward
20,000 a year. Yes, so that was really not a big deal. I mean — and we are trying to actually cull some of those customers off where there’s no way we make money on some of these little tiny customers like that. Now I am looking back to the bookings data for this past quarter and I’d say that I guess on the whole three of them were probably smaller than average, one was larger. And I think part of this is a result of some of these deals where we are starting with pilots that tend to be smaller and then get larger. So average deal size do move around a bit from quarter-to-quarter. But again I didn’t have this going for the quarter that deal sizes are getting smaller and I don’t think we are seeing a trend where that’s going to happen.
And I am seeing one other thing Bavan is that I think we are also just trying to be maybe a bit more conservative on our outlooks too because it’s just not — obviously we are unhappy with the inconsistence of the performance and part of it was also just — the part of the issue of the booking outlook too is based on as I mentioned we’ve changed a bit our methodology around forecasting. I think some of the things were forecasted as a deal before, now I am not. So I will put a little more conservatism I think into it. And the average deal size is probably more affected by like the new business, not the upsell business.
Bavan Suri
Okay. I guess it just begs the question that, I know you are saying you are going to continue spending on sales but you have made the organization leaner and you’ve flattened it out. You’ve moved some people into the partner side of things. I guess when you look at the business, what gives you the confidence that this can reaccelerate back up without making any investments which then leads to are you cutting too much here to actually drive growth?
Mark Woodward
Well I wouldn’t think, I mean the most significant effect on our revenue for the year is from the cancellations and non-renewals we had, right. If you added up starting with at the beginning of the year we dropped $10 million, right. So that’s the single largest affect. I absolutely believe the pipeline is there. I mean as you can imagine I’ve been doing a lot of scrubbing on the pipeline and have been highly involved and as I’ve always have been. But really digging into the business as we’ve kind of transitioned it over and made some of the changes that we did, and I just know the business was there simply by being involved and looking at it and just seeing it in the pipelines. And so that’s why, I am not sure if you are looking for that much reacceleration, I think just by us not having the cancellations next year we did this year, and having growth that’s at bookings standpoint, it’s even equivalent to what we had this year on a net new basis, and revenue comes back.
Bavan Suri
Yes, you had that large deal last year that one of the SIs helped you closing the deal, energy gas deal that was I think it was 4x or 5x the average size of the typical deal, figured it would take 12 months to implement. I would expect some of that stuff given that the incremental customer adds this year. All that sort of stuff, the solid bookings the previous year to sort of drive revenue growth nicely through the year, it’s more of my concern around bookings growth and sort of the stuff I am supposed to sign but how do you drive net new bookings if the sales team is not leaner and shifted a little bit.
Mark Woodward
Let me be clear about that. So we have made no reductions in sales head count. It’s purely in management and structure. So we’ve taken a layer out and we’ve done some consolidation at the management level. We’ve made no changes at the field level.
Bavan Suri
Okay.
Mark Woodward
It’s really just allowed us I think to get closer, it just allowed us to get closer to the business.
Bavan Suri
How has the market, the competitive environment changed at all? Are you seeing more pressure from the competitors from a price perspective or from an offering perspective?
Mark Woodward
No. I mean it didn’t in this business or any business. I mean you see competitors come and go and you will see certain quarters where they seem to be strong and then they can just completely fade away. I mean there’s really no — in the second half of this year there’s no change in competitive landscape from the first half of the year. I mean we are not dealing with anything new, any new competitors. In fact the wins we have, the couple I talked about, we competed very well against even installed competitors who beat them. So I don’t, I haven’t felt any real difference in the competitive dynamic at all.
Bavan Suri
Okay, I will jump back in queue. Thanks for taking my questions.
Mark Woodward
Yes.
Operator
Thank you. Our next question comes from the line of Scott Childs with Bank of America Merrill Lynch. Please proceed with your question.
Scott Childs – Bank of America Merrill Lynch
Hi. I had a question; I wanted to drill down into the new upsell bookings revision. The scrubbing, you mentioned there was a scrubbing on the pipeline. I am wondering what was the exact change in the methodology that drove the discrepancy. It seems to be a fairly large change that drove to the kind of the $20 million change in the bookings all of a sudden.
