Top Image Systems' (TISA) CEO Brendan Reidy on Q1 2017 Results - Earnings Call Transcript
May 18, 2017 4:39 PM ET| About: Top Image Systems, Ltd. (TISA)
Q1: 05-13-17 Earnings Summary
Press Release Slides News
EPS of $-0.07 misses by $-0.03 | Revenue of $7.3M (- 13.7% Y/Y) beats by $0.27M
Top Image Systems, Ltd. (NASDAQ:TISA)
Q1 2017 Earnings Conference Call
May 18, 2017 10:00 AM ET
Executives
Shelli Zargary – Director of Corporate Marketing and Investor Relations
Brendan Reidy – Chief Executive Officer
Yossi Dagan – Chief Financial Officer
Analysts
Richard Baldry – ROTH Capital
Kevin Dede – Rodman
Michael Potter – Monarch Capital Group
George Melas – MKH Management
Shelli Zargary
Thank you, Doug. Thank you all very much for joining us today. Our earnings release was issued just before market opened this morning and it's been posted on our website in the News Release section as well as in the Financial Release Section in the Investor cart of our website www.topimagesystems.com. At the bottom of the release in the Investors Financial Release Section, you will find a link to download the release with the financial table as well as the link to download the webcast presentation that is accompanying this call, which you can see on the webcast. Representing the company on the call today is our CEO, Mr. Brendan Reidy; and our CFO, Mr. Yossi Dagan.
Before we begin, we would like to remind everyone that today's conference call may contain projections or forward-looking statements and the Safe Harbor Provision in the press release issued today also applies to the contents of the call with the prepared remarks and the question-and-answer section. Top Image Systems expressly disclaims any obligation to update or revise any of these forward-looking statements whether due to future events, new information or change in our views, expectations or otherwise.
The prepared remarks and the question-and-answer section that follows may also include non-GAAP financial measures, including without limitation, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, and non-GAAP income per share. These measures are presented in addition to our quarterly results determined in accordance with GAAP and management believes that these details may provide additional useful information and help to understand our results. Non-GAAP measures are reconciled to comparable GAAP measures in the tables contained in the earnings release that we released this morning.
A replay of the call will be available from the day after the call in the Investors section of the website, again from the same place where you downloaded the press release or the webcast, so go there to download the zip file containing the audio recording of today’s call. Alternatively, you can also click on the webcast link again tomorrow and review a recorded version of this webcast. This will be available on our site for 90 days.
At this point, I would like to turn the floor over to our CEO, Mr. Brendan Reidy, to make his opening remarks. Brendan, please go ahead.
Brendan Reidy
Okay, thank you, Shelli. I’d like to start by thanking everyone on the call for joining us today. I’ll begin by discussing our quarterly results followed by a discussion of the progress we are making towards restoring the company to financial health and transitioning our business to the higher growth cloud application software segment with particular emphasis on accounts payable automation. Then I will turn it over to Yossi to review the financials in greater detail and then we will open it up for questions and answers.
Let me begin with the discussion of our results for the quarter. Revenues for the quarter ending March 31, 2017 were $7.3 million up from $7 million up from $7 million in Q4. Our Q1 results are indicative of and reflect the transformational initiatives that the company instituted in 2016 and which we continue to execute in 2017. While our sequential top-line revenue growth is encouraging, we continue to be challenged by maintaining the balance between attaining profitability from our core capture business while in parallel making prudent investments to accelerate our focus on the higher growth cloud application software business.
Well this transformational process will take time to realize, we are confident that the steps we are taking are laying the foundation for delivering sustainable growth and shareholder value. We measure our progress against three objectives that is introducing continuous efficiency improvements into our operations, protecting our core receivables automation and forms processing business and making prudent investments and transforming our company to focus on higher velocity cloud-based process automation solutions with particular initial emphasis on accounts payable automation, solutions for the mid-market, the segment that analyst estimate is growing at a 30% annual compound growth rate.
