Omniture, Inc. Q3 2008 Earnings Call Transcript

Oct.28.08 | About: OMNITURE, INC. (OMTR)

Omniture, Inc. (OMTR) Q3 2008 Earnings Call October 22, 2008 5:00 PM ET

Executives

Michael Look – Vice President Investor Relations

Joshua G. James – President, Chief Executive Officer & Director

Michael S. Herring – Chief Financial Officer & Director

Analysts

Richard K. Baldry – Canaccord Adams

Michael S. Huang – ThinkPanmure

Thomas C. Ernst – Deutsche Bank Securities, Inc.

Youssef Squali – Jefferies & Company, Inc.

Bryan McGrath – Credit Suisse

Brent Thill – Citigroup

Analyst for Robert Breza – RBC Capital Markets

Brian Fitzgerald – Bank of America Securities

Sasa Zorovic – Goldman Sachs

Kyle Evans – Stephens, Inc.

Mark Murphy – Piper Jaffray & Co.

Analyst for Steven M. Ashley – Robert W. Baird & Co.

Patrick Walravens – JMP Securities

Chad Bartley – Pacific Crest Securities

Keith Weiss – Morgan Stanley & Co., Inc.

Analyst for Jason Helfstein – Oppenheimer & Co.

David Hilal – Friedman, Billings, Ramsey & Co.

Frank Sparacino – First Analysis

[Brad Whit] – American Technology Research

Derrick Wood – Pacific Growth Equities

Operator

Welcome to the Omniture third quarter 2008 results conference call. My name is [Nikeda] and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of today’s conference. (Operator Instructions) I will now like to turn the call over to Mr. Mike Look, Vice President of Investor Relations.

Mike Look

Thank you for joining us. Joining me on today’s call are Mr. Josh James, our Chief Executive Officer and Co-Founder and Mr. Mike Herring, our Chief Financial Officer. During the call we will discuss Omniture’s financial results for the third quarter ended September 30, 2008. By now you should have a copy of our press release which crossed the wire approximately 45 minutes ago.

If you’d like a copy of our press release, please visit our website at www.OMTR.com. Please note that we’ll be referencing both GAAP and non-GAAP financial measures and wish to note that GAAP reconciliation information is provided in the press release and on our website.

Also, we wish to emphasis that some of the information discussed during the call, particularly information regarding our revenue and operating profit margins or profit targets including expectations concerning GAAP and non-GAAP revenue and revenue growth, GAAP and non-GAAP net income and loss and adjusted EBITDA, business strategy, customer demand, market observations and future product lines are based on information available as of today.

We believe that some of the statements we will make on today’s call, including statements about the expectations that I just mentioned may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act from 1934 and Section 27A of the Securities Act of 1933. Accordingly, we wish to caution you that such statements are just predictions based upon current expectations and assumptions regarding future events and business performance and involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the reports that the company files from time-to-time with the Securities & Exchange Commission which are available on our website and contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or other forward-looking statements. Omniture undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company’s expectations.

Following the prepared remarks from Mr. James and Mr. Herring, we’ll open the call up for Q&A. Let me now turn the call over to our CEO and Co-Founder Mr. Josh James.

Joshua G. James

Thank you everyone for joining us this afternoon. We are pleased to report that in the face of a tough economic environment, Omniture again delivered strong financial results in Q3. We posted record revenues, improved profitability significantly and booked record cash flow. While we’re proud of our financial performance we are cognoscente that these are challenging times for many of our customers and we’re working hard to support these customers and help them manage and improve their businesses in a market environment in which every dollar counts.

Although our Q3 results did not indicate a significant impact from the current macroeconomic environment, we are keeping a sharp focus on our operations and our investment decisions in order to maintain the right balance between prudently investing for growth, continuing to expand our operating margins and ensuring Omniture remains a strong, stable partner for our many customers.

We continue to see positive trends with our financial performance this quarter. With third quarter non-GAAP revenue of nearly $80 million, an increase of 111% over the same period a year ago while organic revenue growth remained above 50% an accomplishment of which we are extremely proud. By diligently managing our business operations this quarter we were able to achieve record non-GAAP operating income of $9.2 million for the quarter and better than expected operating margins of 11%, up more than 500 basis points year-over-year.

This leverage delivered non-GAAP net income of $0.11 per share which was at the high end of our guidance range. I’m also very excited that our adjusted EBITDA for the third quarter was $16.2 million which is above our guidance of $14.5 million to $15.5 million. Despite a challenging macroeconomic environment, annual contract value or ACV bookings continues from a strong first half of 2008 and grew 55% year-over-year in the quarter.

Q3 is traditionally been our softest quarter but this year we delivered our second largest booking quarter in history. This strong performance drove significant deferred revenue growth of 116% year-over-year reaching more than $100 million in the quarter for the first time in the company’s history. We also added approximately 250 new customers once again this quarter and maintained overall nominal customer retention above 95%. Notable additions during the third quarter include AirTran, Amway Global, Burton Corporation, Coach, E*Trade Financial, the Hershey Company, Swedan’s Ikea, Japan’s Kenko.com, China’s [inaudible] Media, France’s Meilleurmobile, SAAB Automotive and Ticket Network.

I’m also ecstatic to report that we generated a record $29 million in operating cash flow and a very meaningful $15 million free cash flow in the quarter through increased success in structuring annual pre-paid contracts, improved collections of advanced billings and more momentum on our overall financial model. Given these metrics, we’re very proud of our third quarter performance during a period in which marketing investments are under intense scrutiny.