Mark Woodward
Well we have done a couple of things. One we have implemented some new technology that allows us to have I think better view on exactly where we are in a sales cycle based on lot of things — just relationships and milestones in the sales process. I think it’s given us a little — a better way to judge close dates. Because that’s really it’s all about forecasting when a deal is going to close, because these are big complex enterprise deals. And I would also say that in the past we had a methodology where it was more about getting to a number and then building the pipeline of the deals to meet that number as opposed to now forecasting based on when specific transactions are going to close. And I mean it’s just — it’s a different mindset that I think gives us better accuracy. The other methodology worked well for us in the past but it seems that over the last couple of quarters that we haven’t been as good at calling the timing of when deals were going to close. And I think this helps us get better at forecasting the timing of when deals are going to close.
Scott Childs
Okay, got it. So it’s more the pyramid forecasting change rather than sort of any change in the interest on the customer side?
Mark Woodward
Absolutely. It’s not a pipeline issue, it’s a timing issue.
Scott Childs
Okay, got it. And then the second question I had was around the professional services. It seems that it stabilized a bit sequentially. Can we expect Pro Serve to stabilize at this point. Will there be a similar volatility going forward that we saw earlier, late last year?
Peter Baloney
We do expect it to be more stable and we think we’ve turned the corner and a couple of things and the productivity of the team. The one thing I would remind you though is this is the last quarter where you have the non-GAAP effect of the RIM contract amendment. So typically we’ve been adding back about $400,000 a quarter associated with that to get to a non-GAAP number for professional services. That will go away in Q4. So excluding that add-back the business should be pretty consistent.
Scott Childs
Okay, got it. Thanks.
Operator
Thank you. Our next question comes from the line of Brendan Barnacle with Pacific Crest Securities. Please proceed with your question.
Brendan Barnacle, Pacific Crest Securities
Thanks guys. Mark in your comments you were saying that the McCormick deal that that was highly competitive. And I was wondering who it was that you were competing against in that situation?
Mark Woodward
Well in almost any situation SAP is involved. In certain industries or certain and after that it changes based on kind of either industry or geography. So we, in this particular case I know SAP was probably our biggest competitor and I don’t recall if there was another player in there or not.
Brendan Barnacle
Have you seen SAP becoming more aggressive or more active in the space?
Mark Woodward
No, I think they from time to time they change their strategy but all in all really nothing much has changed. I think as we had expected to see after the acquisition of Ariba, they will try to position Ariba as a procurement tool, which it is, but it’s not a supply chain tool. So their strategy sometimes will be to get customers to front end procurement as the most important thing that they do, and try and buy time for them to catch up. I mean that’s just the classic SAP strategy forever which is three years from now they are going to they will do more than they do now but I have been here for six years and still three years in the future. So I mean that strategy really hasn’t changed too much. But we do see them when they are installed trying to make a lot of commitments to things that they can’t do today, and we usually combat that either through references or through pilot tests.
Brendan Barnacle
Great, thanks, that helps clarify that. I want to follow up on your earlier comments about the personal changes you made in sales. So you eliminated a layer of management and then you consolidated a layer of management, is that right?
Mark Woodward
Yes, we eliminated a layer and then we reduced from three to two regions in North America, and also made a change in one of those managers in North America as well.
Brendan Barnacle
So you brought in a new leader for one of those groups?
Mark Woodward
Yes, actually well promoted someone internally.
Brendan Barnacle
You promoted somebody internally.
Mark Woodward
Yes.
Brendan Barnacle
And then did you terminate anybody through all this?
Mark Woodward
We did.
Brendan Barnacle
Okay, great. And then I think it was after last quarter you promoted the guy who’s been the head of services to be head of the joint business. Is that the transition that was creating the difficulty in scrubbing the pipeline?
Mark Woodward
So the Head of Service took over the Head of Worldwide Sales. And so through that process we kind of did a real scrub on the pipeline with a different set of eyes, actually with the new organization if you will. And yes, it kind of came up with some what I would just say business that was forecasted that with a different view probably should not have been.
Brendan Barnacle
Got it. Okay, that’s great. So this is sort of the ongoing fallout from the issues that you were seeing over the summer?
Mark Woodward
Right.
Brendan Barnacle
So that typically takes a quarter or two to kind of wash itself through. Okay, that helps provide the clarity. Thanks so much.
Mark Woodward
Yes, okay.
Operator
Thank you. Our next question comes from the line of Richard Davis with Canacord. Please proceed with your question.
Richard Davis – Canacord
How many — you pushed the bunch of your business out the professional services partners and things like that. Do you — how many SIs will be trained and how many in the deals in your pipeline are kind of customer professional services aided in terms of how much are they helping you on that side of the equation?
