Prospectus summary
Prospectus summary This summary highlights selected information appearing elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections titled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Xactly,” the “Company,” “we,” “us” and “our” in this prospectus to refer to Xactly Corporation and, where appropriate, our consolidated subsidiaries.Overview
Xactly is a leading provider of enterprise-class, cloud-based, incentive compensation solutions for employee and sales performance management. We address a critical business need: to incentivize employees and align their behaviors with company goals. Our solutions allow organizations to make better strategic decisions, optimize behaviors, increase sales and employee performance, improve margins, increase operational efficiencies, mitigate risk, design better incentive compensation plans and reduce error rates in incentive compensation calculations. We were the first 100% cloud-based, multi-tenant provider focusing solely on the incentive compensation and employee and sales performance management market and we achieved our leadership position through domain expertise and innovative technology. We deliver our solutions through a Software-as-a-Service (SaaS) business model.
We believe that our solutions are strategic for our customers. We go beyond automation by providing our customers with commercially actionable insights so that they can optimize their employees’ behaviors. We believe that we are the first and only company to make commercially available insights derived from an empirical set of aggregated and anonymized data which helps customers make fact-based decisions to motivate employees and drive business performance. Our solutions help executives design, manage and analyze incentive programs and provide visibility into employee and incentive program performance. At the same time, employees use our solutions to monitor, estimate and track their own and their team’s performance in real-time, and modify their behaviors to maximize their payout consistent with company goals.
The design and management of incentive compensation is often highly complex. Traditional systems such as spreadsheets, manual processes and homegrown solutions are inadequate to deal with the complexity associated with variable forms of pay, such as commissions, bonuses and non-cash rewards. According to an August 2014 research study by Aon Hewitt, 91% of organizations currently offer a variable pay program for their broad based employee populations and expect to spend 13% of payroll on variable pay. Further, according to Aon Hewitt, variable pay budgets and spending have nearly doubled in the last 20 years.
We have a diverse and rapidly growing customer base ranging from FORTUNE 50 enterprises to small, emerging companies in a variety of industries such as business & financial services, communications, high-tech manufacturing, life sciences, media & internet and SaaS & traditional software, which provides us with large, unique, industry-specific data sets. Customers use our solutions to manage and incent a broad range of employees, from bank tellers to post office employees to sales people.
We strive to be a thought leader in incentives and employee performance, identifying and interpreting emerging trends, shaping and guiding industry dialogue, and creating and sharing best practices. Our thought leadership is based on our big-data insights as well as our significant industry experience. We deliver our thought leadership and innovation through the expertise of our employees as well as the authoring and dissemination of information about incentives that complement and leverage our technology solutions. We believe our thought leadership differentiates us and allows us to increase the value of our solutions to our customers.
We have achieved significant growth. As of January 31, 2015, we had approximately 194,000 subscribers, compared to approximately 140,000 subscribers as of January 31, 2014, representing an increase of approximately 39%. We estimate that during the 2014 calendar year approximately 24% of the payees whose compensation was administered through our solution were in non-sales roles. While approximately 54% of our customers were enterprise and mid-market companies, we derived approximately 91% of our revenue from enterprise and mid-market customers for the fiscal year ended January 31, 2015. As of January 31, 2015, we had approximately 725 customers.
We offer our solutions on a subscription basis, typically through non-cancellable contracts with one to three year terms, which provides us with visibility into a substantial portion of our future revenue. We had total revenue of $36.3 million, $47.2 million and $61.1 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively, resulting in year-over-year increases of 30% and 29%. Our subscription revenue for the fiscal years ended January 31, 2013, 2014 and 2015 was $27.5 million, $35.9 million and $47.3 million, respectively, resulting in year-over-year increases of 30% and 32%. We have made and expect to continue to make significant investments to support our growth and our transition to becoming a public company, and accordingly have incurred net losses of $9.4 million, $14.5 million and $18.5 million for the fiscal years ended January 31, 2013, 2014 and 2015, respectively.
Industry background
Market overview and history. To determine variable pay and communicate results, companies have traditionally used spreadsheets or other manual processes that are often error-prone and are not designed for use by mobile users. Spreadsheets, manual processes and homegrown systems tend to provide untimely results with limited visibility, are difficult to understand, and are difficult to integrate with customer relationship management (CRM), configure price quote (CPQ), human capital management (HCM), supply chain management (SCM) and enterprise resource planning (ERP) applications. The incentive compensation programs employed by today’s companies have increased in complexity as management teams seek to implement more innovative variable compensation structures and use incentive compensation plans more broadly across their organizations. The importance and complexity of incentive compensation programs drive a need for sophisticated employee and sales performance management solutions.