We believe these results clearly demonstrate that despite pressures to reduce marketing spending, CMOs and marketers recognize the strategic function and uplift that our solutions provide. Our stated vision is that Omniture provides online business optimization through an online marketing suite of integrated applications and TMO dashboards built on an open online business analytics platform with approximately 5,000 deployments currently installed.

This enables a consistent personalized experience for the web visitor from the first data impression throughout the entire customer lifecycle and this closed loop environment uniquely allows for automated ad optimization and site side personalization. One increment benefactor of this solution is the CMO and we’re committed to becoming their trusted advisor. These CMOs are not only managing through a period of high scrutiny due to the economy but they are also managing through one of the largest shifts that advertising has every gone through.

This requires CMOs to focus on the most profitable channels for interacting with their customers whether they are online channels such as search, display, email, mobile, social media or video, or traditionally offline channels such as television, radio and print. Measuring each of these channels and understanding the interactions between them is critical to success for today’s CMO. Omniture is uniquely positioned to deliver the critical pieces they need in order to compete in this complex digital landscape.

While it’s clear that the current macroeconomic environment is in a state of turmoil, we plan on continuing to very carefully invest to extend our market leadership and build up the right solution for our customers. We believe that challenging times such as these can often create great opportunities for companies who are well poised to take advantage of them. Last week’s announcement of our intention to acquire the assets of Mercado is a good example of one such opportunity.

Mercado’s site search and merchandising customer base and technology compliment our recently announced site search products. Once the transaction is closed will become an essential part of the Omniture online business optimization platform. As I indicated in our press release announcing that transaction, the macroeconomic environment has created a great opportunity for us to acquire assets that we have been interested in for some time at a great value for our stockholders.

In addition to the Mercado transaction, we believe there will be further opportunities to broaden our offerings, increase our market share and extend our leadership. Now, let me speak briefly about what we see in the market today and how it is shaping our outlook. For the most part the third quarter played out pretty much as we expected when we began the quarter. The healthy pipeline in which we entered the quarter translated in to very strong bookings and we saw solid demand from existing as well as new customers across all geographies and all product offerings.

Internet traffic to our customers’ properties continued to growth at a healthy pace. Towards the end of September however, it became apparent that the challenging macroeconomic and financial environment may have some impact on our business going forward although it remains difficult to quantify the uncertainties specifically. That being said, we continue to believe the online business optimization is a multibillion dollar market opportunity and it’s only in its infancy.

There’s a considerable amount of market opportunity out there that to date remains unaddressed. Accordingly, we still believe that maintaining our investing for the future approach is appropriate. However, we have made and will continue to make changes to our cost structure and hiring plans to deal with the changing economic conditions that we face.

We remain confident that the online business optimization market offers significant opportunities for growth even in this macroeconomic climate and we believe we have the right strategy, a seasoned management team who’s acutely aware of how to operate a business in this type of environment and the operational discipline to successfully address these opportunities. We will appropriately grow to best serve our customers but we will also continue to closely monitor the macro situation as well as our sales pipeline and deal closure rates making adjustments to our cost structure and growth investments as needed.

In closing, we’re pleased with Q3 results. Despite these challenging economic times we were able to deliver solid revenue growth, better than expected operating income and record cash flows this quarter. I’d like to thank the entire Omniture team for their hard work and congratulate them on their disciplined operational execution and focus. With that I’d like to turn the call over to our CFO Mike Herring who will go over our financial results in greater detail.

Michael S. Herring

As Josh mentioned, the third quarter was another strong quarter for Omniture. Total revenues more than doubled and deferred revenues grew more than 150% year-over-year. Operating income and margins continue to improve as we maintain tight controls on expenses and cash flows were up significantly following strong cash collection and intense focus on cash management.

Taking a closer look at our Q3 results, total revenues for the third quarter were a record $77.8 million on a GAAP basis and $79.7 million on a non-GAAP basis. These revenue results were at the upper end of our guidance range and represent increases of 108% and 111% over the same period a year ago respectively. Organic growth which we define as revenue growth excluding the acquired revenues from Offermatic and Visual Sciences customers remain above 50% on a year-over-year basis as we continue to see solid demand from both existing customers as well as new customers.

Product revenues for the quarter totaled $69.6 million on a GAAP basis and $71.5 million on a non-GAAP basis. Professional services revenue in the third quarter totaled $8.3 million [inaudible] of 10% total non-GAAP revenues. Switching to geographical mix, as we have stated in the past we continue to benefit from our significant investments in international markets but we have been developing the necessary infrastructure, product sales and support to capitalize on the broad opportunity.

In the third quarter non-GAAP revenues from international operations, increased 121% year-over-year to $22.7 million and now represent 28% of total revenues. Mean while non-GAAP revenues from US operations more than doubled growing 107% year-over-year to end at $57 million or 72% of total revenues. We continue to believe that both US and international markets will be source of revenue growth.

Now, turning to margins, Q3 non-GAAP product gross margins remained essentially flat at 68% as we continue to implement our previously announced datacenter migration project in Oakland, California. As we indicated last quarter, this datacenter migration effort results in significant duplicative expenses that are temporary in nature until the project is complete and are not expected to affect our long term gross margin targets.

With the datacenter migration project expected to be completed later in the fourth quarter, we expect product gross margins to show improvements again in the first quarter of 2009. Non-GAAP professional services gross margins improved to 54% in the third quarter, up from 52% in the prior quarter and 45% in the same period a year ago as there was significant demand for services leading to high utilization throughout our consulting organization. It is not unusual for us to see high demand for services from Omniture in tighter economic times.