Looking first on our key priority of cost reductions and still in operational excellence, we are committed to introducing continuous efficiency improvements into our operations through consolidation, restructuring and installation of best practices in all aspects of our business activities. As such in February, we announced the consolidation of our U.S. sales and marketing operations into our Plano, Texas operations. This consolidation will save about $1 million in costs, enabling us to reinvest these funds into our banking and cloud offerings.
In parallel, we have consolidated our European operations, which is enabling us to streamline our financial sales and marketing operations in this region. We see further opportunities to increase efficiency and are working to reduce costs beyond the $4.2 million we took out in 2016. We will continue to do so throughout the year. We have also implemented rigorous service delivery best practices aimed at maximizing our recurring and high value maintenance renewal revenue streams and generating added incremental revenue from our existing installed base of customers. In this regard, we've implemented a customer success initiative, which has the ultimate strategic goal of increasing corporate profitability and growth by helping our customers be productive as possible.
To carry out this initiative, we have appointed dedicated customer success managers, who are tasked with proactively engaging our existing customers to ensure they are deploying our solutions effectively so as to optimally reach their business objectives. These efforts are not only making our customers and our services operations more successful, but are creating valuable customer references that strengthen our brand and marketing messages and are important to assets that positively influence prospects in closing new sales.
We've also developed a comprehensive set of service offerings for assisting our customers in operating and maintaining our solutions. These managed services can be provided through both our on premise and hosting scenarios. As the market for managed services is growing, we are confident that this initiative will create an additional profitable revenue stream for the customer. As we discussed last quarter, we've made significant progress in improving our service delivery. We have installed better controls around the delivery of our services implementing best practices that improve efficiency and increase both quality and our capacity to support more projects.
As we've mentioned, there have been substantial reductions in the number of customers and escalation mode, demonstrating the success of our improved service operations. This quarter, we continue to build on those efforts as we remain laser focused on achieving operational excellence. In terms of our second key growth objectives, we continue to invest in protecting our core business by fortifying our core remittance and forms processing offerings. In collaborating on remittance processing with the largest financial service providers and with the top U.S. banks, we continue to generate high value recurring revenue streams from our receivables automation business.
Our remittance processing solutions is currently being used by four of the top five U.S. banks, three of the top independent remittance processors in the U.S. and by over 30,000 individual end-users across 10,000 organizations. These leading banks and remittance processors choose our remittance processing solution because it provides the features they require. Security, scalability, compliance and control, we provide a secure repository for historical transaction content management along with customer service features such as exceptions, decisioning, search item maintenance, data exchange with other systems and reporting.
To-date, we process over 500 million images monthly and have processed over 60 billion transactions since our inception. We continually invest in testing and maintaining our compliance with up to-date regulations and data security standards to ensure that we meet and exceed our remittance customers needs.
This quarter we are pleased to have satisfactorily completed a comprehensive historical data migration project for one of our largest remittance processing customers. A U.S. based global bank managing over one trillion dollars in assets. Going forward, we believe that the consolidation of our product portfolio will enable us to leverage our eFLOW platform to offer other enhanced receivables automation functionality not only to our remittance processing installed base but also to the broader receivables market.
In the forms processing arena, we have defined and continue to execute against our product roadmap to ensure that the eFLOW platform and the solutions that rise provide state-of-the-art technology, insurance, superior data capture performance and the highest recognition in straight through processing rates.
Most recently, we’ve released eFLOW 5.2, which provides a series of improvements that enhance, performance, stability and usability for our existing customers. A nice anecdote to mention this quarter is the deal closed to carry out eFLOW proof-of-concept for a global service provider, which came about following our Company's internal review of a very successful implementation of the eFLOW used by one of the global companies franchises in one country.
With industry leading capabilities for superior machine learning and intelligent capture and recognition of complex documents, eFLOW provides the foundation for our business process automation applications. We have focused our recent investments on improved quality control and testing procedures, revamped product architecture for scalability from on-premise to cloud and web enabled architectures, improvements to eFLOWs performance and throughput that ensure optimal performance and deployment flexibility in that of patients of the user interface to ensure compatibility and the ease of use whether working via standard client server or browser based UIs.
We are proactively encouraging our installed base to upgrade to the latest version of the eFLOW an effort that drives higher customer satisfaction. This quarter we deployed eFLOW to automate forms processing for a large scale government project in Asia Pacific. In parallel eFLOW is now in the go-live stage and a large government forms processing project in South America.