Emergence of cloud-based solutions. Over the past decade, cloud-based solutions have emerged, enabling enterprises to improve a range of business and technology operations. In comparison to legacy systems, cloud-based solutions can provide a number of benefits to enterprises, including improved application performance, broader user adoption, simpler integration, greater flexibility and lower costs of ownership. According to IDC, the worldwide SaaS and cloud software market reached $39.3 billion in revenue in 2013, a 22.6% year-over-year growth rate, and will grow to $102.9 billion by 2018, at a compound annual growth rate of 21.3%, compared to an expected compound annual growth rate of 6.3% for the broader software market for the same time period.
Market challenges. Although many companies have invested in legacy and manual incentive compensation systems, these solutions often do not meet the evolving needs of today’s companies for a number of reasons, including:
Expensive to install, implement and maintain. Legacy systems have generally been deployed on-premise, requiring substantial investments in infrastructure and resources in order to enhance, upgrade and maintain such systems.
Difficult to integrate. Legacy sales performance management systems are composed of numerous discrete applications that frequently do not integrate well with each other.
Limited mobility. On-premise systems often lack accessibility and visibility into information in real time and often use outdated technology, making it difficult for the business user to view and interact with information through their mobile devices.
Slower innovation. Legacy systems are often associated with slow innovation and long product development cycles that can easily extend a year or longer.
Market opportunity. Incentive compensation and employee and sales performance management continue to increase in importance for both companies and employees. According to a 2012 Harvard Business Review article, U.S. companies alone spent more than $800 billion on sales force compensation each year, representing the single largest marketing investment for most business-to-business companies.
The addressable market for incentive compensation and employee and sales performance management is large and significantly underpenetrated by commercial solutions. According to CSO Insights, spreadsheets continue to be the dominant tool for both calculating and managing commissions and designing and managing sales territories, with only 12.7% of companies using a commercial incentive compensation management system as their primary method in 2014.
We believe the relatively low market penetration of automated sales performance management (SPM) solutions highlights the nascent nature of our market. According to Gartner in 2015, “the SPM market has continued to mature in the last year, growing into a market of more than $2 billion, as measured by spend on all software, consulting and managed services across SPM and human capital management (HCM) providers (where HCM functions are used for sales processes).” Further, “Gartner also estimates, based on analysis of inquiries and vendors’ feedback, that less than 5% of all companies using at least one SPM solution have implemented the full set of SPM functionality.” Finally, according to Gartner, “by 2017, 15% of organizations will use crowdsourced benchmarks to design their incentive compensation plans.”
We believe the total addressable market is significantly larger than the market currently being served. Based on our internal analysis and industry experience, together with third-party data, we estimate the total addressable market was approximately $7 billion in 2014. We estimate that the number of persons in sales and related occupations in the United States and the European Union was 14 million and 15.6 million in 2013, respectively, based on reports by the U.S. Bureau of Labor Statistics and by ICF and Cedefop for the European Commission. We then applied what we believe is a reasonable 15% discount to this total of 29.6 million people. Finally, we multiplied the result by our fiscal year 2015 average subscription revenue per subscriber, which was approximately $280. Our estimate of the total addressable market of approximately $7 billion does not account for revenue from potential sales to non-sales employees, markets outside the United States and the European Union and for professional services.
Our solutions
Our solutions include the following key attributes:
Automation. Our solutions automate costly and cumbersome processes, such as estimating and calculating commissions and bonuses, assigning sales territories, forecasting accruals and modeling business outcomes. As a result, our solutions enhance productivity by allowing companies to focus on the strategic aspects of incentive compensation.
Intuitive user experience. We designed the user interface and user workflows of our solutions to align with the way users naturally think and act. Our focus on an intuitive and simple user experience enables the adoption of our solutions by even novice users with minimal training. We believe that we enable our customers to generate higher productivity and better business results through broad access to more timely and reliable information.
Mobility. We offer mobile solutions for phones and tablets across the major operating systems so our subscribers have convenient, anytime, anywhere access to performance information in real time, allowing them to optimize their performance no matter where and when. We believe these characteristics result in greater user adoption and higher utilization of our solutions.
Scalable, secure and reliable cloud architecture. Our solutions are 100% cloud-based, built upon a multi-tenant, single instance architecture. Our platform architecture allows all of our customers to use a single and most updated version of our solutions, which enables us to accelerate our speed of implementation, upgrades and support.
Data integration with other business applications. Our open application programming interfaces (APIs) allow our customers to integrate our solutions into their existing business processes and systems. Our customers use our APIs to import data into our solutions from CRM, ERP, HCM and CPQ solutions, such as those provided by Microsoft Corporation (Microsoft), Oracle Corporation (Oracle), salesforce.com, inc. (Salesforce), SAP AG (SAP) and Workday, Inc. (Workday), as well as to extract data from our solutions for use in CRM, finance and payroll solutions such as those provided by Automatic Data Processing, Inc. (ADP), Ceridian HCM Holding Inc. (Ceridian) and Paychex, Inc. (Paychex).