As our customers get leaner in headcount projects that might have been implemented internally get increasingly outsourced to service providers including Omniture. It is one of the reasons why we developed our consulting arm and focus intently on supporting our certified agency partners. We need the expertise out there to assist our customers on their path to optimization using our tools either directly or indirectly.

This resulted in a combined Q3 non-GAAP gross margin for the company of 66% and reflects a slight shift in mix between product and professional services revenue. Operating expenses in the third quarter were $53.3 million on a GAAP basis and $43.5 million on a non-GAAP basis or 55% of total revenues. That is down 240 basis points from 57% in Q2 as we continue to carefully manage our expenses in order to meet operating margin goals.

Sales and marketing expense in Q3 was 34% of revenue, down again from 37% in Q3 of last year and slightly down from 35% in the prior quarter. This has been the trend over the last several quarters as leverage in our business model enables us to improve sales and marketing expense ratios despite increases in those expenses on an absolute dollar basis. We ended the third quarter with 147 QBSRs, up the from the second quarter’s 144 QBSR figure.

Non-GAAP R&D expense remained flat in Q3 at 10% while G&A expense declined again from 12% to 11% of revenue as we continued to realize operating costs synergies from the Visual Sciences acquisition and see the leverage from the larger revenue basis. Non-GAAP operating profit was a record $9.2 million up nearly $7 million from the same period a year ago and resulting in the Q3 non-GAAP operating margin of 11% above the 10% guidance we provided last quarter.

This is the 12th consecutive quarter in which we have been able to improve operating profitability and highlights our ability to manage expenses and achieve operating income growth targets while delivering quality revenue growth. GAAP net loss for the quarter was $17.3 million or $0.24 per diluted share in line with what we guided to on our Q2 conference call. The primary difference between our actual results and guidance was due to the reversal of a $7.9 million one-time non-cash tax benefit required under GAAP accounting and original recorded in the acquisition of Visual Sciences.

Going forward we will no longer have these large swings in GAAP results from tax accounting requirements as we will be back to a more routing tax provision process. Non-GAAP net income for the second quarter was $8.2 million or $0.11 per fully diluted share and at the top end of our guidance range. Adjusted EBITDA increased for the 13th consecutive quarter to $16.2 million or 20.4% of non-GAAP revenue. This result was significantly better than our $14.5 million to $15.5 million guidance.

Turning our attention now to customer metrics, transactional volume across our entire customer base continues to experience healthy growth as we capture 939 billion transactions during the quarter. Our network now consists of 15,000 servers and more than 19,000 network devices. ATV bookings in the quarter were exceptionally strong as we saw solid demand for our products and solutions from both our existing customers as well as new customers.

In fact, total ATV bookings during the quarter grew 55% year-over-year. As Josh mentioned earlier, this strong booking performance drove significant deferred revenue growth of 163% year-over-year reaching more than $100 million at quarter’s end for the first time in the company’s history. We also added roughly 250 new customers during the quarter while continuing to maintain a nominal customer retention rate greater than 5%.

There have been a lot of questions about sales productivity at Omniture that stem from a misunderstanding of our new customers added per quarter and our total number of QBSR metrics that we provide during our quarterly conference calls. Let me take a brief moment to bring some clarity to this issue. While we were essentially a one product company analysts often simply divide the number of customers added per quarter by the total number of effective QBSRs to create a high level sales productivity metric.

As we have added new projects to the Omniture suite we have focused teams of sales people on the significant up sell and cross sell opportunity within our existing customer base. In fact, more than 30% of our total QBSR headcount is currently on overlay teams that can concentrate on selling non site catalyst products rather than driving additional new logos. So far this approach has worked quite well as we have seen significant growth in bookings, in average deal size as well as an average number of products per customer.

Because of this change in our sales number however, simply dividing the number of customers added in the quarter by total number of QBSRs would significantly understate sales productivity at least as it relates to comparisons to prior periods. One way to clear up this confusion is to talk about the average number of products sold to each customer which was about 1.3 in the third quarter. Additionally, we have made progress cross selling these new products in to our existing customer base.

From the first quarter of 2006 through the first quarter of 2008 product sales to existing customers on top of site catalyst went from 24 products per quarter to about 70 products per quarter. With the current overlay sales approach however, the product sales to existing customers for the first three quarters of this year jumped to approximately 70 products per quarter to nearly 200 products per quarter.

We believe these sales metrics clearly illustrate why simply looking at new customers added per quarter does not provide a complete view of our sales team productivity. We will continue to work on this analysis to identify the most appropriate metric to share with you on our going forward quarterly conference calls.

Turning now to our balance sheet and cash flow, both of which remain solid but as you would expect were impacted by the rapid strengthening of the dollar and foreign exchange translation loss during the quarter. We generated a record $28.6 million in cash from operations in the quarter, an increase of $12 million from the prior quarter and $23 million from the same period a year ago. Cap ex for the quarter totaled $13.9 million and did not include an additional $3.3 million in equipment purchased at our operating leases.

This is significant investment in our network that we felt was appropriate in light of strong operating cash flows and the potential significant increases in traffic at our media and retail customer sites in the coming months related to the holiday season and presidential elections. Total cash and investments at the end of Q3 were $96.5 million an increase of $13 million over the second quarter.

Continuing on to accounts receivables and DSOs, collection in Q3 were strong. As a result, our accounts receivable balance at the end of the quarter were $95.2 million, a $3 million decrease from the second quarter. This resulted in the gross DSO of 100 days. Net DSO which backs out deferred revenue from AR before running the calculations was 52 days, down from 56 days in the second quarter.