These large scale projects are bolstered by a variety of other forms processing and digital mail room sales. Furthermore via our leading financial service provider partners we continue to see steady demand for our mobiFLOW, mobile capture platform mostly in North America but in other regions as well. We continue to collaborate with banks and insurance companies implementing mobile loan origination and customer on-boarding solutions were by our mobiFLOW SDK is integrated into their mobile applications.
Concurrently more and more banks around the world such as Bangkok bank in Thailand have access to mobiFLOW for bill payment via our partner Fiserv and their mobility edge mobile banking product, alerting payments platforms with Fiserv continuously enhances with additional innovative mobile capabilities. Our third key growth initiative is making prudent investments in our financial process automation applications. These applications target the under-served mid-market for accounts payable automation. They are also foundational to our aim to transform our Company into a high-growth cloud applications and services business.
During the first quarter, we presented eFLOW accounts payable for SAP at the SAP financial 2017 conference in Las Vegas, which was the leading conference focusing on our SAP solutions for finance. At the event, we’ve demonstrated the solution to finance executives from numerous larger and mid-sized enterprises who are most impressed by the solutions powerful advantages for executing end-to-end accounts payable processing directly within their familiar SAP environment.
This quarter we closed a deal via our partner to deploy the solutions for a North American retail chain. eFLOW AP for SAP implementations have been deployed at sites in the U.S., Germany and Switzerland and numerous additional projects are underway. This quarter TIS was advised that the CIO review had selected us as one of the top 20 most promising SAP application providers for 2017.
Top Image Systems was chosen as one of the top 20 solution providers on the basis of the intuitive user experience and single point of access to the entire accounts payable process within the familiar SAP environment offered by eFLOW AP for SAP. Certified by SAP Hana the eFLOW accounts payable solution extends the Company's proven powerful data extraction and machine learning technology with integrated workflow approval, streamlined exception and resolution, posting and payment, empowering AP processors and finance teams alike with 360 degree visibility into invoices and related data while also extending access to AP processes via SAP Fiori other web and mobile apps and email.
We are encouraged by the positive feedback from our customers deploying our accounts payable solution. Recently the renowned industry analyst firm IDC published a case study detailing the use eFLOW by one of our leading customers Bosch Service Solutions part of the Bosch Group technology for the global technology and services company which employs approximately 390,000 people worldwide with 450 subsidiaries and regional companies in some 60 countries earning 2016 revenues of EUR 73.1 billion.
IDC reviewed the Bosch Service Solution deployment of eFLOW invoice, which is to-date processing more than 450,000 invoices per month with high recognition rates resulting in a large percentage of supplier invoices processed straight through without any manual intervention. The case study mentions that Bosch is now migrating to the latest version of the eFLOW to take advantage of the new dynamic learning or machine learning features to further improve their strength through processing rates.
These successes for the on-premise version of this solution support our optimism for the cloud version, which targets a mid-market, that is growing at a 30% compound annual growth rate. We are launching the cloud solutions this year and are eager to tap into that market that will deliver higher margin recurring revenue.
By consistently focusing on our three main objectives, continuous efficiency improvements, investing in our core capture platforms to maintain our technological edge and focusing our R&D efforts primarily on the high growth cloud applications software business. We are confident that we will transform our business, increase growth and return to profitability.
At this point I will turn the call over to our CFO Yossi Dagan, who will provide more details about our quarterly financial results. Yossi.
Yossi Dagan
Thank you Brendan and thank you everyone for joining us today. Let’s look first at our Q1 financial results. Total revenues for the first quarter of 2017 were $7.3 million, compared to $7.0 million in the fourth quarter of 2016 and $8.5 million in the same period last year. Excuse me.
Growing FPA revenues will decrease the revenues fluctuations we experienced with our core capture sales of FPA yields, shorter sales cycles and faster revenue recognition. We expect FPA on-premise which was launched in March 2016 to steadily increase its contribution to sales revenue in 2017. Furthermore, we expect FPA and the cloud to start to contribute to revenues and more specifically to revenues in the second half of 2017.