Mark Woodward
Well our focus from the kind of the SIs is really still just three. It’s Accenture, primarily Accenture in Europe, and then KPMG and PWC here in North America, and I would say we are seeing more traction with KPMG than PWC. In terms of how much of our pipeline is aided or were they involved, honestly I don’t have that number, I don’t want to say, I am going to guess.
Peter Baloney
Between 20% and 40% is what I have seen.
Mark Woodward
Probably just stay in the 20s. So between 20-40%. I mean 2 out of the five new deals we had, we have partners, we are involved. So that’s probably about typical for the rest of our pipeline.
Richard Davis
Got it. Now there are new strategies that you will use with your new sales management. Is it just blocking and tackling or would you reassign it by industry or geographic, sometimes people.
Mark Woodward
That’s a great question. So one thing we haven’t implemented yet but we are looking at for next year is to get a little more vertically focused in our sales organization because it certainly is helpful. I mean as an example yesterday I was out meeting with a prospect in a vertical that’s kind of a new one for us and one of the big things is they really want to, big part of what we have or use the cell was based on our experience and best practices and people buy from us a lot of the time because of the experience we have and the best practices we recommend.
I think we got a bit away from that and got a little too much on feature function selling as opposed to all of the things we bring to bear and a lot of it is just experience and the breadth of our capability from doing is broad enterprise class supply chain implementations over and over again. So I think part of it is getting back to really sell them that expertise that we have and it’s even, that’s emphasized or we do it with the vertical focus. So we have someone who can speak supply chain lingo that’s very specific to either oil and gas or CPG or high-tech that’s important. So I think we can actually help ourselves out a bit by becoming little more vertically focused with our sales force.
Richard Davis
Got it, thanks.
Operator
Thank you. Our next question comes from the line of Michael Hang with Neeham & Company. Please proceed with your question.
Michael Hang – Neeham & Company
Thanks very much and Happy New Year guys. Just a couple of questions for you. First of all I think in your prepared remarks you had talked about no macro impact that you are concerned about but perhaps you are seeing some length in your sales cycles. So throwing into that a little bit like what are you seeing that’s causing sales cycles to lengthen and is that something that’s controlled on your part and then is there anything you guys are thinking about that ultimately can help increase the velocity of sales cycles which ultimately may be translated to smaller deals but would help out with predictability?
Mark Woodward
Yes, let me clarify that when I talk about lengthening of sales cycles. It was really more around bad forecast. I think it was deals taking longer to close than we had originally anticipated not so much an extension of our sales cycles. I don’t think it’s taking us any longer to close these deals. I think that we were just, we didn’t do a good job of forecasting when some of this was going to happen. Therefore it’s closing later than we had expected really based on poor forecasting as opposed to lengthened sales cycles.
Michael Hang
Okay. And then just kind of, the second part of the question and that helps. As you think about what ultimately might help out the predictability of the business and obviously we have seen some variability quarter to quarter, is there anything that you guys can do to help increase the velocity of sales cycles? I understand there’s some big strategic enterprise stuff but what can you guys do to help with that?
Mark Woodward
I think one of the things that Richard was asking about being more vertically focused I think is one of those things. Also one thing I had mentioned was starting to put a little more focus on our install base although we do a good job of mining the install base. I think there is untapped opportunity there. For example, we spend little to no marketing dollars on actually marketing and selling to the install base. So I think there’s some opportunities there where it’s almost low-hanging fruit but it’s certainly much easier to spell through an existing customer than it is a brand new customer. So I think that in terms of new logos I think we are already doing some things that’s allowing us, that’s helping us accelerate the new logo addition. So we got 12 in the last two quarters but we had 13 in all of last year. So I think we are already doing well and some of the things we are doing around and when I look at the pipeline and I see what’s in the pipeline I feel pretty comfortable around the new logo acquisition. I think it’s just predict and timing those better, managing the sales cycles a little bit better and then maybe put a little more focus on the installed base.
Michael Hang
Okay. And just a follow-up on one of the earlier questions. So when you think about kind of what you are seeing or expecting in Q4 and where maybe some of the revisions may have hit, is that at all biased in a particular area. I mean it’s a new versus upsell or across geography or across vertical, I mean is there any particular area that stands out as the area that perhaps might be a little bit weaker?
Mark Woodward
No. Not as it relates to product or vertical. I think some of the forecasting issues were a little bit more focused on the new versus the upsell. The upsell typically is easier to forecast but there is no specific team of concern. It’s all about execution.
Michael Hang
Okay, great. Thanks guys, appreciate it.
Mark Woodward
Okay.
Operator
Thank you. Our next question comes from the line of Scott Burg with Northland Capital Markets. Please proceed with your question.
