##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 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
    
    77-0438629(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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 þ 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
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 6. Exhibits
    
    
    46Signatures
    
    
    47Exhibit Iindex
    
    
    48EXHIBIT 31.1EXHIBIT 32.1
   
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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 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,286
    
    
    $
    12,082Short-term investments
    
    
    36,935
    
    
    
    40,857Accounts receivable, net
    
    
    26,090
    
    
    
    23,064Prepaid and other current assets
    
    
    3,118
    
    
    
    3,939Total current assets
    
    
    79,429
    
    
    
    79,942Property and equipment, net
    
    
    4,456
    
    
    
    4,086Deposits and other assets
    
    
    4,533
    
    
    
    1,166Total assets
    
    $
    88,418
    
    
    $
    85,194LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,044
    
    
    $
    899Accrued payroll and related expenses
    
    
    5,936
    
    
    
    6,647Accrued expenses
    
    
    7,590
    
    
    
    3,721Deferred revenue
    
    
    13,222
    
    
    
    13,726Total current liabilities
    
    
    30,792
    
    
    
    24,993Long-term deferred revenue
    
    
    1,208
    
    
    
    1,578Other liabilities
    
    
    1,250
    
    
    
    1,243Total liabilities
    
    
    33,250
    
    
    
    27,814Stockholders equity:Common stock, $0.001 par value;
100,000 shares authorized;
29,370 and 28,354 shares issued and
outstanding at
September 30, 2007 and December 31, 2006,
respectively
    
    
    29
    
    
    
    28Additional paid-in capital
    
    
    201,006
    
    
    
    193,499Accumulated other comprehensive income
    
    
    421
    
    
    
    408Accumulated deficit
    
    
    (146,288
    )
    
    
    (136,555
    )Total stockholders equity
    
    
    55,168
    
    
    
    57,380Total liabilities and stockholders equity
    
    $
    88,418
    
    
    $
    85,194
  3




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##### Table of Contents



CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)Revenues:License revenues
    
    $
    6,200
    
    
    $
    5,776
    
    
    $
    21,869
    
    
    $
    18,669Services, maintenance and
on-demand revenues
    
    
    19,170
    
    
    
    11,649
    
    
    
    54,883
    
    
    
    33,377Total revenues
    
    
    25,370
    
    
    
    17,425
    
    
    
    76,752
    
    
    
    52,046Cost of revenues:License revenues
    
    
    191
    
    
    
    105
    
    
    
    646
    
    
    
    389Services, maintenance and
on-demand revenues
    
    
    14,238
    
    
    
    8,205
    
    
    
    41,474
    
    
    
    24,570Total cost of revenues
    
    
    14,429
    
    
    
    8,310
    
    
    
    42,120
    
    
    
    24,959Gross profit
    
    
    10,941
    
    
    
    9,115
    
    
    
    34,632
    
    
    
    27,087Operating expenses:Sales and marketing
    
    
    7,293
    
    
    
    5,570
    
    
    
    23,156
    
    
    
    17,929Research and development
    
    
    3,688
    
    
    
    3,612
    
    
    
    11,781
    
    
    
    10,832General and administrative
    
    
    3,951
    
    
    
    3,195
    
    
    
    11,372
    
    
    
    9,274Total operating expenses
    
    
    14,932
    
    
    
    12,377
    
    
    
    46,309
    
    
    
    38,035Operating loss
    
    
    (3,991
    )
    
    
    (3,262
    )
    
    
    (11,677
    )
    
    
    (10,948
    )Interest and other income
    
    
    657
    
    
    
    754
    
    
    
    2,239
    
    
    
    1,997Loss before provision for income taxes
    
    
    (3,334
    )
    
    
    (2,508
    )
    
    
    (9,438
    )
    
    
    (8,951
    )Provision for income taxes
    
    
    36
    
    
    
    
    
    
    
    144
    
    
    
    Loss before cumulative effect of a
change in
accounting principle
    
    
    (3,370
    )
    
    
    (2,508
    )
    
    
    (9,582
    )
    
    
    (8,951
    )Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Net loss
    
    $
    (3,370
    )
    
    $
    (2,508
    )
    
    $
    (9,582
    )
    
    $
    (8,823
    )Net loss per share  basic and dilutedLoss per share before cumulative
effect of a
change in accounting principle
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.33
    )
    
    $
    (0.33
    )Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.33
    )
    
    $
    (0.32
    )Shares used in basic per share
computation
    
    
    29,175
    
    
    
    27,888
    
    
    