Recurring revenues for the first quarter of 2017 were 4.4 – $4.5 million, compared to $4.6 million in the first quarter of 2016 and compared to $5 million in the same period of last year. As we grow our cloud-based application software base, both in the area of remittance, as well as for accounts payable, we can expect a proportion of recurring revenues within our total revenues to increase.
Gross profit for the first quarter of 2017 was $3.2 million, compared to $2.7 million in the first quarter of 2016, and compared to $4.2 million in the same period last year. Gross margin for the first quarter of 2017 was 44% compared to 39% in the fourth quarter of 2016 and 60% in the same period of last year.
GAAP net loss for the first quarter of 2017 was $1.8 million, compared to a loss of $3.8 million in first quarter of 2016 and the loss of $2.1 million same period last year. First quarter of 2017 GAAP loss per share was $0.10, compared to a loss off $0.21 in the first quarter of 2016 and a loss of $0.12 in the same period of last year. First quarter of 2017 non-GAAP loss per share was $0.07, compared to a loss of $0.10 in the fourth quarter of 2016 and a loss of $0.02 in the same period of last year.
Adjusted EBITDA loss was $900,000, compared to a loss of $1.1 million in the fourth quarter of last year and the breakeven in the same period of last year.
This concludes my remarks and I would like to turn the call back to our CEO, Brendan Reidy. Brendan?
Brendan Reidy
Thank you Yossi. I’ll just add that there is a chasm between where we are going and where we stand today. Work that needs to be done to cross that gap includes cost reduction and operational improvements, core product protection and cloud application investment. We're making progress against these key objectives, but they are not yet fully met. We realized that it takes time to transform a company, however, we are focused on doing so with a sense of urgency to transform our company into and nimble, high growth cloud applications and services business to maximize shareholder value.
So in conclusion, astute observers will note that we have the same objectives on this stage that we did at the end of last quarter proving that we're committed to the strategy that we've previously announced to you and that we're continuing to execute on it.
Thank you all very much for your time and attention so far. Now I would like to open the call for questions and answers.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Richard Baldry from ROTH Capital. Please proceed with your question.
Richard Baldry
Thanks. Transitions like these are often tough on organizations so you may be speak to how you feel about status of the organization overall, maybe specifically to grow also down into the sales force or the tenure you've got the number of heads how you feel about that moving forward and how the retention rates have been there recently? And any plans on that group? Thanks.
Brendan Reidy
Okay, thank you Richard. So our sales force today is about a third fewer than it was when I joined the company. And I feel very comfortable in both the seniority to your direct question, as well as the quality of our sales force. We have added new sales people, especially in the UK we’ve already seeing results from a great team there. And in a transition like this you always have to ask who the survivors are going to be. And I feel very comfortable saying that we've really retained the people that we're most confident in port delivering.
We will be expanding our sales force. Going forward we're actively recruiting four sales people in the United States right now. And I'm very comfortable though with where we're at on the sales force, Richard.
Richard Baldry
And for direct [indiscernible] stocks have come down materially we see people sometimes do repricings on auctions to try and bolster people’s willingness to start, call it fresh again from the current levels, any thought that or any other meaningful actions you intend to do to work on sort of that employee on other side of the table. Thanks.
Brendan Reidy
Okay, so the company did execute a repricing last year prior to my arrival here. And I think that proved to be effective at helping motivate and retain the right people. We are in the process with our compensation committee evaluating our option pool and how they're allocated and looking to expand that pool to be used to attract and retain additional people. But I do not see any additional reprising on the horizon at this point.
Richard Baldry
And the cloud-based product you are looking to launch later in the year, if you talk about where SaaS is at in sort of an advanced beta stage, have you got some customers sort of stress testing it already or is that still internal, or is that sort one of the next steps we’d get to? Thanks.
Brendan Reidy
So it's still very much internal, we are expecting to be beta in early second half of this year. And my approach to releasing new software is to be conservative, have a very tightly well-managed beta program with customers whose expectations are set around knowing their own beta. We've been instituting that with the most recent releases of the eFLOW where the last service pack was initially deployed to one of the eFLOW customers. And they were highly collaboratively really with us in identifying your bugs and other issues that we needed to address before more broadly deploying the software. So you'll also see that kind of gated rollout on the cloud offering.
