##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 000-50463
 Callidus Software Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or Other Jurisdiction of 
Incorporation or Organization)
    
    77-0438629(I.R.S. Employer
Identification Number)
 Callidus Software Inc.
 160 West Santa Clara Street, Suite 1500
San Jose, CA 95113  (Address of principal executive offices, including zip code)  (408) 808-6400  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 6. Exhibits
    
    
    40Signatures
    
    
    41Exhibit Index
    
    
    42EX-10.1EX-31.1EX-32.1
  ® ® ® ® ® ® ®
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1 Financial Statements
 CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,308
    
    
    $
    35,390Short-term investments
    
    
    13,637
    
    
    
    1,455Accounts receivable, net
    
    
    12,072
    
    
    
    22,710Deferred income taxes
    
    
    360
    
    
    
    360Prepaid and other current assets
    
    
    3,474
    
    
    
    4,104Total current assets
    
    
    51,851
    
    
    
    64,019Long-term investments
    
    
    897
    
    
    
    3,828Property and equipment, net
    
    
    4,825
    
    
    
    4,890Goodwill
    
    
    5,528
    
    
    
    5,655Intangible assets, net
    
    
    3,601
    
    
    
    3,208Deferred income taxes, noncurrent
    
    
    811
    
    
    
    811Deposits and other assets
    
    
    675
    
    
    
    1,468Total assets
    
    $
    68,188
    
    
    $
    83,879LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,523
    
    
    $
    2,447Accrued payroll and related expenses
    
    
    5,127
    
    
    
    7,128Accrued expenses
    
    
    3,456
    
    
    
    5,027Deferred income taxes
    
    
    816
    
    
    
    816Deferred revenue
    
    
    19,168
    
    
    
    21,881Total current liabilities
    
    
    31,090
    
    
    
    37,299Long-term deferred revenue
    
    
    394
    
    
    
    1,202Deferred income taxes, noncurrent
    
    
    111
    
    
    
    Other liabilities
    
    
    1,430
    
    
    
    1,412Total liabilities
    
    
    33,025
    
    
    
    39,913Stockholders equity:Common stock, $0.001 par value; 100,000
shares authorized;
30,409 and 29,240 shares issued and
outstanding at
September 30, 2009 and December 31, 2008,
respectively
    
    
    30
    
    
    
    29Additional paid-in capital
    
    
    211,312
    
    
    
    207,493Accumulated other comprehensive income
    
    
    230
    
    
    
    121Accumulated deficit
    
    
    (176,409
    )
    
    
    (163,677
    )Total stockholders equity
    
    
    35,163
    
    
    
    43,966Total liabilities and stockholders equity
    
    $
    68,188
    
    
    $
    83,879
  3




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CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)Revenues:Recurring
    
    $
    11,170
    
    
    $
    10,874
    
    
    $
    34,669
    
    
    $
    29,208Services
    
    
    5,349
    
    
    
    10,597
    
    
    
    25,958
    
    
    
    37,992License
    
    
    872
    
    
    
    6,782
    
    
    
    5,034
    
    
    
    12,638Total revenues
    
    
    17,391
    
    
    
    28,253
    
    
    
    65,661
    
    
    
    79,838Cost of revenues:Recurring
    
    
    5,711
    
    
    
    4,147
    
    
    
    16,912
    
    
    
    11,095Services
    
    
    5,054
    
    
    
    10,092
    
    
    
    22,034
    
    
    
    33,739License
    
    
    214
    
    
    
    355
    
    
    
    656
    
    
    
    705Total cost of revenues
    
    
    10,979
    
    
    
    14,594
    
    
    
    39,602
    
    
    
    45,539Gross profit
    
    
    6,412
    
    
    
    13,659
    
    
    
    26,059
    
    
    
    34,299Operating expenses:Sales and marketing
    
    
    4,586
    
    
    
    7,748
    
    
    
    15,892
    
    
    
    22,337Research and development
    
    
    3,397
    
    
    
    3,808
    
    
    
    10,871
    
    
    
    10,958General and administrative
    
    
    3,072
    
    
    
    3,529
    
    
    
    9,322
    
    
    
    10,261Restructuring
    
    
    1,973
    
    
    
    
    
    
    
    2,778
    
    
    
    397Total operating expenses
    
    
    13,028
    
    
    
    15,085
    
    
    
    38,863
    
    
    
    43,953Operating loss
    
    
    (6,616
    )
    
    
    (1,426
    )
    
    
    (12,804
    )
    
    
    (9,654
    )Interest and other income (expense), net
    
    
    49
    
    
    
    103
    
    
    
    239
    
    
    
    914Loss before provision (benefit) for income taxes
    
    
    (6,567
    )
    
    
    (1,323
    )
    
    
    (12,565
    )
    