    28,901
    
    
    
    27,500Shares used in diluted per share
computation
    
    
    29,175
    
    
    
    27,888
    
    
    
    28,901
    
    
    
    27,500
  4




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CALLIDUS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Nine Months Ended September 30,2007
    
    
    2006(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (9,582
    )
    
    $
    (8,823
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and other amortization
    
    
    1,417
    
    
    
    1,380Provision for doubtful accounts and sales returns
    
    
    82
    
    
    
    (38
    )Stock-based compensation
    
    
    3,949
    
    
    
    3,665Loss on disposal of property
    
    
    2
    
    
    
    10Net (accretion) amortization on investments
    
    
    (489
    )
    
    
    23Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (128
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,940
    )
    
    
    (4,362
    )Prepaid and other current assets
    
    
    1,175
    
    
    
    (1,577
    )Other assets
    
    
    (1,652
    )
    
    
    142Accounts payable
    
    
    1,801
    
    
    
    25Accrued payroll and related expenses
    
    
    (735
    )
    
    
    (1,990
    )Accrued expenses
    
    
    3,435
    
    
    
    675Deferred revenue
    
    
    (902
    )
    
    
    (1,009
    )Net cash used in operating activities
    
    
    (4,439
    )
    
    
    (12,007
    )Cash flows from investing activities:Purchases of investments
    
    
    (33,572
    )
    
    
    (39,949
    )Proceeds from maturities and sale of investments
    
    
    38,005
    
    
    
    40,950Purchases of property and equipment
    
    
    (2,385
    )
    
    
    (1,511
    )Change in restricted cash
    
    
    130
    
    
    
    122Net cash provided by (used in) investing activities
    
    
    2,178
    
    
    
    (388
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,558
    
    
    
    2,784Net cash provided by financing activities
    
    
    3,558
    
    
    
    2,784Effect of exchange rates on cash and cash equivalents
    
    
    (93
    )
    
    
    63Net increase (decrease) in cash and cash equivalents
    
    
    1,204
    
    
    
    (9,548
    )Cash and cash equivalents at beginning of period
    
    
    12,082
    
    
    
    23,705Cash and cash equivalents at end of period
    
    $
    13,286
    
    
    $
    14,157
  5




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##### Table of Contents



CALLIDUS SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Valuation Accounts
  6




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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, 2007
    
    $
    483
    
    
    $
    37
    
    
    $
    
    
    
    $
    520Three months
ended September 30, 2006
    
    
    553
    
    
    
    (90
    )
    
    
    
    
    
    
    463Nine months ended September 30, 2007
    
    
    463
    
    
    
    57
    
    
    $
    
    
    
    
    520Nine months ended September 30, 2006
    
    
    480
    
    
    
    (12
    )
    
    
    (5
    )
    
    
    463
 Balance at
    
    
    
    
    
    Remediation
    
    Balance atBeginning
    
    
    
    
    
    Service
    
    End ofof Period
    
    Provision
    
    Claims
    
    PeriodSales return reserveThree months
ended September
30, 2007
    
    $
    259
    
    
    $
    240
    
    
    $
    (233
    )
    
    $
    266Three months
ended September
30, 2006
    
    
    281
    
    
    
    112
    
    
    
    (104
    )
    
    
    289Nine months
ended September
30, 2007
    
    
    241
    
    
    $
    953
    
    
    
    (928
    )
    
    
    266Nine months
ended September
30, 2006
    
    
    310
    
    
    
    610
    
    
    
    (631
    )
    
    
    289
 Restricted Cash
  Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
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Fixed or Determinable Fee.
  Collection is Deemed Probable.
 Perpetual Licensing.
  Residual Method. Software Revenue Recognition, Software Revenue Recognition with Respect to Certain Transactions.
  8




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Contract Accounting Method. Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
  Maintenance Revenue.
 Professional Service Revenue.
 On-Demand Revenue. Application of AICPA Statement of Position 97-2 to Arrangements That Include the
Right to Use Software Stored on Another Entitys Hardware, Revenue
Recognition Revenue Arrangements
with Multiple Deliverables.
  9




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Net Loss Per Share
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Restricted stock
    
    
    118
    
    
    
    
    
    
    
    46
    
    
    
    16Stock options
    
    
    8,277
    
    
    
    6,996
    
    
    
    8,215
    
    
    
    6,829Warrants
    
    
    
    
    
    
    11
    
    
    
    1
    
    
    
    69ESPP
    
    
    48
    
    
    
    69
    
    
    
    204
    
    
    