Scott Burg, Northland Capital Markets
Hi guys. Couple of quick ones for me I think. First of all, Peter, let’s towards next year. With the $20 million reduction in bookings forecast, is next year a growth year in terms of total revenue?
Peter Baloney
Sure. We are not in a position right now where we are going to be giving any guidance for next year but we do expect growth. One of the things we are focused on as well is profitability and we’ve talked about bringing the adjusted EBITDA breakeven back into next year and Q4. So yes, it should be a growth year and we should be existing in the year where we’re actually breakeven.
Scott Burg
Okay. And just the two questions on that is to get to that breakeven rate. Is it more of a function of pulling additional cost out of your current structure, operating structure or is it a result of revenue growth will offset the existing structure.
Mark Woodward
It will be a balanced approach. As you’ve seen we’ve already taken some actions to restrain the growth and some of the spending and we are taking a lot at some other things on the spending side that we will probably make some adjustments as we walk into next year. And we do expect revenue to grow. So it’s going to be a balanced approach to the business.
Scott Burg
And then I guess as I look at Q4 noting the 400K RIM adjustments will bring professional services revenues down on a Q-over-Q basis. By my estimate that means subscription revenues are also coming down sequentially between the two quarters. Is there a reason why you didn’t have any abnormal additional attrition in the quarter, is that reflective of one of the three customers that was previously announced or just trying to understand the dynamic there?
Mark Woodward
One of the biggest things is the churn that we talked about when we were on our Q2 call. So if you remember for subscription about 40% of the impact on this year hit Q3 and 60% will hit Q4. So I think that’s the biggest impact on the sequential growth.
Scott Burg
Got it. Thank you. I think that’s probably it at the moment. Thanks for taking the questions, I will jump back into the queue.
Mark Woodward
Thanks Scott.
Operator
Thank you. Our next question comes from the line of Alex Zukin with Stephens. Please proceed with your question.
Alex Zukin – Stephens
Hey guys, just a couple for me. So you guys referenced an appropriate level of cash in 2016 and I guess I was just wondering if you could get a bit more specific about what kind of incremental cash burn do you expect from here before we get to breakeven?
Mark Woodward
So we are not going to give specific numbers for fiscal 2016. I expect to end the year on the high 20s of cash on the balance sheet. We talked about in the Q2 call where we were comfortable with that same level of ending the year cash and how we are going to operate the business and how we are going to get to adjusted breakeven profitability by fiscal 2017. And so when you look at the fact we are pulling in the breakeven target at least a couple of quarters we don’t feel like we are in any worst position, in fact we are in a better position to operate the business with the cash that’s on the balance sheet. And the other thing I had mentioned is we do have a $20 million credit facility that’s available to us. We don’t currently plan on using that but it is there if we need it.
Alex Zukin
Got it, that’s helpful. And then if sounds like the issue about the bookings losses as a timing issue, so I guess I am wondering are those deals: is this a couple of deals getting pushed out by a quarter, do you expect to kind of recoup that bookings in the first half of next year or what’s the right way to think about that discrepancy?
Mark Woodward
So I mean I do believe it’s a timing consideration. We do believe that we’ve taken the right sort of corrective actions. But it does take a couple of quarters to move forward and execute with those corrective actions. So it’s hard to give you a specific timing of when we would start to see some of those close. But there are still deals that are available to us and we are working on it.
Alex Zukin
Got it. And then the last one just about how you guys are thinking about sales capacity growth for next year?
Mark Woodward
So this year we’ve been pretty much right on plan. As we are looking to next year clearly the two areas that we do not want to restrain growth and impact the businesses in product development and our ability to sell our sales capacity. So we are going to continue to invest in the areas that are going to grow the business.
Alex Zukin
Got it, okay. Thanks guys.
Operator
Thank you. Our next question comes from the line of Mark Shappel with Benchmark. Please proceed with your question.
Mark Shappel, Benchmark
Hi, good evening. Peter could you just talk a little bit about some of the line items, the expense line items that we should expect let’s just say some meaningful leverage from with respect to or getting to cash flow breakeven at an earlier date?
Peter Baloney
Yes, what we have been doing is like I said with restraining growth this year and we are going to look to the same thing next year. I think that you will see continued improvement on the subscription gross margin line and professional services next year. And then you are going to also see us leverage G&A a little bit better.
Mark Shappel
Okay, thank you.
Peter Baloney
Okay.
Operator
Thank you. And that is all the questions we have in queue at this time. This does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