Finally, our adjusted free cash flow which we define as cash flow from operations less cap ex was a record $14.7 million, represents a $13.5 million improvement from the same period a year ago and a $16.3 million improvement from the prior quarter. Now, turning to the outlook for the fourth quarter. While our results in the third quarter were strong and we have high confidence in the fundamentals of our business, the current macroeconomic environment is creating a high degree of uncertainty around the fourth quarter and that’s even with our fairly predictive business model. We are cautious with our outlook in the fourth quarter.

We expect revenue to be in the range of $82.5 million to $84.5 million on a GAAP basis and $84 to $86 million on a non-GAAP basis. We estimate GAAP net loss per share in the range of $0.10 to $0.09 and a non-GAAP net income per share in the range of $0.12 to $0.13. Adjusted EBITDA is expected to be in the range of $17 million to $18 million and operating margins for the quarter to be at 12% of revenue, in line with our previously stated targets for the quarter.

For the full year we expect GAAP revenue to be in the range of $295 million to $297 million. GAAP net loss is expected to be in the range of $0.62 to $0.61per diluted share. Non-GAAP net revenue is expected to be in the range of $308 million to $310 million. Non-GAAP net income is expected to be in the range of $0.42 to $0.43 per diluted share. Adjusted EBTIDA is expected to be in the range of $59 million to $60 million.

In conclusion, we have high expectations for ourselves at Omniture and we are executing towards meeting those expectations with focus and discipline. With that, we’d like to open the call for questions. We’d request that you limit your number of questions to one.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Richard K. Baldry – Canaccord Adams.

Richard K. Baldry – Canaccord Adams

Can you talk a little bit about seasonality in the business that you see maybe from Q4 to Q1. I know you’re not giving ’09 guidance but if I look historically you’ve been a pretty straight sequential grower. It was a little skewed last year obviously by the acquisition but just in terms of the broader model is there any reason to think that seasonality either on the revenue or earnings side would change this year? Maybe on the earnings side with a particular eye to hiring patterns that could in theory create a seasonal downturn on the EPS?

Michael S. Herring

You’re correct, seasonally Q1 has seen a variety of expenses that happen in the quarter that tend to keep earnings flat quarter-over-quarter and we’re talking everything from our customer events and sales kick off events that we have in the quarter as well as certain tax fluctuations that are season. But I think it’s important to caution that it’s really hard for us to know what Q1 will be like in this environment and for us to speculate on that at this point would just be getting ahead of ourselves. So, we’d prefer just to not talk about what we expect for 2009 at this point. We will after Q4 is over.

Operator

Our next question comes from Michael S. Huang – ThinkPanmure.

Michael S. Huang – ThinkPanmure

Could you update us on the large wins that you guys closed in Q2 like Yahoo Japan and Circuit City? I was wondering whether or not these were contributing in a major way to revenue or will this be phased in more notably in Q4 or next year?

Michael S. Herring

They’re definitely going to impact 2008 revenue and would better primarily impact in Q4 rather than Q3 with the exception at some level with Yahoo Japan which was already implemented in some of the initial sites that we did at proof of concept. But, those large installations tend to take 90 days or more to install so they wouldn’t have impacted Q3, it would primarily be a Q4 event.

Operator

Our next question comes from Thomas C. Ernst – Deutsche Bank Securities, Inc.

Thomas C. Ernst – Deutsche Bank Securities, Inc.

You mentioned the datacenter migration is going to be completed later here in the fourth quarter. Are you through most of the risk elements with that migration or is there potential for disruption or up time? Then, maybe more broadly as a follow up to that, cap ex has been elevated now for a couple of quarters when you adjust for operating leases near $18 million. What should we expect for cap ex in Q4 when you’re done with the migration?

Michael S. Herring

There is always risk in these but I wouldn’t expect that we have most of it in front of us, I think most of it is definitely behind us. It has taken a while to do this migration because of other things happening in the marketplace, not economic marketplace but just with traffic spikes around the Olympics and upcoming ones and current ones around media traffic spikes in particular the presidential election and the information being pass around that cultural event.

On the cap ex side that’s one of the reasons we were head in our cap ex spend in Q3 was we were getting a lot of notifications from customers about potential traffic spikes in Q4 around the presidential election and also seasonal ones around retail. So, we got in front of those with some extra spending in cap ex. I do expect that cap ex to drop pretty significantly in Q4 because we got in front of that in Q3 and total cap ex for the year to end around $50 million including all the datacenter stuff.

Thomas C. Ernst – Deutsche Bank Securities, Inc.

Mike, can you remind us how much of cap ex was in Q3 for the datacenter migration?

Michael S. Herring

Total datacenter cap ex out of that $50 million will probably be about $6 or $7 million.

Operator

Our next question comes from the line of Youssef Squali – Jefferies & Company, Inc.

Youssef Squali – Jefferies & Company, Inc.

How does the overlay team keep working on the integration? I guess at some point the integration will be completed and the cross selling will abate a bit. Is there a time line to have them focused back on hunting new accounts or is this kind of the new structure going forward?

Joshua G. James

This is the new structure going forward. They’re not really focused on the integration as they’re focused on selling their products and whether they sell them in to current accounts or whether they sell them to new accounts, that’s really at their discretion. We have lots of lead generation programs internally, we’ve incented our account management team and everyone that touches the customers to be able to find opportunities where these customers are trying to figure out how to more effectively interact with the visitors to their site and there’s many opportunities that we’ve been able to discover that way.