    310Totals
    
    
    8,443
    
    
    
    7,076
    
    
    
    8,466
    
    
    
    7,224
  10




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Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 2. Investments
  11




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##### Table of Contents



Carrying
    
    
    Unrealized
    
    
    UnrealizedSeptember 30, 2007
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAuction-rate securities and
preferred stock
    
    $
    8,300
    
    
    $
    
    
    
    $
    
    
    
    $
    8,300Corporate notes and obligations
    
    
    24,671
    
    
    
    25
    
    
    
    (45
    )
    
    
    24,651US government and agency
obligations
    
    
    6,000
    
    
    
    5
    
    
    
    
    
    
    
    6,005Investments in debt and
equity securities
    
    $
    38,971
    
    
    $
    30
    
    
    $
    (45
    )
    
    $
    38,956
 Carrying
    
    
    Unrealized
    
    
    UnrealizedDecember 31, 2006
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAuction-rate securities and
preferred stock
    
    $
    13,750
    
    
    $
    
    
    
    $
    
    
    
    $
    13,750Corporate notes and obligations
    
    
    29,129
    
    
    
    
    
    
    
    (37
    )
    
    
    29,092US government and agency
obligations
    
    
    500
    
    
    
    
    
    
    
    (2
    )
    
    
    498Investments in debt and
equity securities
    
    $
    43,379
    
    
    $
    
    
    
    $
    (39
    )
    
    $
    43,340
 September 30,
    
    
    December 31,2007
    
    
    2006Recorded as:Cash equivalents
    
    $
    2,021
    
    
    $
    2,483Short-term investments
    
    
    36,935
    
    
    
    40,857$
    38,956
    
    
    $
    43,340
   3. Commitments and Contingencies
  Accounting for Contingencies
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Other Contingencies
  Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others.
 4. Segment, Geographic and Customer Information
 Disclosures about Segments of an Enterprise and Related Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    21,582
    
    
    $
    13,718
    
    
    $
    63,857
    
    
    $
    41,933Europe
    
    
    3,564
    
    
    
    2,589
    
    
    
    11,603
    
    
    
    4,902Asia Pacific
    
    
    224
    
    
    
    1,118
    
    
    
    1,292
    
    
    
    5,211$
    25,370
    
    
    $
    17,425
    
    
    $
    76,752
    
    
    $
    52,046
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Customer 1
    
    
    3
    %
    
    
    18
    %
    
    
    2
    %
    
    
    6
    %Customer 2
    
    
    6
    %
    
    
    12
    %
    
    
    8
    %
    
    
    14
    %
 5. Comprehensive Loss
  13




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (3,370
    )
    
    $
    (2,508
    )
    
    $
    (9,582
    )
    
    $
    (8,823
    )Other comprehensive loss:Change in unrealized loss on
investments, net
    
    
    17
    
    
    
    18
    
    
    
    24
    
    
    
    78Change in cumulative
translation
adjustments
    
    
    3
    
    
    
    
    
    
    
    (10
    )
    
    
    83Comprehensive loss
    
    $
    (3,350
    )
    
    $
    (2,490
    )
    
    $
    (9,568
    )
    
    $
    (8,662
    )
 6. Stock-based Compensation
 Expense Summary
 Share-Based Payment
   14




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Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2007
    
    
    2006
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of services,
maintenance and
on-demand revenues
    
    $
    288
    
    
    $
    250
    
    
    $
    38
    
    
    
    15
    %Sales and marketing
    
    
    333
    
    
    
    264
    
    
    
    69
    
    
    
    26
    %Research and development
    
    
    205
    
    
    
    217
    
    
    
    (12
    )
    
    
    (6
    )%General and administrative
    
    
    379
    
    
    
    335
    
    
    
    44
    
    
    
    13
    %Total stock-based
compensation
    
    $
    1,205
    
    
    $
    1,066
    
    
    $
    139
    
    
    
    13
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Year to Year
    
    
    Year over2007
    
    
    2006
    
    
    Increase
    
    
    YearStock-based compensation:Cost of services,
maintenance and
on-demand revenues
    
    $
    809
    
    
    $
    760
    
    
    $
    49
    
    
    
    6
    %Sales and marketing
    
    
    874
    
    
    
    794
    
    
    
    80
    
    
    
    10
    %Research and development
    
    
    737
    
    
    
    682
    
    
    
    55
    
    
    
    8
    %General and administrative
    
    
    1,529
    
    
    
    1,429
    
    
    
    100
    
    
    