So I expect 2017 we're not going to have a meaningful revenue impact from the cloud product because your customers will be coming on board towards the latter part of that period and of course coming on internally limited number of months. So I look to 2007 – the end of 2017 as more broadly deploying the product coming out of beta, and coming into a more broader offering.
Richard Baldry
Left on the staff side, how do you feel about the senior team do you have the people in their right seats now if you want? Have you been able to retain those people as you look forward to sort of re-executing what the new plan [indiscernible]? Thanks.
Brendan Reidy
Okay. So I feel good about the team. We have recently added to the team and we've expanded the team. Patti Barton, who was our Controller for North America has been promoted to a Global Finance position as VP of Finance and very recently we were joined by a former colleague of mine, John McCaffrey, who is Vice President of Services in the U.S. And John recently had a successful exit from the Virtustream Corporation. He was part of the management team that sold that company to EMC for $1.2 billion. Previously John worked with me at Clara Systems and at U.S. West. So I see it as we're strengthening the existing team and I’m comfortable with where we are at.
Richard Baldry
Thanks.
Brendan Reidy
Thank you, Richard.
Operator
Our next question comes from the line of Kevin Dede from Rodman. Please proceed with your question.
Kevin Dede
Hi, Brendan and Yossi, thanks for taking question.
Brendan Reidy
Hi, Kevin.
Kevin Dede
So a lots of thing to talk about I guess – you saw a nice pick up in license revenues. I was just wondering if you can speak to how you see that progressing for the balance of the year, sometimes it's seasonal to have some customers to sort of regain up in early part of the year. I’m wondering how you might look at that and conversely had to look at the sequential decline in service revenue especially Brendan in late the new customer service managers that you’re empowering to try to bolster that, can you – sort of talk to those issues little?
Brendan Reidy
Sure. Thank you, Kevin. So a couple of really good aspects in your questionnaire, first on the license revenue I expect to still see that be highly lumpy on a quarter-to-quarter basis, the license revenue is primarily consists of new licenses. And that is subject to the vagaries of large enterprise software sales. So one of the things that I'm very comfortable with on there is that I think the quality of our pipeline has improved substantially. And that Yossi and I personally review the pipeline on a very regular basis with formal quarterly business reviews addressing where the pipeline was at the start of the quarter changes fluctuations and looking for both qualitative and quantitative improvements in the pipeline.
And then on the second question about the services revenue, one of the highlights that we've had has really been taking customers out of escalation mode. And in some cases, we had services revenue there that we were unable to build for. And then secondly, we do have a fair amount of revenue from the fourth quarter of services work where we did the work but the payments or – more importantly the revenue recognition I guess come until later periods and that's – so that's a carry forward from the current quarter to future quarters on the services revenue.
Now with as we've improved the quality of the product I will expect that to flatten out so that we won’t have unbuild work or will be able to have contracts that more closely aligned payment for services work with the timeframes in which the services are actually performed.
Kevin Dede
Okay. So from an outsider's perspective as if they’d assume that level it should be what more consistent or start to increase as you said as you believe the quality will improve?
Brendan Reidy
So I believe that it will first be more consistent and then secondly increase. And that what we have found with these success managers is that the clients are looking for additional work to have us do. And we're also finding that the most recent releases of the software are such a significant improvement over older releases that clients are now planning upgrade products to get clients with the newest release of the software.
Kevin Dede
Okay. Same sort of line of questioning with regard to OpEx, Brendan, you’ve got commentary from the fourth quarter discussion that led us to believe that you’d try to monitor expenses in driving EBITDA and profitability. And I guess I was just little concern to see sort of at least expensive on a non-GAAP basis raise as much as they did sequentially. So I was wondering if you could talk to that a little bit and West you might imagine you should look for going forward especially in light of your first key growth objective and sort of rationalizing and controlling expenses.
Brendan Reidy
Okay, and Yossi is signaling, he would actually like to take that question, Kevin.