But, this is definitely the model for us going forward. But, it’s not integration related, it’s just been driven by the opportunities that are out there and also by our customers who are asking us for these [inaudible] services, that’s why we have them in the first place. That’s what’s led to the acquisitions and to building these different services.

Again, as we talked about last quarter it’s really exciting to see that when you look at our bookings and you see about half of our bookings are coming from the cross selling and from selling these incremental products in to new accounts, selling a lot of these products in to first time accounts. You look at a new deal, as Mike mentioned on the call, the average number of products per new deal has also increased pretty dramatically.

So, it’s not just cross selling in to old accounts as much as it is also in to new opportunities. We look at the products per customer for new opportunities and that’s also increased fairly dramatically so it’s the new Omniture.

We’ve always talked about the fact that we were an online business optimization company not a web analytics company. We think if you look at our bookings the last two quarters and we think that’s pretty apparent, pretty evident.

Operator

Our next question comes from Bryan McGrath – Credit Suisse.

Bryan McGrath – Credit Suisse

I was just wondering you hit on the fact that you’re seeing some sort of impact from the overall market turmoil or economic turmoil in September. Has that crossed over or had any impact on renewal rates in a material way? Then as a follow up to that, I think the operating margin goals have been to kind of increase margins by 100 basis points per quarter, I’m wondering is that still kind of on the table as kind of a longer term goal that you guys are tracking towards?

Joshua G. James

From a renewal perspective and we talked about on the call and I think every call that we’ve had have been 95% [inaudible] and that’s all detail we’ve ever given there. So, we still feel pretty confident about our ability to keep our customers happy and the fact that they’re getting good returns off of our products. We haven’t seen too much of an impact. We mentioned in our prepared remarks there’s definitely some concern out there and that’s why we’re trying to be very conservative about the way we run the company and the way we allocate our investments.

But, in terms of the operating margin, we aren’t making any comments about next year. We’re trying to balance the opportunities that are out there, the opportunities that may come. When opportunities like Mercado come along we’re going to try to take advantage of those and we believe that there’s definitely a lot of opportunity out there in terms of new customer fill. Once we get these customers if we can go in and sell four or five products per customer that presents a really big multibillion opportunity for us and that’s what we’re focused on.

Operator

Our next question comes from Brent Thill – Citigroup.

Brent Thill – Citigroup

Josh, I think you made some comments around you making some changes to the cost structure and your hiring plans. Can you just elaborate on that? Then, as a follow up can you just walk through what you’ve done now in your pipeline forecasting? Have you taken a more stringent approach to scrubbing the pipeline and taking some of the kinds of things you think may close out of the pipeline and focusing just on the things that are certain?

Joshua G. James

When we plan we actually don’t plan too much based on the pipeline. We plan based on what’s closed. That’s the one thing that’s really nice about our business. So, in terms of how Chris Harrington runs his business, I am sure he would tell you that he scrubbed it just as much before as he scrubs it now. He is probably apply different close rates to thinks and he’s probably not thinking about as much upside, the ranges that he gives me, about what he thinks is going to close, it’s a smaller range because we’re just not seeing the bluebirds that are coming in.

But at the same time, having a bookings quarter that’s the second largest in history and which has traditionally been the softest quarter for us, we’re seeing pretty good sales opportunities and pretty good close rates and still feeling really good. But, to the second part of your question, how are we operating from an investment standpoint and an expense standpoint, we’re just delaying decisions as much as we can in a quarter so that we’re not making decisions based on anything other than revenue we know that is coming, contracts that we know are signed.

We’re being very judicious about the way that we’re allocating investments. Just really tightening down and putting a lot of controls. Mike’s always had his finger on the pulse of every expense that goes through this company and we’ve now just increased that to where a lot to where a lot of the expenses and all the headcounts and hires and all the pay increases, I’m approving all of those along with Mike just making sure that everything we are doing is doubly justified. Then, also making sure that there’s revenue associated with that.

Operator

Our next question comes from Analyst for Robert Breza – RBC Capital Markets.

Analyst for Robert Breza – RBC Capital Markets

You didn’t really talk about 2009 at all, I’m wondering could you remind us again about the cap ex efficiency and maybe your thoughts around that? Do you see that improving in to the Q4 and beyond that? Just refresh us on that point.

Michael S. Herring

The cap ex efficiency has gradually gotten better as we’ve been a public company. When we went public we use to talk about how we spend about $0.40 on the dollar every time we sign another dollars worth of annualized subscription revenue and that has dropped to around $0.30 on average.

That moves around a little bit depending on how many large customers we’re signing. The larger our average customer is, they tend to be a little bit higher than $0.30 but when we do our planning we tend to think about it from that perspective. As you add new products those numbers change a little bit. From a high level perspective that metric still applies.

It does only apply to the non one-time set up costs so that’s what we were talking about earlier, the cap ex associated with setting up these data centers wouldn’t apply in that ratio.

Operator

Our next question comes from Brian Fitzgerald – Bank of America Securities.

Brian Fitzgerald – Bank of America Securities

In terms of the lower Q4 guidance, can you give us a general parse out the impact of currency versus macro to that lower guidance? Then the second part was in terms of softening online advertising and softening ecommerce is one having a more outsized impact than the other?

Michael S. Herring

I’ll answer that second part first, I wouldn’t say it’s one or the other. Both of those are effecting approximately equally. Generally media companies make up about 30% of our customers, ecommerce make up about 30% of our customers so trends that effect those markets good and bad do affect us tangentially but it’s not as direct as you might think.