    7
    %Total stock-based
compensation
    
    $
    3,949
    
    
    $
    3,665
    
    
    $
    284
    
    
    
    8
    %
 Determination of Fair Value
  15




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##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Stock Option PlansExpected life (in years)
    
    
    3.50
    
    
    
    3.50
    
    
    
    2.50 to 3.50
    
    
    
    2.50 to 6.00Risk-free interest rate
    
    
    4.83
    %
    
    4.69% to 5.07%
    
    4.50% to 5.00%
    
    4.36% to 5.11%Volatility
    
    
    46
    %
    
    
    54
    %
    
    
    39% to 54
    %
    
    
    54% to 60
    %Dividend Yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase
PlanExpected life (in years)
    
    
    0.50 to 1.00
    
    
    
    0.50 to 1.00
    
    
    
    0.49 to 1.00
    
    
    
    0.49 to 1.00Risk-free interest rate
    
    4.47% to 4.55%
    
    5.08% to 5.17%
    
    4.47% to 5.16%
    
    4.68% to 5.17%Volatility
        
    30% to 32
    %
    
    
    37% to 39
    %
    
    
    30% to 37
    %
        
    36% to 43
    %Dividend Yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 7. Income Taxes
 Accounting for
Uncertainty in Income Taxes
   8. Related-Party Transactions
  16




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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 the year ended December 31, 2006 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 license revenues and gross margins, future operating expense levels,
the impact of quarterly fluctuations of revenue and operating results, levels of 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 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, 2007
   17




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##### Table of Contents



Strong Revenue Growth
   Increased Expenses to Support Growth
    Challenges and Risks
   
    
    Higher margin license revenues have grown at a slower rate than lower margin
professional services, maintenance and on-demand revenues;
    
    our professional services business has been able to grow rapidly; however, at the
same time it has been unable to generate industry standard margins; and
 18




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##### Table of Contents




    
    our investment in developing a hosted on-demand service has been generating a loss
since inception.
  Application of Critical Accounting Policies and Use of Estimates
   Revenue Recognition
   Evidence of an Arrangement.
 Delivery.
 Fixed or Determinable Fee.
 19




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##### Table of Contents



Collection is Deemed Probable.
 Perpetual Licensing.
  Residual Method. Software Revenue Recognition, Software Revenue Recognition with Respect to Certain Transactions.
  Contract Accounting Method. Accounting for Performance of Construction-Type and Certain
 20




---



##### Table of Contents



Production-Type Contracts
  Maintenance Revenue.
 Professional Service Revenue.
 On-Demand Revenue. Application of AICPA
Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entitys Hardware, Revenue Recognition Revenue Arrangements with Multiple Deliverables.
   21




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##### Table of Contents



Allowance for Doubtful Accounts and Sales Return Reserve
  Revenue Recognition When
Right of Return Exists,
 Stock-Based Compensation
 Share-Based Payment
 22




---



##### Table of Contents



Income Taxes
  Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Results of Operations
 Comparison of the Three and Nine Months Ended September 30, 2007 and 2006
 Revenues, cost of revenues and gross profit
  23




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##### Table of Contents



Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Year to Year
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Increase
    
    
    YearRevenues:License
    
    $
    6,200
    
    
    
    24
    %
    
    $
    5,776
    
    
    
    33
    %
    
    $
    424
    
    
    
    7
    %Services,
maintenance and
on-demand
    
    
    19,170
    
    
    
    76
    %
    
    
    11,649
    
    
    
    67
    %
    
    
    7,521
    
    
    
    65
    %Total revenues
    
    $
    25,370
    
    
    
    100
    %
    
    $
    17,425
    
    
    
    100
    %
    
    $
    7,945
    
    
    
    46
    %
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    of Related
    
    
    September 30,
    
    
    of Related
    
    
    Year to Year
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Increase
    
    
    YearCost of revenues:License
    
    $
    191
    
    
    
    3
    %
    
    $
    105
    
    
    
    2
    %
    
    $
    86
    
    
    
    82
    %Services, maintenance
and on-demand
    
    
    14,238
    
    
    
    74
    %
    
    
    8,205
    
    
    
    70
    %
    
    
    6,033
    
    
    
    74
    %Total cost of revenues
    
    $
    14,429
    
    
    
    
    
    
    $
    8,310
    
    
    
    
    
    
    $
    6,119Gross profit
    
    $
    10,941
    
    
    
    43
    %
    
    $
    9,115
    
    
    
    52
    %
    
    $
    1,826
    
    
    