    
    (8,740
    )Provision (benefit) for income taxes
    
    
    173
    
    
    
    64
    
    
    
    319
    
    
    
    407Net loss
    
    $
    (6,740
    )
    
    $
    (1,387
    )
    
    $
    (12,884
    )
    
    $
    (9,147
    )Net loss per share  basic and dilutedNet loss per share
    
    $
    (0.22
    )
    
    $
    (0.05
    )
    
    $
    (0.43
    )
    
    $
    (0.31
    )Shares used in basic and diluted per share
computation
    
    
    30,205
    
    
    
    30,063
    
    
    
    29,901
    
    
    
    29,937
  4




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CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months Ended September 30,2009
    
    
    2008(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (12,884
    )
    
    $
    (9,147
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Depreciation expense
    
    
    2,184
    
    
    
    1,782Amortization of intangible assets
    
    
    1,450
    
    
    
    2,138Provision for doubtful accounts and service remediation reserves
    
    
    (128
    )
    
    
    451Stock-based compensation
    
    
    3,217
    
    
    
    5,890(Gain) loss on disposal of property
    
    
    
    
    
    
    24Deferred income taxes
    
    
    111
    
    
    
    Net (accretion) amortization on investments
    
    
    32
    
    
    
    (159
    )Put option (gain) loss
    
    
    387
    
    
    
    (Gain) loss on investments classified as trading securities
    
    
    (472
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    10,921
    
    
    
    8,744Prepaid and other current assets
    
    
    610
    
    
    
    (1,007
    )Other assets
    
    
    232
    
    
    
    730Accounts payable
    
    
    (57
    )
    
    
    (1,031
    )Accrued expenses
    
    
    (2,252
    )
    
    
    (2,808
    )Accrued payroll and related expenses
    
    
    (1,640
    )
    
    
    (1,200
    )Accrued restructuring
    
    
    (417
    )
    
    
    (972
    )Deferred revenue
    
    
    (3,542
    )
    
    
    1,906Net cash provided by (used in) operating activities
    
    
    (2,248
    )
    
    
    5,341Cash flows from investing activities:Purchases of investments
    
    
    (18,311
    )
    
    
    (13,919
    )Proceeds from maturities and sale of investments
    
    
    9,670
    
    
    
    35,720Purchases of property and equipment
    
    
    (1,554
    )
    
    
    (1,927
    )Purchases of intangible assets
    
    
    (1,487
    )
    
    
    (280
    )Acquisition, net of cash acquired
    
    
    (14
    )
    
    
    (7,500
    )Change in restricted cash
    
    
    202
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (11,494
    )
    
    
    12,094Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    1,719
    
    
    
    4,785Repurchases of stock
    
    
    (742
    )
    
    
    (5,140
    )Repurchase of common stock from employees for payment of taxes on
vesting of restricted stock units
    
    
    (372
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    605
    
    
    
    (355
    )Effect of exchange rates on cash and cash equivalents
    
    
    55
    
    
    
    30Net increase (decrease) in cash and cash equivalents
    
    
    (13,082
    )
    
    
    17,110Cash and cash equivalents at beginning of period
    
    
    35,390
    
    
    
    21,813Cash and cash equivalents at end of period
    
    $
    22,308
    
    
    $
    38,923Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    
    
    
    $
    8Non-cash investing and financing activities:Purchases of property and equipment not paid as of quarter-end
    
    $
    113
    
    
    $
    533Purchases of intangible assets not paid as of quarter-end
    
    $
    456
    
    
    $
    81Deferred direct stock-based compensation costs
    
    $
    2
    
    
    $
    
  5




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CALLIDUS SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Reclassifications
  Principles of Consolidation
  Certain Risks and Uncertainties
   6




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Use of Estimates
  Fair Value of Financial Instruments and Concentrations of Credit Risk
   Reserve Accounts
   7




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Balance at
    
    Provision,
    
    
    
    
    
    Balance atBeginning
    
    Net of
    
    
    
    
    
    End ofof Period
    
    Recoveries
    
    Write-Offs
    
    PeriodAllowance for doubtful accountsThree months ended September 30, 2009
    
    $
    539
    
    
    $
    53
    
    
    $
    (238
    )
    
    $
    354Three months ended September 30, 2008
    
    
    113
    
    
    
    102
    
    
    
    (34
    )
    
    
    181Nine months ended September 30, 2009
    
    
    550
    
    
    
    126
    
    
    
    (322
    )
    
    
    354Nine months ended September 30, 2008
    
    
    154
    
    
    
    61
    
    
    
    (34
    )
    
    
    181
 Balance at
    
    
    
    
    
    
    Remediation
    
    
    Balance atBeginning
    
    
    
    
    