Yossi Dagan
So our current expense rate is that $8.3 million a quarter excluding one-time expenses and non-GAAP items, which means that in order to reach profitability we have to reach $8.3 million. We made some reductions in consolidations and efficiencies in our business and we decided to reinvest this money in our core product improvements in order to get better succession rates from our customers on one end. And then on the other end, we decided to reinvest in our new launch or new products in order to meet our launch targets and go out to the market as a brand. So I don’t think we expect some expense reduction due to efficiencies we are continuing to do. But we do not expect significant reduction in OpEx.
Kevin Dede
Okay, thank you, Yossi. All right, so last question for me is in regard new logos you suggested that we look for, Brendan I know you spoke to handful of new deals in your summary remarks. I was just wondering if you could sort of roll that down if you wouldn’t mind just telling that a little bit and pull out what you think are the really important highlights of the new wins that you posted in the beginning of the year?
Brendan Reidy
Okay, Kevin so of course in most cases customers are restrict us from publicly naming who they are and wherever possible we obtain the rights to issue press releases on them. But some of the ones that we're most proud of we have a transaction that was closed in conjunction with one of our primary partners for a very large retail distribution company headquartered in North America.
So it's an accounts payable solution in conjunction with a partner for North America that will be a reference of all accounts and it's with a fashion brand that we're quite proud to have among our customer base. So I look for customers like that to be strategic in nature in terms of their leading an industry vertical and which they're recognized for their technology leadership.
We're deploying a very large project in Asia also in conjunction with a partner that project is going very well. We’re receiving payments in advance of when we have predicted so that's always a good sign that the projects going well. We have a situation where we had the branch of a global company here in Israel who was a customer I say here in Israel because I'm going to Tel Aviv today. But we have a customer here that selected us. Based on their reference we’ve installed in European affiliates; and now that their parent company is looking at deploying us on a global basis. So taking kind of a medium-sized deal, leveraging that into a larger one and into a true strategic relationship.
So we're also seeing very good traction in the middle market for currently on-premise solutions with our accounts payable for SAP, product offering where we've been primarily focusing that to-date in Europe, primarily in Germany where SAP has such a strong position with customers and I see it’s getting good traction there. So these are all things that individually might not be a lot of revenue, but cumulatively they add up and really enforce the view that we have the right strategic direction going forward.
Kevin Dede
So just to make sure I understand it correctly. How would you put that Bosch relationship, or how would you rank that Bosch relationship in late of the – these are the four that you’ve highlighted.
Brendan Reidy
Well, Bosch is a very key strategic customer. They have a very significant global presence. They process with the scale and scope that’s unmatched by anything other than really large enterprises. And they prove our ability to execute on a global basis and satisfy the multi-currency, multi-lingual needs that a processor like Bosch has. On the downside, Bosch is representative of a very large enterprise sale, where it takes a long time to close, long time to deploy. But as far as I know, we have a very positive relationship with the client, has evidenced by them rolling it out to additional subsidiaries.
So the other thing is that there are very demanding customers, that rigorously tests our product and that's really good news for a company like ours, because I can go now to the middle market and have a reference of ones of premier providers in that business to point to and say, look, we solved their needs, we solved it from a scale and scope perspective and we can solve your needs to in the middle market.
Kevin Dede
If I understand it correctly, we’re in the starting realm of growth, right? You're within their services group, but there's an opportunity to be deployed enterprise wide or our Europe solution or Europe functionality and the solutions that you offer being provided by, I don't know, some model from SAP or a competitor?
Brendan Reidy
So we definitely have the opportunity to grow – to continue growing with companies like Bosch. And one of the things that we're proud of is that they use us not only for their internal purposes, but their broader services business services non-Bosch customers as well, and they will be using our software to grow that business, and we’ll grow along with them.
Kevin Dede
Okay, great. Thanks very much. Thanks very much for taking questions. Appreciate it.
Brendan Reidy
Okay. Thank you, Kevin.
Operator
[Operator Instructions] Our next question comes from the line of Michael Potter from Monarch Capital Group. Please proceed with your question.