    20
    %
 24




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##### Table of Contents



Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Year to Year
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Increase
    
    
    YearRevenues:License
    
    $
    21,869
    
    
    
    28
    %
    
    $
    18,669
    
    
    
    36
    %
    
    $
    3,200
    
    
    
    17
    %Services,
maintenance and
on-demand
    
    
    54,883
    
    
    
    72
    %
    
    
    33,377
    
    
    
    64
    %
    
    
    21,506
    
    
    
    64
    %Total revenues
    
    $
    76,752
    
    
    
    100
    %
    
    $
    52,046
    
    
    
    100
    %
    
    $
    24,706
    
    
    
    47
    %
 Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    of Related
    
    
    September 30,
    
    
    of Related
    
    
    Year to Year
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Increase
    
    
    YearCost of revenues:License
    
    $
    646
    
    
    
    3
    %
    
    $
    389
    
    
    
    2
    %
    
    $
    257
    
    
    
    66
    %Services, maintenance
and on-demand
    
    
    41,474
    
    
    
    76
    %
    
    
    24,570
    
    
    
    74
    %
    
    
    16,904
    
    
    
    69
    %Total cost of revenues
    
    $
    42,120
    
    
    
    
    
    
    $
    24,959
    
    
    
    
    
    
    $
    17,161Gross profit
    
    $
    34,632
    
    
    
    45
    %
    
    $
    27,087
    
    
    
    52
    %
    
    $
    7,545
    
    
    
    28
    %
 Revenues
 License Revenues.
 Services, Maintenance and On-demand Revenues.
 25




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##### Table of Contents



Cost of Revenues and Gross Margin
 Cost of License Revenues.
 Cost of Services, Maintenance and On-demand Revenues.
 Gross Margin.
 Operating Expenses
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Year to Year
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Increase
    
    
    YearOperating expenses:Sales and marketing
    
    $
    7,293
    
    
    
    29
    %
    
    $
    5,570
    
    
    
    32
    %
    
    $
    1,723
    
    
    
    31
    %Research and
development
    
    
    3,688
    
    
    
    15
    %
    
    
    3,612
    
    
    
    21
    %
    
    
    76
    
    
    
    2
    %General and
administrative
    
    
    3,951
    
    
    
    16
    %
    
    
    3,195
    
    
    
    18
    %
    
    
    756
    
    
    
    24
    %Total operating
expenses
    
    $
    14,932
    
    
    
    59
    %
    
    $
    12,377
    
    
    
    71
    %
    
    $
    2,555
    
    
    
    21
    %
 26




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##### Table of Contents



Nine
    
    
    
    
    
    
    NineMonths
    
    
    
    
    
    
    Months
    
    
    
    
    
    
    
    
    
    
    PercentageEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    of Total
    
    
    September 30,
    
    
    of Total
    
    
    Year to Year
    
    
    Year over2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Increase
    
    
    YearOperating expenses:Sales and marketing
    
    $
    23,156
    
    
    
    30
    %
    
    $
    17,929
    
    
    
    34
    %
    
    $
    5,227
    
    
    
    29
    %Research and
development
    
    
    11,781
    
    
    
    15
    %
    
    
    10,832
    
    
    
    21
    %
    
    
    949
    
    
    
    9
    %General and
administrative
    
    
    11,372
    
    
    
    15
    %
    
    
    9,274
    
    
    
    18
    %
    
    
    2,098
    
    
    
    23
    %Total operating
expenses
    
    $
    46,309
    
    
    
    60
    %
    
    $
    38,035
    
    
    
    73
    %
    
    $
    8,274
    
    
    
    22
    %
  Sales and Marketing.
  Research and Development.
  General and Administrative.
 27




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##### Table of Contents



Stock-Based Compensation
  Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2007
    
    
    2006
    
    
    (Decrease)
    
    
    YearStock-based compensation:Cost of services,
maintenance and
on-demand revenues
    
    $
    288
    
    
    $
    250
    
    
    $
    38
    
    
    
    15
    %Sales and marketing
    
    
    333
    
    
    
    264
    
    
    
    69
    
    
    
    26
    %Research and development
    
    
    205
    
    
    
    217
    
    
    
    (12
    )
    
    
    (6
    )%General and administrative
    
    
    379
    
    
    
    335
    
    
    
    44
    
    
    
    13
    %Total stock-based
compensation
    
    $
    1,205
    
    
    $
    1,066
    
    
    $
    139
    
    
    