    
    Service
    
    
    End ofof Period
    
    
    Provision
    
    
    Claims
    
    
    PeriodService remediation reserveThree months ended September 30, 2009
    
    $
    280
    
    
    $
    17
    
    
    $
    (152
    )
    
    $
    145Three months ended September 30, 2008
    
    
    211
    
    
    
    886
    
    
    
    (482
    )
    
    
    615Nine months ended September 30, 2009
    
    
    399
    
    
    
    669
    
    
    
    (923
    )
    
    
    145Nine months ended September 30, 2008
    
    
    225
    
    
    
    1,385
    
    
    
    (995
    )
    
    
    615
  Restricted Cash
  Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 8




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Fixed or Determinable Fee.
  Collection is Deemed Probable.
 Recurring Revenue
  On-Demand Revenue. , Revenue
Recognition
  9




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Time Based Term License.
     Maintenance Revenue.
 10




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##### Table of Contents



Services Revenue
 Professional Service Revenue.
  Perpetual License Revenue
 Perpetual Licensing.
  Residual Method. .
  11




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Contract Accounting Method.
  Net Loss Per Share
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restricted stock
    
    
    932
    
    
    
    1,291
    
    
    
    1,041
    
    
    
    1,095Stock options
    
    
    6,643
    
    
    
    6,434
    
    
    
    6,654
    
    
    
    6,789ESPP
    
    
    96
    
    
    
    93
    
    
    
    297
    
    
    
    218Totals
    
    
    7,671
    
    
    
    7,818
    
    
    
    7,992
    
    
    
    8,102
  12




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Recent Accounting Pronouncements
 Revenue Arrangements
with Multiple Deliverables Revenue Recognition 
Multiple-Element Arrangements,
 Certain Revenue
Arrangements That Include Software Elements Software-Revenue Recognition,
 2. Restructuring
     13




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December 31,
    
    
    Cash
    
    
    
    
    
    
    
    
    
    
    September 30,2008
    
    
    Payments
    
    
    Additions
    
    
    Adjustments
    
    
    2009Severance and
termination-related
costs
    
    $
    810
    
    
    $
    (3,190
    )
    
    $
    2,822
    
    
    $
    (45
    )
    
    $
    397Total accrued
restructuring
charges
    
    $
    810
    
    
    $
    (3,190
    )
    
    $
    2,822
    
    
    $
    (45
    )
    
    $
    397
  Total Costs
    
    
    Total CostsIncurred to
    
    
    Expected toDate
    
    
    be IncurredSeverance and termination-related costs
    
    $
    5,877
    
    
    $
    5,877
 3. Goodwill and Intangible Assets
   December 31,
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    September 30,2008
    
    
    2008
    
    
    
    
    
    
    Amortization
    
    
    2009Cost
    
    
    Net
    
    
    Additions
    
    
    Expense
    
    
    NetPurchased technology
    
    $
    3,579
    
    
    $
    1,624
    
    
    $
    1,843
    
    
    $
    (1,012
    )
    
    $
    2,455Customer backlog
    
    
    1,500
    
    
    
    63
    
    
    
    
    
    
    
    (63
    )
    
    
    Customer relationships
    
    
    2,000
    
    
    
    1,521
    
    
    
    
    
    
    
    (375
    )
    
    
    1,146Total intangible assets, net
    
    $
    7,079
    
    
    $
    3,208
    
    
    $
    1,843
    
    
    $
    (1,450
    )
    
    $
    3,601
  14




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Purchased
    
    
    CustomerTechnology
    
    
    RelationshipsYear Ending December 31:Remainder of 2009
    
    $
    482
    
    
    $
    1252010
    
    
    1,241
    
    
    
    5002011
    
    
    524
    
    
    
    5002012
    
    
    208
    
    
    
    212013
    
    
    
    
    
    
    2014 and beyond
    
    
    
    
    
    
    Total expected future amortization
    
    $
    2,455
    
    
    $
    1,146
 4. Investments
    Total OtherThan TemporaryImpairment
    
    
    Gain (Loss) onTotal Unrealized
    
    
    Recorded In
    
    
    InvestmentsLosses in Other
    
    
    Other
    
    
    Recorded in theAmortized
    
    
    Unrealized
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    Statement of
    
    
    EstimatedSeptember 30, 2009
    
    Cost
    
    
    Gains
    
    
    Income (Loss)
    
    
    Income (Loss)
    
    
    Operations
    
    
    Fair ValueMoney market funds
    
    $
    17,036
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,036Auction rate securities classified as
available for sale
    
    
    900
    
    
    
    20
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    897Corporate notes and obligations
    
    
    4,052
    
    
    
    11
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    4,062U.S. government and agency obligations
    
    
    6,002
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,022Investments in debt and equity securities
    