Actionable big data. We believe that we are the only company that has empirical incentive compensation data combined with the associated metadata across companies and multiple industries. We anonymize and aggregate the data from the billions of transactions we process annually, allowing us to provide value-added, commercially actionable insights. The commercial insights derived from our data help customers make fact-based decisions to motivate employees and drive business performance.
Key customer benefits
Finance leaders. Our solutions help finance leaders gain control of incentive compensation, mitigate risk and increase accuracy through automation, which create more efficient workflows. In addition, finance executives can make better strategic decisions, design optimal plans and forecast and monitor the performance of their incentive compensation expenditures.
Compensation administrators. Compensation administrators more quickly and accurately process incentive compensation using our solutions, leading to faster, more accurate financial closes with fewer disputes and greater trust from the sales teams they support. Moreover, they can add strategic value to their organizations by providing analyses and insights into compensation expenditures beyond simply managing the compensation process.
Sales leaders. We help sales leaders inspire performance, drive top line results and align employee behaviors with company goals. Our solutions allow sales leaders to incent the right behaviors, bring visibility to front-line sales representatives, coach them to drive better results and adjust incentives to better compete in a complex, competitive environment.
Technology leaders. We help chief information officers support business users more effectively while adding strategic value to the organization. Our customers are able to quickly implement and easily integrate our solutions with other systems and applications. Chief information officers can safely and securely scale their companies for growth since they do not have to manage costly hardware and are assured of always using the latest version of our solutions.
Human resources teams. We help human resources teams inspire performance by enabling companies to bring incentive compensation not only to sales teams, but to all employees. With our solutions, human resources professionals can retain top talent by incenting and rewarding the right behavior and delivering incentives with timeliness, visibility and transparency.
Our growth strategy
The key elements of our growth strategy include:
Acquire new customers. We believe the market for incentive compensation and employee and sales performance management is large and underserved, and there is substantial opportunity for us to continue to increase the size of our customer base across a broad range of industries. We intend to continue to make investments in our business to pursue this market opportunity.
Sell more subscriptions and modules to our existing customer base. Frequently, an organization will purchase our solutions for one division and later expand its deployment to other divisions within the organization. We believe there is a significant opportunity for us to sell more subscriptions to existing customers as well as to increase the number of modules deployed by our existing customers.
Enhance existing offerings and develop new solutions. We have made and will continue to make significant investments in engineering and development to enhance our existing solutions, and to expand the number of our solutions and modules. For example, we launched two new products in 2014: Xactly Insights and Xactly Quota.
Expand internationally. We estimate that approximately 28% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2015. Given our cloud-based architecture and the highly scalable nature of our solutions, we believe our solutions are particularly well-suited to large, dynamic enterprises with complex, global operations. We plan to expand our sales capability internationally by expanding our direct sales force and by collaborating with partners around the world.
Develop our partner ecosystem. We have established relationships with other organizations to sell and deliver our solutions to customers. These relationships include platform partners, referral partners and consulting and implementation partners. We plan to expand our partner ecosystem in order to increase our market reach.
Pursue selective acquisitions. From time to time, we may seek to acquire businesses and technologies that would increase our value proposition for our customers.
Risks affecting us
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:
Corporate information
Our principal executive offices are located at 300 Park Avenue, Suite 1700, San Jose, California 95110, and our telephone number is (408) 977-3132. Our website is www.xactlycorp.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and should not be relied on in determining whether to make an investment decision. We were incorporated in Delaware in March 2005.
Xactly, the Xactly logo, “Inspire Performance,” and other trademarks or service marks of Xactly appearing in this prospectus are the property of Xactly. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and TM designations, as applicable, for the trademarks used in this prospectus.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.
The offering
The number of shares of our common stock to be outstanding after this offering is based on 83,016,636 shares of our common stock outstanding as of January 31, 2015, and excludes:
Unless otherwise noted, the information in this prospectus reflects and assumes the following:
Summary consolidated financial data
The following tables summarize our consolidated financial and other data. We have derived the summary consolidated statement of operations data for the fiscal years ended January 31, 2013, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial and other data should be read in conjunction with the section titled “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
Consolidated statements of operations data (in thousands, except per share data):
Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP and our calculation of Adjusted EBITDA may differ from that of other companies in our industry. We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net loss. We calculate Adjusted EBITDA as net loss before (i) other income (expense), net, which includes interest expense, the change in fair value of convertible preferred stock warrant liabilities and other income and expense, (ii) income tax expense, (iii) depreciation and amortization of property and equipment, (iv) amortization of intangible assets, (v) amortization of debt issuance costs, (vi) stock-based compensation and (vii) any applicable, non-recurring or unusual charges as we may determine from time to time, including legal settlement charges in connection with a legal matter (which was not inclusive of legal defense costs). The following provides a reconciliation of net loss to Adjusted EBITDA (in thousands):Consolidated balance sheet data (in thousands):