    13
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    
    
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Year to Year
    
    
    Year over2007
    
    
    2006
    
    
    Increase
    
    
    YearStock-based compensation:Cost of services,
maintenance and
on-demand revenues
    
    $
    809
    
    
    $
    760
    
    
    $
    49
    
    
    
    6
    %Sales and marketing
    
    
    874
    
    
    
    794
    
    
    
    80
    
    
    
    10
    %Research and development
    
    
    737
    
    
    
    682
    
    
    
    55
    
    
    
    8
    %General and administrative
    
    
    1,529
    
    
    
    1,429
    
    
    
    100
    
    
    
    7
    %Total stock-based
compensation
    
    $
    3,949
    
    
    $
    3,665
    
    
    $
    284
    
    
    
    8
    %
  Other Items
  28




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##### Table of Contents



Three
    
    
    ThreeMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2007
    
    
    2006
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    657
    
    
    $
    754
    
    
    $
    (97
    )
    
    
    (13
    )%Provision for income taxes
    
    $
    36
    
    
    $
    
    
    
    $
    36
    
    
    
    100
    %Cumulative effect of a change
in accounting principle
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    %
 Nine
    
    
    NineMonths
    
    
    Months
    
    
    
    
    
    
    PercentageEnded
    
    
    Ended
    
    
    Year to Year
    
    
    ChangeSeptember 30,
    
    
    September 30,
    
    
    Increase
    
    
    Year over2007
    
    
    2006
    
    
    (Decrease)
    
    
    YearInterest and other income
    
    $
    2,239
    
    
    $
    1,997
    
    
    $
    242
    
    
    
    12
    %Provision for income taxes
    
    $
    144
    
    
    $
    
    
    
    $
    144
    
    
    
    100
    %Cumulative effect of a change
in accounting principle
    
    $
    
    
    
    $
    128
    
    
    $
    (128
    )
    
    
    (100
    )%
 Interest and Other Income
   Provision for Income Taxes
  Liquidity and Capital Resources
  29




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Net Cash Used in Operating Activities.
 Nine Months Ended September 30,2007
    
    
    2006Cash collections
    
    $
    74,327
    
    
    $
    47,012Payroll-related costs
    
    
    (49,591
    )
    
    
    (41,121
    )Professional services costs
    
    
    (14,431
    )
    
    
    (6,084
    )Employee expense reports
    
    
    (5,520
    )
    
    
    (4,970
    )Facilities-related costs
    
    
    (2,977
    )
    
    
    (2,724
    )Third-party royalty payments
    
    
    (848
    )
    
    
    (483
    )Other
    
    
    (5,399
    )
    
    
    (3,637
    )Net cash used in operating activities
    
    $
    (4,439
    )
    
    $
    (12,007
    )
  Net Cash Provided by/Used in Investing Activities.
 Net Cash Provided by Financing Activities.
 Contractual Obligations and Commitments
  30




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##### Table of Contents



Payments due by PeriodRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012Contractual Obligations
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    and beyondOperating lease
commitments
    
    $
    8,322
    
    
    $
    659
    
    
    $
    2,662
    
    
    $
    2,499
    
    
    $
    1,825
    
    
    $
    677
    
    
    $
    Unconditional
purchase commitments
    
    $
    4,260
    
    
    $
    580
    
    
    $
    1,924
    
    
    $
    1,062
    
    
    $
    494
    
    
    $
    100
    
    
    $
    100
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  31




---



##### Table of Contents



Expected MaturityTotal
    
    Total1 Year
    
    More Than
    
    Principal
    
    Fairor Less
    
    1 Year
    
    Amount
    
    ValueAvailable-for-sale securities
    
    $
    35,042
    
    
    $
    3,929
    
    
    $
    38,971
    
    
    $
    38,956Weighted average interest rate
    
    
    5.40
    %
    
    
    4.80
    %
  Foreign Currency Exchange Risk.
    
 Item 4. Controls and Procedures
   32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 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
following factors, 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
 We have a history of losses, and we cannot assure you that we will achieve or sustain
profitability.
  Our quarterly license revenues remain largely dependent on a relatively small number of license
transactions involving sales of our products to new customers, and any delay or failure in
closing one or more of these transactions could adversely affect our results of operations.
  Our success depends upon our ability to develop new products and enhance our existing products.
Failure to successfully introduce new or enhanced products may adversely affect our operating
results.
 33




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##### Table of Contents




    
    Rapid technological advances in hardware and software development;
    
    evolving standards in computer hardware, software technology and communications
infrastructure;
    
    changing customer needs; and
    
    frequent new product introductions and enhancements.
  The market for sales performance management software is new and rapidly evolving and may not
develop as we expect.
  Our quarterly revenues and operating results are unpredictable and are likely to continue to
fluctuate substantially, which may harm our results of operations.
    