    $
    27,990
    
    
    $
    51
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    
    
    
    $
    28,017
 15




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September 30,
    
    
    December 31,2009
    
    
    2008Recorded as:Cash equivalents
    
    $
    17,036
    
    
    $
    27,202Short-term investments
    
    
    13,637
    
    
    
    1,455Long-term investments
    
    
    897
    
    
    
    3,828$
    31,570
    
    
    $
    32,485
   Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    
    Significant
    
    
    SignificantActive Markets for
    
    
    Other Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsSeptember 30, 2009
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Money market funds (1)
    
    $
    17,036
    
    
    $
    17,036
    
    
    $
    
    
    
    $
    Auction rate securities (2), (3)
    
    
    4,450
    
    
    
    
    
    
    
    
    
    
    
    4,450Corporate notes and obligations (3)
    
    
    4,062
    
    
    
    
    
    
    
    4,062
    
    
    
    U.S. government and agency obligations (3)
    
    
    6,022
    
    
    
    
    
    
    
    6,022
    
    
    
    Asset associated with put option (4)
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Total
    
    $
    31,675
    
    
    $
    17,036
    
    
    $
    10,084
    
    
    $
    4,555
 
 (1)
    
    Included in cash and cash
equivalents on the condensed
consolidated balance sheet.(2)
    
    $897K included in long-term investments on the condensed consolidated balance sheet.(3)
    
    Except as indicated in (2), included in short-term investments on the condensed consolidated balance sheet.(4)
    
    Included in prepaid and other current assets on the condensed consolidated balance sheet. 16




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Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    
    Significant
    
    
    SignificantActive Markets for
    
    
    Other Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsDecember 31, 2008
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Money market funds (1)
    
    $
    27,202
    
    
    $
    27,202
    
    
    $
    
    
    
    $
    Auction rate securities (2)
    
    
    3,828
    
    
    
    
    
    
    
    
    
    
    
    3,828Corporate notes and obligations (3)
    
    
    1,455
    
    
    
    
    
    
    
    1,455
    
    
    
    Asset associated with put option (4)
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    492Total
    
    $
    32,977
    
    
    $
    27,202
    
    
    $
    1,455
    
    
    $
    4,320
 
 (1)
    
    Included in cash and
cash equivalents on the
consolidated balance sheet.(2)
    
    Included in long-term investments on the consolidated balance sheet.(3)
    
    Included in short-term investments on the consolidated balance sheet.(4)
    
    Included in deposits and other assets on the consolidated balance sheet.  CumulativeEffectGain (Loss)
    
    
    
    
    
    
    AdjustmentBalance at
    
    
    Recorded in
    
    
    
    
    
    
    as a Result
    
    
    Balance atDecember 31,
    
    
    Statement of
    
    
    Unrealized
    
    
    of Adopting
    
    
    September 30,2008
    
    
    Operations
    
    
    Gain (Loss)
    
    
    ASC 320-10-65-1
    
    
    2009Auction rate securities
classified as trading
    
    $
    3,081
    
    
    $
    472
    
    
    $
    
    
    
    $
    
    
    
    $
    3,553Auction rate securities
classified as available for
sale
    
    
    747
    
    
    
    
    
    
    
    (3
    )
    
    
    153
    
    
    
    897Asset associated with put option
    
    
    492
    
    
    
    (387
    )
    
    
    
    
    
    
    
    
    
    
    105Total
    
    $
    4,320
    
    
    $
    85
    
    
    $
    (3
    )
    
    $
    153
    
    
    $
    4,555
 Valuation of Investments and Put Option
 Level 2
  Level 3
  17




---



##### Table of Contents



Adoption of Recognition and Presentation of Other-Than-Temporary Impairments Guidance
   
    
    Adverse conditions specifically related to the security, industry, or geographic area
(i.e., financial condition of the issuer, financial condition of the underlying assets,
changes to the underlying business, and changes in the quality of the underlying assets);
    
    the historical and implied volatility of the security;
    
    the payment structure of the debt security (i.e., the increased/decreased probability
of repayment);
    
    failure of the issuer to make payments or default on obligations;
    
    changes to the rating of the security; and
    
    declines in value of the underlying assets.
  5. Commitments and Contingencies
  18




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##### Table of Contents



Other Contingencies
  .
 6. Segment, Geographic and Customer Information
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Americas
    
    $
    15,626
    
    
    $
    25,378
    
    
    $
    56,491
    
    
    $
    68,069EMEA
    
    
    1,571
    
    
    
    2,590
    
    
    
    8,338
    
    
    
    10,776Asia Pacific
    
    
    194
    
    
    
    285
    
    
    
    832
    
    
    