We’re not tied generally to their revenues or the dollars driving on an absolute basis. But, in terms of looking at Q4’s guidance we do have a relatively significant portion of our revenues that’s denominated in foreign currencies. Not as much as a lot of companies out there but it does affect us. It is generally counteracted by expenses that we have in foreign currency so the effects on earnings isn’t significant.

But, it can dampen revenue when the dollar appreciates and we did factor that in at some level in to our Q4 guidance. Most of our guidance is really more around some of the uncertain economic environment that we’re in and just understanding how much investment people are going to be making and trying to be prudent in not getting ahead of ourselves from an expectation standpoint with investors and from a planning standpoint with ourselves and the way we run our business.

Operator

Our next question comes from the line Sasa Zorovic – Goldman Sachs.

Sasa Zorovic – Goldman Sachs

Could you please comment on the competitive environment that you’re seeing in this point and specifically regarding pricing if you would?

Joshua G. James

If anything over the last several quarters its improved from a competitive standpoint. Not necessarily pricing, since we’ve been a public company, pricing has held flat to increased every quarter that we’ve been a public company. If you look on a product by product basis and if you look at each segment, all of those have held pretty firm which is good.

We just also had the ability from a competitive standpoint, we win a lot more deals, our close rates are higher because what we’ve heard from the market is we’re the defacto solution. The long end of the tail those guys will go and use Google, they don’t mind having the fox in the hen house but all the other price customers they want to have an independent source that’s helping them manage their corporate traffic, their corporate data and then trying to figure out how to use that data and really optimize their business based on it and we just become the defacto solution.

It’s definitely one of the spaces that people like to [inaudible] around the winner. You see things like Genesis where we’ve got over 200 partners and hundreds of partners that want to become part of Genesis and it’s definitely an area where to the victor goes the spoils and we happen to be the victor right now. We’re going to continue to try and take advantage of that in the marketplace and invest appropriately as our customers are trusting and relying on us to build out the right solution and that’s what we’re laser focused on.

Operator

Our next question comes from Kyle Evans – Stephens, Inc.

Kyle Evans – Stephens, Inc.

Josh, last third quarter you made some comments about forward growth and I guess I could understand if you didn’t want to throw something out there today but, we’re looking at a very wide range of growth projections for the company next year and I wanted to know if you had any comment? If you don’t, Mike I’d like to know what you think the growth cap ex will be this year and should we just go on and divide that by .3 and use that as a proxy?

Joshua G. James

Just given what we’re all accurately aware of taking place out there in the macro environment, we think it’s probably prudent not to make any comments about next year. So, I’ll like Mike answer the second component of your question.

Michael S. Herring

The answer is we think cap ex total will be around $50 million this year which around $7 million or so of it is kind of one-time datacenter set up costs and such. Whether that translates directly to revenue next year is a harder answer because obviously the cap ex that we spend in Q1 isn’t related to expectations of 2009 growth. Those ratios are really more about giving an idea of how cap ex translates in to revenue over time.

Generally, we do build out our network based upon the expectations of growth over the next 60 to 120 days or so and that’s really as far out as we look when we’re building capacity. So, I wouldn’t say that there’s a direct connection there although overtime there is a more general connection between cap ex investment and forward-looking revenue expectations.

Operator

Our next question comes from the line of Mark Murphy – Piper Jaffray & Co.

Mark Murphy – Piper Jaffray & Co.

You had referenced a change in the environment towards the end of September. Just to clarify, was that a change in the Internet traffic at your customers’ sites or was that a change in your new deal close rates or something having to do with the pipeline? Because, just based upon the organic growth that we see in the quarter and the bookings results, it’s not imminently clear that there really was any discernable change in your results.

Michael S. Herring

I think what we saw, and I’ll let Josh add to this if he’d like, was we watch CNN and read newspapers just like everyone else and we see customers of ours in some cases really struggling publically in the news and we have a lot of big name customers that are definitely going through changes in their business and big fluctuations in what their potential future might be and that is across multiple industries not just one or two but across the whole economy.

So, for us it isn’t really about looking at what closed in the quarter or traffic patterns. In fact, traffic was up significantly in Q3 over Q2 and didn’t drop off at the end of the quarter. A lot of things are going on right now and the Internet has become more and more intrinsic in how we interact with everything in our daily life and that isn’t changing with more difficult economic times.

It’s more of us looking around and seeing what our customer is going through and being prepared to help them through that and understanding that that might also mean that it slows down some long term purchasing decisions or the growth of their business which also drives our business. We’ve talked historically many times about how our average customer grows 5% to 10% every year.

There are some segments of our customer populations, certain industries that have a down turn or a slump, the growth of that organic core business could be affected and we’re just being prudent about how we invest ahead of that growth.

Operator

Our next question comes from Analyst for Steven M. Ashley – Robert W. Baird & Co.

Analyst for Steven M. Ashley – Robert W. Baird & Co.

I’m hoping you can comment on the mix of billing terms in the quarter. In Q2 there was a shift from quarterly billings to annual billings. Did that shift continue in Q3 or did you find that customers wanted to pay on a shorter term basis such as quarterly given the challenging economic environment?

Michael S. Herring

So Q2 we had pretty extraordinary pre-payment spike in Q2. In general 2008 we’ve seen a significant shift to paying annually in advance. That did continue in Q3 although we didn’t have anything as in normal as we did in the second quarter, hence the decline in AR. The collection of those pre-payments combined without a large of huge big pre-payments in the quarter so quarter-over-quarter AR declined. But, overall we haven’t seen a shift in really willingness of customers to consider or to pre-pay annually in advance.