Michael Potter
Hi guys, thanks for taking the call. I guess along the lines of the prior caller, clearly turnarounds can be tricky and I guess shareholders looking from the outside and don't always see what you see or what the insiders see. Well, I'm trying to get a better sense of is, when I look at the company, I’m seeing perhaps a disappointing quarter, because that’s what the numbers are telling us for the quarter just reported. But that may not be exactly what you're seeing Brendan in the turnaround. Can you give us a better sense of where we should be focusing in particular when we look at the prior quarter and where we're looking at the current quarter in order to track that this turnaround is progressing and I guess is on target.
Brendan Reidy
Okay. Yes, thank you, Michael. So when doing a turnaround, my concern always is how much of a hit am I going to take in quarters that I'm introducing new processes, new procedures, turning over salespeople and so forth. And what I'm comfortable with is that on a sequential basis we have we were slightly up over fourth quarter of last year. And very frequently in turnarounds it's not surprising to see a very large drop in revenues for the quarters in which these changes are being implemented.
So I’m actually – although of course I would have loved to had a much larger number, I'm pleased to say that we're on track, and quite frankly something that we're proud of is that we hit budget for the year – for the quarter rather for both top line and bottom line. So that gives me confidence that what we're telling our board and what we're telling our shareholders is tracking correctly. So that part – of course I wish we had $14 million revenue a quarter, but at the same time from a realistic perspective I think the $7.3 million revenue was something that we're not ashamed of.
Michael Potter
Okay. And then where do you want us to focus, I guess going forward? So if you’re on track and you’re on budget, which is good. And obviously you have more experience on the managing of a turnaround than certainly I do. How or where do you want the owners of this company to focus to again perhaps the KPIs that you're looking at to feel comfortable that this company is continuing to track plan.
Brendan Reidy
Okay. So I think Michael, the key thing is that we make sure we deliver the cloud product in the timeframes that we're committing to deliver. And there what I'm comfortable with is that we built enough of the technology that we know it's not dependent on some invention. It's dependent on a lot of things that are in our control and things that we have experience in. So one of the things that we've been doing with our CTO, under Carsten’s leadership, is that we're really pulling the expertise that we have from our various operations to execute on this cloud delivery.
So as an example, our Head of Development from the remittance business in the U.S. is coming to our core development center here in Israel and in Frankfurt to spend much of his summer as part of the team building out the cloud product. And making sure that all of the best practices that we’ve learned from processing 500 million transactions among that, that the formulary just extensity that those, that knowledge is shared equally with the people developing our cloud product.
So that gives me comfort that the technology is tracking properly. And it's a lower risk technology development than it would be, say, if we were a venture capital funded start up, and say, I think I know how to spell cloud. We have the track record and [indiscernible]. So I think that towards the latter half of the year the thing that I would be most interested in as a shareholder and as a CEO is seeing the initial market acceptance for the cloud offerings. So that the customers that we’re showing to at trade shows are giving us very positive feedback, and what I'm expecting is that we’ll have a number of strategic customers that I'll be able to share with you in subsequent quarters, especially the ones towards the latter part of the year.
Michael Potter
And if without this cloud offering, how should we track the core business at this point? And it is the core business enough to achieve profitability, including the increasing R&D expense for the development of the cloud product?
Brendan Reidy
Yes. So another really good question. And I will think Michael, if we had just stayed with the core business. Today you would see us managing that more as frankly as a cash cow offering. We wouldn’t be investing $4.5 million a year in R&D, because it wouldn’t take that amount of money to sustain just the core. And what you would see in that case is that we’d be a company that you would evaluate strictly on an EBITDA basis. And probably see it as a relatively slow growth business that continues to have the lumpy kind of revenues that small software companies have.
So with the cloud product, what you’ll see is as the product comes on stream and certainly in 2018, as it can really contribute to revenue growth, you’ll see a smoother and more steadily growing software company and be able to grow – be able to analyze that business on a growth basis rather than the pure EBITDA basis that you would use for the core business.
Michael Potter
Okay. All right, thanks guys. I’ll get back in queue.
Brendan Reidy
Okay. Thank you, Michael.
George Melas
Thank you, Michael.