    993$
    17,391
    
    
    $
    28,253
    
    
    $
    65,661
    
    
    $
    79,838
  19




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Customer 1
    
    
    10
    %
    
    
    6
    %
    
    
    8
    %
    
    
    7
    %Customer 2
    
    
    1
    %
    
    
    10
    %
    
    
    1
    %
    
    
    4
    %
 7. Comprehensive Loss
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (6,740
    )
    
    $
    (1,387
    )
    
    $
    (12,884
    )
    
    $
    (9,147
    )Other comprehensive loss:Change in unrealized gain (loss)
on investments, net
    
    
    30
    
    
    
    (130
    )
    
    
    169
    
    
    
    (413
    )Change in cumulative translation
adjustments
    
    
    (40
    )
    
    
    (3
    )
    
    
    93
    
    
    
    (31
    )Comprehensive loss
    
    $
    (6,750
    )
    
    $
    (1,520
    )
    
    $
    (12,622
    )
    
    $
    (9,591
    )
 8. Stock-based Compensation
 Expense Summary
    20




---



##### Table of Contents



Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Stock-based compensation:Cost of recurring revenues
    
    $
    108
    
    
    $
    184Cost of services revenues
    
    
    185
    
    
    
    320Sales and marketing
    
    
    221
    
    
    
    401Research and development
    
    
    181
    
    
    
    294General and administrative
    
    
    310
    
    
    
    795Total stock-based compensation
    
    $
    1,005
    
    
    $
    1,994
 Nine
    
    
    NineMonths
    
    
    MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Stock-based compensation:Cost of recurring revenues
    
    $
    402
    
    
    $
    497Cost of services revenues
    
    
    441
    
    
    
    970Sales and marketing
    
    
    795
    
    
    
    1,487Research and development
    
    
    590
    
    
    
    915General and administrative
    
    
    989
    
    
    
    2,021Total stock-based compensation
    
    $
    3,217
    
    
    $
    5,890
 Determination of Fair Value
  21




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Stock Option PlansExpected life (in years)
    
    
    3.50
    
    
    
    *
    
    
    
    0.50 to 3.50
    
    
    
    2.50 to 3.50Risk-free interest rate
    
    
    1.78%
    
    
    
    *
    
    
    0.30% to 1.78%
    
    2.48% to 2.58%Volatility
    
    
    67%
    
    
    
    *
    
    
    63% to 106%
    
    42% to 44%Dividend Yield
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    Employee Stock Purchase PlanExpected life (in years)
    
    
    0.50 to 0.99
    
    
    
    0.50 to 1.00
    
    
    
    0.49 to 1.00
    
    
    
    0.50 to 1.00Risk-free interest rate
    
    0.27% to 0.46%
    
    1.97% to 2.18%
    
    0.27% to 0.62%
    
    1.97% to 2.18%Volatility
    
    68% to 101%
    
    58% to 59%
    
    68% to 126%
    
    48% to 61%Dividend Yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    No stock options were issued during the three months ended September 30, 2008. 9. Stockholders Equity
 Repurchase Program
  10. Related-Party Transactions
    22




---



##### Table of Contents



11. Subsequent Events
  23




---



##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of financial condition and results of operations should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and the notes thereto included in our Annual
Report on Form 10-K for 2008 and with the unaudited condensed consolidated financial statements and
the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q . This section
of the Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements relate to our future plans, objectives, expectations, prospects, intentions and
financial performance and the assumptions that underlie these statements. Generally, the words
believe, expect, intend, estimate, anticipate, project, will, and similar expressions
and the negatives thereof identify forward-looking statements, which generally are not historical
in nature. These forward-looking statements include, but are not limited to, statements concerning
the following: changes in and expectations with respect to our business strategy and products
revenues and gross margins, future operating expense levels, the impact of quarterly fluctuations
of revenue and operating results, levels of annual contract value bookings and recurring revenues,
staffing and expense levels, the impact of foreign exchange rate fluctuations and the adequacy of
our capital resources to fund operations and growth. As and when made, management believes that
these forward-looking statements are reasonable. However, caution should be taken not to place
undue reliance on any such forward-looking statements because such statements speak only as of the
date when made and may be based on assumptions that do not prove to be accurate. Our Company
undertakes no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. In addition, forward-looking statements
are subject to certain risks and uncertainties that could cause actual results to differ materially
from our Companys historical experience and our present expectations or projections. Many of
these trends and uncertainties are described in Risk Factors set forth in our Annual Report on
Form 10-K for 2008 and elsewhere in this Quarterly Report on Form 10-Q . We undertake no obligation
to update forward-looking statements to reflect events or circumstances occurring after the date of
this Quarterly Report on Form 10-Q .
 Overview of the Results for the Three and Nine Months Ended September 30, 2009
   24




---



##### Table of Contents



Recurring Revenue Model Gaining Momentum
     Cost Control
   Other Business Highlights
  25