Operator

Our next question comes from Patrick Walravens – JMP Securities.

Patrick Walravens – JMP Securities

Josh, this is probably for you, Akamai buying Acerno, if that’s how it’s pronounced, how do we look at that? Does it bring them in to your space at all?

Joshua G. James

No, it doesn’t necessarily bring them in to our space. The way that we look at the behavioral targeted ad networks is the way we look at all the ad networks and that is that our customers, they love and appreciate when there’s new announcements like that because that just means there’s more competition in trying to find better ways to get higher returns and higher click through rates and higher conversions for the same advertising dollar.

The one thing that transaction in particular raises is just there’s some additional privacy issues and question and concerns that people have. We know there’s already chatter in DC going on about what that particular transaction is going to bring and we’re certainly going to watch it and pay a lot of attention to it. We have a lot of data, our customers want to do more and more things with the data, they just want to be very prudent and very privacy conscious about the way that they do it.

So, it’s just going to be something that continues to push the envelope on that and we’re participating in those conversations and other conversations around behavioral targeting because it’s clear that there’s uplift there. It’s just balancing that with what the consumers want and we’ll be paying attention to that. But, regardless of who wins, regardless of what does well, all it does is just drive more usage of our product.

Operator

Our next question comes from Chad Bartley – Pacific Crest Securities.

Chad Bartley – Pacific Crest Securities

A couple of questions on Visual Sciences, sorry if I missed some of our commentary on this but, at a high level just hoping to get an update on how the integration is going, how the support of the users is going? Then in the past you’ve given us some metrics around revenue retention as well as revenue lift as those customers migrate over to the SiteCatalyst platform and take additional products so I was hoping to get an update there too?

Joshua G. James

So it was obviously a very important transaction for us. We feel like we’ve made it through the initial phase here. We’re ahead of schedule on every front. From a revenue retention standpoint we’re more than 100% revenue retention so we’re feeling really good about the transaction. It’s much better than what our expectations were and that’s just in regards to the HBX business. In addition to that we’re out there and we’re successfully selling our Discover OnPremise which is formerly known as Visual Sciences Visual Site.

Then, the [Adams] products have also turned out to be some great technology that just needed a little more love, care and money and we’ve been supporting that team. Mike and I are actually here in the San Francisco office doing this earnings call and that’s where all the old [Adams] folks are and the Offermatica so we really are truly getting an integrated company and the acquisitions have performed very well for us. I won’t be giving quarterly updates on the transaction because it’s ahead of every expectation we have and we’re feeling pretty good about it. It’s in a very stable position.

So congratulations to that team. I know that we already – our goal for the year we just hit about two weeks ago and a big email went out to all the folks in San Diego that were responsible for converting those customers. We feel really good about that transaction.

Chad Bartley – Pacific Crest Securities

Josh, can you say relative to last quarter, I think it was a 20% revenue uplift that you saw versus 16% in Q1, can you give us that for Q3?

Joshua G. James

Again, I think you’re talking about 20% that was when you’re looking at one average customer and what the uplift is for each average customer. That doesn’t take in to account the customers that you lose and just on a net-net basis the revenue retention was greater than 100%. I want to make sure that number isn’t misleading.

In terms of Q3 and everything that we’re seeing on an ongoing basis we don’t anticipate that those numbers will change much. If they do change they’ll change for the positive as we get better and more in depth at selling these incremental products in to the customer base understanding which things they need and want, rolling out features and functionality that those customers needed. There were some customers that were holding out waiting for additional products and additional functionality that they wanted to see in the SiteCatalyst product so again, we’re feeling really good about that transaction.

Operator

Our next question comes from Keith Weiss – Morgan Stanley & Co., Inc.

Keith Weiss – Morgan Stanley & Co., Inc.

Last quarter you talked about ending the quarter with nearly 4,700 customers and I believe on the conference call you talked to doing greater than 400 transactions during the quarter and adding in the offshore transactions as well. I was wondering if we could get an update on those two metrics for 3Q?

Michael S. Herring

We added about approximately 250 new customers.

Keith Weiss – Morgan Stanley & Co., Inc.

Where does that end up?

Michael S. Herring

It was approximately 5,000 customers at the end of the quarter.

Keith Weiss – Morgan Stanley & Co., Inc.

That’s actually more than 250.

Joshua G. James

We don’t give specific metrics there you know Keith.

Keith Weiss – Morgan Stanley & Co., Inc.

But that 5,000 is comparable to the nearly 4,700?

Michael S. Herring

Roughly 250 additional new customers.

Keith Weiss – Morgan Stanley & Co., Inc.

On a gross basis?

Michael S. Herring

Yes.

Keith Weiss – Morgan Stanley & Co., Inc.

So basically you’re saying that you had approximately 100% nominal renewal rates in the quarter to get to nearly 5,000.

Michael S. Herring

We had greater than 95% customer retention nominally.

Keith Weiss – Morgan Stanley & Co., Inc.

Then on the 400 transactions?

Michael S. Herring

We talked about we had approximately 200 transactions to existing customers like the sale of additional products to existing customers in the quarter. Then, about 1.3 products on average to each of the 250 new customers so if you take the 200 and add it to 250 plus times 1.3 you get approximately 500 and some new products sold in the quarter.

Operator

Our next question comes from Analyst for Jason Helfstein – Oppenheimer & Co.

Analyst for Jason Helfstein – Oppenheimer & Co.