Operator
Our next question comes from the line of George Melas from MKH Management. Please proceed with your question.
George Melas
Hi, good morning, guys.
Brendan Reidy
Good morning, George.
George Melas
Just I have a few sort more, sort of mechanical question. Looking at the gross margin, gross margin improved meaningfully in the license side that drops quite a bit on the services side. Can you sort of talk about those two dynamic. And just on the services side, the cost of the revenue is roughly flat. So I’m just trying to understand what are the components of cost of revenue on the services line?
Brendan Reidy
Okay. So first George, thank you for again for joining us, but we have a few hundred thousand dollars of services work that we’ve performed that we are unable to recognize the revenues on until future periods, which makes the cost of doing our services work artificially high relative to the revenue that was recognized. And when we account for that, it improves the services business. We also had as part of taking these customers, who are in escalation mode.
Out of escalation mode and into satisfied happy customers, there was a lot of services work that we performed that was unbillable. And our Chief Services Officer, who joined earlier in 2016, Kristian Niklasson has really done a remarkable job and turning around that business. Meeting with clients and then subsequently achieving clients expectations from original contracts that were previously signed. And he has done a remarkable job getting clients out of escalation mode and into the mode where we can resume charging for those services. So I am expecting our services revenue to pick up throughout the rest of the year.
George Melas
Okay, great. And just as go to the smaller question on the product side, the gross margin sort of reach 90%, are you – is there a fewer payments that third-party software going to – include in that. Is that sustainable?
Brendan Reidy
On the license revenues, gross margin, we are continuing – one of our role, as we said in the beginning, is to perfect the core. And I’m happy that we are able to prolong and protect the core and from the other end reduce the costs that required in order to sell, to generate our revenues from licenses. So, towards at the end of the year and on June 2018, as we increase the pipeline and as far FPA on-premise, we expect to increase the gross margins from the license revenues.
George Melas
Okay. Listen, just how did you reduce the cost there? The component…
Brendan Reidy
Yes. In the past, we had a many partners that we have to work with in order to deliver our technology and currently we’re – the product was announced by R&D in the last year enough. We made tremendous work over the product and reduced the dependencies on the partners. So we have much less costs on the licenses side.
George Melas
Okay, great. And then Brendan on the services side, are you at the point where you were satisfied or where you’re more or less satisfied with the customer satisfaction at this point and the escalation. Or do you see meaningful progress to go there?
Brendan Reidy
So George, I think that we definitely still have progress to be made. We’ve taking the number of escalations from a double-digit number down to fewer than a handful. The goal of courses, is to have zero customers in escalation mode and I don’t know, if any software that ever – software company that gets there others in briefly. But we continue to strive to deliver the best service as possible for the right price for our customers.
George Melas
Okay. And then question on the receivables were roughly $10 million in the first half of 2016 and it dropped $5 million now. I’m just trying to understand, how to interpret that, what does that mean?
Brendan Reidy
Yes. So, as you can see on the cash side, we also didn’t burn cash in Q1 versus December. We increased our collection. We got – as Brendan mentioned earlier, we’re see that the much faster money from some of our customers, which shows our customers succession. So increase collection or collection was higher in Q1 versus revenues. So collection – we collected more than we delivered.
George Melas
Okay. Thank you. It should be that part of the customer satisfaction.
Brendan Reidy
Yes. And what the customer satisfaction than really speaks to is the quality of the receivables. As you know the company over the last two years has had fairly sizable account receivable write-offs. And right now our expectation is that’s not going to happen again and to anywhere near those magnitude that it has the last two years.
George Melas
Okay. And then just one quick last question, can you – the very large banking customer as you just take – would you start to recognize revenue from the recommended quarter. Did you recognize a full quarter? Can you tell us about the ramp there?
Brendan Reidy
So that’s a company that we have been recognizing revenue on as we were doing their back file conversion. And you’ll see that revenue now that their live grow over what it has been and continue to grow.
George Melas
Okay. Fairly good. Thank you very much.
Brendan Reidy
Okay, thank you, George.
Operator
There are no other questions in the queue at this time. I’d like to hand the call back over to management for closing comments.
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