---



##### Table of Contents



Challenges and Risks
      26




---



##### Table of Contents



Application of Critical Accounting Policies and Use of Estimates
    Recent Accounting Pronouncements
  Results of Operations
 Comparison of the Three and Nine Months Ended September 30, 2009 and 2008
 Revenues, cost of revenues and gross profit
  27




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##### Table of Contents



Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2009
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:Recurring
    
    $
    11,170
    
    
    
    64
    %
    
    $
    10,874
    
    
    
    38
    %
    
    $
    296
    
    
    
    3
    %Services
    
    
    5,349
    
    
    
    31
    %
    
    
    10,597
    
    
    
    38
    %
    
    
    (5,248
    )
    
    
    (50
    )%License
    
    
    872
    
    
    
    5
    %
    
    
    6,782
    
    
    
    24
    %
    
    
    (5,910
    )
    
    
    (87
    )%Total revenues
    
    $
    17,391
    
    
    
    100
    %
    
    $
    28,253
    
    
    
    100
    %
    
    $
    (10,862
    )
    
    
    (38
    )%
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Related
    
    
    September 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2009
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:Recurring
    
    $
    5,711
    
    
    
    51
    %
    
    $
    4,147
    
    
    
    38
    %
    
    $
    1,564
    
    
    
    38
    %Services
    
    
    5,054
    
    
    
    94
    %
    
    
    10,092
    
    
    
    95
    %
    
    
    (5,038
    )
    
    
    (50
    )%License
    
    
    214
    
    
    
    25
    %
    
    
    355
    
    
    
    5
    %
    
    
    (141
    )
    
    
    (40
    )%Total cost of revenues
    
    $
    10,979
    
    
    
    
    
    
    $
    14,594
    
    
    
    
    
    
    $
    (3,615
    )Gross profit:Recurring
    
    $
    5,459
    
    
    
    49
    %
    
    $
    6,727
    
    
    
    62
    %
    
    $
    (1,268
    )
    
    
    (19
    )%Services
    
    
    295
    
    
    
    6
    %
    
    
    505
    
    
    
    5
    %
    
    
    (210
    )
    
    
    (42
    )%License
    
    
    658
    
    
    
    75
    %
    
    
    6,427
    
    
    
    95
    %
    
    
    (5,769
    )
    
    
    (90
    )%Total gross profit
    
    $
    6,412
    
    
    
    37
    %
    
    $
    13,659
    
    
    
    48
    %
    
    $
    (7,247
    )
    
    
    (53
    )%
 28




---



##### Table of Contents



Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2009
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearRevenues:Recurring
    
    $
    34,669
    
    
    
    53
    %
    
    $
    29,208
    
    
    
    37
    %
    
    $
    5,461
    
    
    
    19
    %Services
    
    
    25,958
    
    
    
    40
    %
    
    
    37,992
    
    
    
    48
    %
    
    
    (12,034
    )
    
    
    (32
    )%License
    
    
    5,034
    
    
    
    8
    %
    
    
    12,638
    
    
    
    16
    %
    
    
    (7,604
    )
    
    
    (60
    )%Total revenues
    
    $
    65,661
    
    
    
    100
    %
    
    $
    79,838
    
    
    
    100
    %
    
    $
    (14,177
    )
    
    
    (18
    )%
 Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Related
    
    
    September 30,
    
    
    of Related
    
    
    Increase
    
    
    Year over2009
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearCost of revenues:Recurring
    
    $
    16,912
    
    
    
    49
    %
    
    $
    11,095
    
    
    
    38
    %
    
    $
    5,817
    
    
    
    52
    %Services
    
    
    22,034
    
    
    
    85
    %
    
    
    33,739
    
    
    
    89
    %
    
    
    (11,705
    )
    
    
    (35
    )%License
    
    
    656
    
    
    
    13
    %
    
    
    705
    
    
    
    6
    %
    
    
    (49
    )
    
    
    (7
    )%Total cost of revenues
    
    $
    39,602
    
    
    
    
    
    
    $
    45,539
    
    
    
    
    
    
    $
    (5,937
    )Gross profit:Recurring
    
    $
    17,757
    
    
    
    51
    %
    
    $
    18,113
    
    
    
    62
    %
    
    $
    (356
    )
    
    
    (2
    )%Services
    
    
    3,924
    
    
    
    15
    %
    
    
    4,253
    
    
    
    11
    %
    
    
    (329
    )
    
    
    (8
    )%License
    
    
    4,378
    
    
    
    87
    %
    
    
    11,933
    
    
    
    94
    %
    
    
    (7,555
    )
    
    
    (63
    )%Total gross profit
    
    $
    26,059
    
    
    
    40
    %
    
    $
    34,299
    
    
    