Kind of building on some earlier questions, just amongst the Visual Sciences clients who renewed, how much push back have you guys seen if any to the volume base pricing at SiteCatalyst versus the Visual Sciences subscription base pricing? Are you at all concerned about customers wanting more fixed pricing contracts and how would that impact margins?

Joshua G. James

The customers that we’ve been focused on migrating have been the HBX customers who had a very similar pricing model as the Omniture SiteCatalyst customers so it’s something they’re definitely use to and we haven’t seen anything there worth noting in terms of the way that we’re pricing things, it’s just kind of steady as you go.

Operator

Our next question comes from David Hilal – Friedman, Billings, Ramsey & Co.

David Hilal – Friedman, Billings, Ramsey & Co.

I wanted to follow up on this metric of 1.3 products per customer. I guess first, is that based on the transactions in the quarter or is that a lifetime customer metric? Then the follow up to that is the additional products outside of SiteCatalyst, which ones are you seeing the most transaction with?

Michael S. Herring

That’s for asking me that clarification. That related to new customers signed up in the third quarter. So, in the initial transaction they bought and average of 1.3 products per customer so the 250 new customers is where that applies. In terms of what they’re buying initially, if we’re talking about new customers, their primary focus has been either Discovery or Search Center, if it’s added on to the initial SiteCatalyst purchase.

Operator

Our next question comes from Frank Sparacino – First Analysis.

Frank Sparacino – First Analysis

Josh, I assume most of your customers are in the planning process right now looking at ’09 online marketing budgets and I’m just curious if you’ve had conversations that suggest that those budgets maybe coming under pressure particularly in light of the view that I think some people have that perhaps Omniture spend is somewhat discretionary in nature.

Joshua G. James

Every dollar that a marketer has, I think everyone has in every organization is under pressure right now and certainly marketing spend is where CFOs like to look and see if they can cut. But, what we’ve seen with our customers is their online channels are the ones that are performing the best. Their online channels are the ones that are giving the most direct impact within that quarter that spend is also taking place.

In terms of the way that they think about Omniture, even if they cut let’s say 10% of their marketing spend, they’re going to use us to a) identify the 10% they’re going to cut and b) use us to optimize the other 90% to try to get back up to the same results as they had with the 100% the year before. These kinds of times actually drive usage of our product.

When things are good it’s a lot easier when you want more sales just to throw more money at the top of funnel and to generate more leads and go through the process. When things get bad people try to focus on of everyone that’s already coming to our store, what can we do to keep them more attracted? What can we do to get them to look at other things? What can we do to get them to read additional articles? All of those behaviors drive uses of our product.

One other thought I wanted to share is that we were doing this in 2000, 2001 and 2002 and it’s very similar to the way customers think and our business was growing very rapidly then and it was on a much smaller scale but the conversations that we had with customers back then are very similar to the conversations we have with customers today. All of this just drives usage of our products and services because we take things that are inefficient, we find efficiencies and we automate it.

It’s actually good for our business. There’s just some macroeconomic stuff going on right now where sometimes people make very irrational brash and short term decisions and we’re just trying to be prepared for that also. But, overall it’s definitely driving usage of our products and making people pay more attention to what we are doing for our customers.

Operator

Our last question comes from [Brad Whit] – American Technology Research.

[Brad Whit] – American Technology Research

Mike, can you just help me a little bit when prior to giving the Q4 guidance you said you have a high degree of uncertainty and with the subscription model I would think you have pretty good visibility on this quarter’s revenue. Can you just help us understand the different variables that fit in to the revenue this quarter and why you have a high degree of uncertainty?

Michael S. Herring

Well, I think the market is uncertain. I think my point was more despite the fact that we have a lot of visibility in to our model as you correctly point out, because the market is so volatile, we’re concerned that a lot of unknowns could still occur with two months left in the quarter. When we enter a quarter like this we have about 85% of our revenue booked and under contract and it’s not necessarily going to be affected no matter what happens other than maybe a complete default by a customer which is extremely rare.

That last 15% is then earned through professional services or variable traffic patterns which could be very uncertain depending on what happens with the holiday retail season, etc. That’s what we meant by we just are not sure what’s going on. We watch the same television programs and listen to the same earnings calls you do around our customers and we do talk to them as well about what their expectations are and honestly, a lot of them don’t know what to expect over the next couple of weeks so we are just approaching it cautiously since we don’t have a silver ball in to how the rest of this quarter is going to roll out.

Operator

Our last question comes from Derrick Wood – Pacific Growth Equities.

Derrick Wood – Pacific Growth Equities

Just curious if this challenging macro environment persists would you expect any push back in pricing as contracts come up for renewal or do you feel that pricing is fairly sticky?

Joshua G. James

I’m sure we’ll get push back. Customers, they all seem to negotiate, that’s the first thing that they focus on in renewals is to try and figure out how to get better pricing but what we’ve been able to do is most of the customers that are coming back are also looking for incremental products and services and it ends up usually being focused on what’s the total price going to be for the renewal and the incremental products and services.

That allows us to find the right places to do the discounts that make sense and position it to the customers the right way and also helps them get the wins that they need to get. Then, overtime we do have very stable relationships because with greater than 95% retention we know our customers are getting a return. That’s not really an area that we think we’re going to see too much pressure at least from a financial model perspective.

I’m sure there’s going to be lots of pressure from a sales perspective and they’re going to have to negotiate really well but we know we have good strong relationships with our customers and it truly is partnership so most of our customers treat us that way.

We appreciate everyone’s time. We’ll see you at the upcoming investor conferences.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!