    
    The discretionary nature of our customers purchase and budget cycles and changes in
their budgets for software and related purchases;
 34




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##### Table of Contents




    
    the priority our customers place on the purchase of our products as compared to other
information technology and capital acquisitions;
    
    competitive conditions in our industry, including new products, product announcements
and discounted pricing or special payment terms offered by our competitors;
    
    customers selection of our on-demand solution, under which we recognize revenue as
part of services, maintenance and on-demand revenues over the term of the agreement, in
lieu of traditional perpetual license revenue, which is typically recognized in the quarter
in which the transaction closes or as the products are implemented;
    
    our ability to hire, train and retain appropriate sales and professional services
staff;
    
    varying size, timing and contractual terms of orders for our products, which may delay
the recognition of revenues;
    
    indeterminate and often lengthy sales cycles;
    
    changes in the mix of revenues attributable to higher-margin product license revenues
as opposed to substantially lower-margin services, maintenance and on-demand revenues;
    
    strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments or changes in business strategy;
    
    merger and acquisition activities among our customers, which may alter their buying
patterns;
    
    our ability to timely complete our service obligations related to product sales;
    
    the utilization rate of our professional services personnel and the degree to which we
use third-party consulting services;
    
    changes in the average selling prices of our products;
    
    the rates the market will bear for our professional services and our ability to
efficiently and profitably perform such services based on those market rates;
    
    timing of product development and new product initiatives;
    
    increased operating expenses associated with channel sales, increased product
development efforts and Sarbanes-Oxley compliance; and
    
    customer concerns regarding the impact of implementing large, enterprise-wide
deployments of products, including our products, and compliance with the internal control
requirements of Sarbanes-Oxley.
 We might not be able to manage our future growth efficiently or profitably.
  35




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##### Table of Contents



If our hosted on-demand offering fails to achieve broad market acceptance, or if we are unable
to offer this service on a profitable basis, our operating results could be adversely affected.
   Our services, maintenance and on-demand revenues produce substantially lower gross margins than
our license revenues, and decreases in license revenues relative to services, maintenance and
on-
demand revenues have harmed, and may continue to harm, our overall gross margins.
   
    
    Competitive pricing pressure on the rates that we can charge for our professional
services;
    
    the complexity of the customers information technology environment;
    
    the resources directed by customers to their implementation projects; and
    
    the extent to which outside consulting organizations provide services directly to
customers.
 36




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##### Table of Contents



Our products have long sales cycles, which makes it difficult to plan our expenses and forecast
our results.
  
    
    The complex nature of our products and services;
    
    the need to educate potential customers about the uses and benefits of our products and
services;
    
    the requirement that a potential customer invest significant financial and other
resources in connection with the purchase and implementation of our products and services;
    
    budget cycles of our potential customers that affect the timing of purchases;
    
    customer requirements for competitive evaluation and internal approval before
purchasing our products and services;
    
    potential delays of purchases due to announcements or planned introductions of new
products and services by us or our competitors; and
    
    the lengthy approval processes of our potential customers, many of which are large
organizations.
  37




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##### Table of Contents



Professional services comprise a substantial portion of our revenues and, to the extent our
customers choose to use other services providers, our revenues and operating results may
decline.
  If we are unable to hire and retain qualified employees, including sales, professional
services, and engineering personnel, our growth may be impaired.
  Our latest product features and functionality may require existing customers to migrate to more
recent versions of our software. Moreover, we may choose to or be compelled to discontinue
maintenance support for older versions of our software products, forcing customers to upgrade
their
software in order to continue receiving maintenance support. If existing customers fail to
migrate or delay migration to newer versions of our software, our revenues may be harmed.
  If we do not compete effectively, our revenues may not grow and could decline.
  38




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##### Table of Contents



Managing large-scale deployments of our products requires substantial technical implementation
and support by us or third-party service providers. Failure to meet these requirements could
cause a decline or delay in recognition of our revenues and an increase in our expenses.
    A substantial majority of our revenues are derived from our TrueComp software application and
related products and services, and a decline in sales of these products and services could
adversely affect our operating results and financial condition.
  39