    43
    %
    
    $
    (8,240
    )
    
    
    (24
    )%
 Revenues
 Recurring Revenues.
 29




---



##### Table of Contents



Services Revenues.
 License Revenues.
 Cost of Revenues and Gross Margin
 Cost of Recurring Revenues.
 Cost of Services Revenues.
 Cost of License Revenues.
 Gross Margin.
 30




---



##### Table of Contents



Operating Expenses
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2009
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and marketing
    
    $
    4,586
    
    
    
    26
    %
    
    $
    7,748
    
    
    
    27
    %
    
    $
    (3,162
    )
    
    
    (41
    )%Research and development
    
    
    3,397
    
    
    
    20
    %
    
    
    3,808
    
    
    
    13
    %
    
    
    (411
    )
    
    
    (11
    )%General and administrative
    
    
    3,072
    
    
    
    18
    %
    
    
    3,529
    
    
    
    12
    %
    
    
    (457
    )
    
    
    (13
    )%Restructuring
    
    
    1,973
    
    
    
    11
    %
    
    
    
    
    
    
    
    %
    
    
    1,973
    
    
    
    N/MTotal operating
expenses
    
    $
    13,028
    
    
    
    75
    %
    
    $
    15,085
    
    
    
    53
    %
    
    $
    (2,057
    )
    
    
    (14
    )%
 Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Increase
    
    
    Year over2009
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    (Decrease)
    
    
    YearOperating expenses:Sales and marketing
    
    $
    15,892
    
    
    
    24
    %
    
    $
    22,337
    
    
    
    28
    %
    
    $
    (6,445
    )
    
    
    (29
    )%Research and development
    
    
    10,871
    
    
    
    17
    %
    
    
    10,958
    
    
    
    14
    %
    
    
    (87
    )
    
    
    (1
    )%General and administrative
    
    
    9,322
    
    
    
    14
    %
    
    
    10,261
    
    
    
    13
    %
    
    
    (939
    )
    
    
    (9
    )%Restructuring
    
    
    2,778
    
    
    
    4
    %
    
    
    397
    
    
    
    *
    %
    
    
    2,381
    
    
    
    600
    %Total operating
expenses
    
    $
    38,863
    
    
    
    59
    %
    
    $
    43,953
    
    
    
    55
    %
    
    $
    (5,090
    )
    
    
    (12
    )%
 
 *
    
    Less than 1%.N/M:
    
    Percentage is not meaningful Sales and Marketing.
 31




---



##### Table of Contents



Research and Development.
  General and Administrative.
  Restructuring.
 Stock-Based Compensation
  32




---



##### Table of Contents



Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2009
    
    
    2008
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of recurring revenues
    
    $
    108
    
    
    $
    184
    
    
    $
    (76
    )
    
    
    (41
    )%Cost of services revenues
    
    
    185
    
    
    
    320
    
    
    
    (135
    )
    
    
    (42
    )%Sales and marketing
    
    
    221
    
    
    
    401
    
    
    
    (180
    )
    
    
    (45
    )%Research and development
    
    
    181
    
    
    
    294
    
    
    
    (113
    )
    
    
    (38
    )%General and administrative
    
    
    310
    
    
    
    795
    
    
    
    (485
    )
    
    
    (61
    )%Total stock-based
compensation
    
    $
    1,005
    
    
    $
    1,994
    
    
    $
    (989
    )
    
    
    (50
    )%
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2009
    
    
    2008
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of recurring revenues
    
    $
    402
    
    
    $
    497
    
    
    $
    (95
    )
    
    
    (19
    )%Cost of services revenues
    
    
    441
    
    
    
    970
    
    
    
    (529
    )
    
    
    (55
    )%Sales and marketing
    
    
    795
    
    
    
    1,487
    
    
    
    (692
    )
    
    
    (47
    )%Research and development
    
    
    590
    
    
    
    915
    
    
    
    (325
    )
    
    
    (36
    )%General and administrative
    
    
    989
    
    
    
    2,021
    
    
    
    (1,032
    )
    
    
    (51
    )%Total stock-based
compensation
    
    $
    3,217
    
    
    $
    5,890
    
    
    $
    (2,673
    )
    
    
    (45
    )%
  Other Items
  33




---



##### Table of Contents



Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2009
    
    
    2008
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    49
    
    
    $
    103
    
    
    $
    (54
    )
    
    
    (52
    )%Provision for income taxes
    
    $
    173
    
    
    $
    64
    
    
    $
    109
    
    
    
    170
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2009
    
    
    2008
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    239
    
    
    $
    914
    
    
    $
    (675
    )
    
    
    (74
    )%Provision for income taxes
    
    $
    319
    
    
    $
    407
    
    
    $
    (88
    )
    
    
    (22
    )%
 Interest and Other Income
   Provision for Income Taxes
   34




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##### Table of Contents



Liquidity and Capital Resources
   Nine Months Ended September 30,2009
    
    
    2008Net cash provided by (used in):Operating activities
    
    $
    (2,248
    )
    
    $
    5,341Investing activities
    
    
    (11,494
    )
    
    
    12,094Financing activities
    
    
    605
    
    
    
    (355
    )
 Net Cash (Used In) Provided by Operating Activities.
 Net Cash (Used in) Provided by Investing Activities.
 Net Cash Provided by (Used in) Financing Activities.
 35




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##### Table of Contents



Auction Rate Securities
  Contractual Obligations and Commitments
  Payments due by PeriodRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2014Contractual Obligations
    
    Total
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    and beyondOperating
lease commitments
    
    $
    4,670
    
    
    $
    676
    
    
    $
    2,112
    
    
    $
    985
    
    
    $
    316
    
    
    $
    201
    
    
    $
    380Unconditional purchase commitments
    
    $
    3,021
    
    
    $
    714
    
    
    $
    1,538
    
    
    $
    667
    
    
    $
    102
    
    
    $
    
    
    
    $
    
   Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk.
  36




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##### Table of Contents



Interest Rate Risk.
  Expected MaturityTotal
    
    
    Total1 Year
    
    
    More Than
    
    
    Principal
    
    
    Fairor Less
    
    
    1 Year
    
    
    Amount
    
    
    ValueAvailable-for-sale securities
    
    $
    19,043
    
    
    $
    8,047
    
    
    $
    27,090
    
    
    $
    27,120Weighted average interest rate
    
    
    0.18
    %
    
    
    1.37
    %
  Foreign Currency Exchange Risk.
   37




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##### Table of Contents



As of September 30, 2009AverageNotional
    
    
    Contract
    
    
    EstimatedAmount
    
    
    Exchange Rate
    
    
    Fair Value(In thousands except contract rates)Foreign currency forward contracts:Mexican Pesos (MXN)
    
    $
    1,243
    
    
    
    14.0665
    
    
    $
    23
 
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  38




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##### Table of Contents



Factors That Could Affect Future Results
 We operate in a dynamic and rapidly changing environment that involves numerous risks and
uncertainties that could cause actual results to differ materially from the results contemplated by
the forward-looking statements contained in this Quarterly Report on Form 10-Q . Because of the
factors discussed below and in our Annual Report on Form 10-K for 2008, as well as other variables
affecting our operating results, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
 RISKS RELATED TO OUR BUSINESS
 Our transition to a recurring revenue business model relies on our ability to increase our cumulative
Net Annual Contract Value and our failure to do so will adversely impact our financial results.
  Our professional services revenues declined materially in recent periods as a result of changes to our business model, and we expect this trend to continue.
  
    
    The initial implementation time for our on-demand solution is substantially less than our traditional on premise enterprise software model resulting in a decreased need for our professional services.  The continued emphasis on sales of our on-demand solution is
expected to further decrease this demand, thereby putting further pressure on professional services revenue.
    
    Historically, our on premise enterprise software license transactions require post-implementation professional services, typically in the form of upgrade, updates and configuration support.  Under our on-demand solution model, upgrades and updates are included in
our on-demand technical operations thereby further reducing customers professional services needs.
    
    The number of third party professional services providers capable of implementing,
configuring and performing other consulting services related to our on-demand solutions,
including our partners, continues to expand. To the extent customers use third party
professional services providers, our professional services revenues may be reduced.
    
    Certain customers may experience budget constraints causing them to delay or cancel
projects, including projects in which we would have performed professional services related
to our software applications. To the extent these budget constraints continue or our
customers become impacted by them, our professional services revenues may be reduced.
 39




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##### Table of Contents



Our failure to effectively implement and manage the offering of our on-premise product on a
time based term license basis or the restructuring of our sales and marketing organizations in
connection with our transition to a recurring revenue business model may harm our business and
financial results.
  Uncertain economic conditions may adversely impact our business.
   
 Item 6. Exhibits
 (a) Exhibits
 ExhibitNumber
    
    Description10.1
    
    
    Offer Letter with Lorna Heynike dated July 24, 200931.1
    
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act32.1
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
 Availability of this Report
  40




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##### Table of Contents



SIGNATURES
  CALLIDUS SOFTWARE INC.By:
    /s/ RONALD J. FIORRonald J. FiorChief Financial Officer,
Senior Vice President, Finance and Operations 41




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##### Table of Contents



EXHIBIT INDEX
TO
CALLIDUS SOFTWARE INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 ExhibitNumber
    
    Description10.1
    
    
    Offer Letter with Lorna Heynike dated July 24, 200931.1
    
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act32.1
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
 42