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##### Table of Contents



If we reduce prices or alter our payment terms to compete successfully, our margins and
operating results may be adversely affected.
  Our products depend on the technology of third parties licensed to us that are necessary for our
applications to operate and the loss or inability to maintain these licenses, errors in such
software, or discontinuation or updates to such software could result in increased costs or
delayed sales of our products.
   Errors in our products could be costly to correct, adversely affect our reputation and impair
our ability to sell our products.
  40




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##### Table of Contents




    
    Lost or delayed market acceptance and sales of our products;
    
    product liability suits against us;
    
    diversion of development resources; and
    
    substantially greater service and warranty costs.
 Our revenues might be harmed by resistance to adoption of our software by information technology
departments.
  The loss of key personnel or the inability of replacements to quickly and successfully perform
in their new roles could adversely affect our business.
  We may lose sales opportunities and our business may be harmed if we do not successfully develop
and maintain strategic relationships to implement and sell our products.
  41




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Breaches of security or failure to safeguard customer data could create the perception that our
services are not secure, causing customers to discontinue or reject the use of our services and
potentially subject us to significant liability. Implementing, monitoring and maintaining
adequate security safeguards may be costly.
   If we fail to adequately protect our proprietary rights and intellectual property, we may lose
valuable assets, experience reduced revenues and incur costly litigation to protect our rights.
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Our results of operations may be adversely affected if we are subject to a protracted
infringement claim or one that results in a significant damage award.
  
    
    Require costly litigation to resolve;
    
    absorb significant management time;
    
    cause us to enter into unfavorable royalty or license agreements;
    
    require us to discontinue the sale of all or a portion of our products;
    
    require us to indemnify our customers or third-party systems integrators; or
    
    require us to expend additional development resources to redesign our products.
 Our inclusion of open source software in our products may expose us to liability or require
release of our source code.
  If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
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We expect to continue expanding our international operations but we do not have substantial
experience in international markets, and may not achieve the expected results.
  
    
    Unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
    
    differing abilities to protect our intellectual property rights;
    
    differing labor regulations;
    
    greater difficulty in supporting and localizing our products;
    
    greater difficulty in establishing, staffing and managing foreign operations;
    
    possible political and economic instability; and
    
    fluctuating exchange rates.
  Acquisitions and investments present many risks, and we may not realize the anticipated financial
and strategic goals for any such transactions.
  
    
    As was the case with our acquisition of an assembled workforce and source code license
from Cezanne Software in 2004, we may find that the acquired business or assets do not
further our business strategy, or that we overpaid for the business or assets, or that
economic conditions change, all of which may generate a future impairment charge;
    
    we may have difficulty integrating the operations and personnel of the acquired
business, and may have difficulty retaining the key personnel of the acquired business;
    
    we may have difficulty integrating the acquired technologies or products with our
existing product lines;
    
    there may be customer confusion where our products overlap with those of the acquired
business;
    
    we may have product liability associated with the sale of the acquired business
products;
    
    our ongoing business and managements attention may be disrupted or diverted by
transition or integration issues and the complexity of managing geographically and
culturally diverse locations;
    
    we may have difficulty maintaining uniform standards, controls, procedures and policies
across locations;
    
    the acquisition may result in litigation from terminated employees or third-parties;
and
    
    we may experience significant problems or liabilities associated with product quality,
technology and legal contingencies.
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RISKS RELATED TO OUR STOCK
 Our stock price is likely to remain volatile.
  
    
    Our operating performance and the performance of other similar companies;
    
    significant sales or distributions by existing investors coupled with a lack of trading
volume for our stock;
    
    announcements by us or our competitors of significant contracts, results of operations,
projections, new technologies, acquisitions, commercial relationships, joint ventures or
capital commitments;
    
    changes in our management team;
    
    publication of research reports about us or our industry by securities analysts; and
    
    developments with respect to intellectual property rights.
  Future sales of substantial amounts of our common stock by us or our existing stockholders could
cause our stock price to fall.
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Provisions in our charter documents, our stockholder rights plan and Delaware law may delay or
prevent an acquisition of our company.
  
 Item 6. Exhibits
 (a) Exhibits
 ExhibitNumber
    
    Description31.1
    
    302 Certifications32.1
    
    906 Certification
 Availability of this Report
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SIGNATURES
  CALLIDUS SOFTWARE INC.By:
    /s/ RONALD J. FIORRonald J. Fior
Chief Financial Officer,
Senior Vice President, Finance and Operations 47




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EXHIBIT INDEX
TO
CALLIDUS SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
 ExhibitNumber
    
    Description31.1
    
    302 Certifications32.1
    
    906 Certification
 48