Art Technology Group, Inc. Q3 2008 Earnings Call Transcript

Art Technology Group, Inc. (ARTG)

Q3 2008 Earnings Call Transcript

October 28, 2008, 10:00 am ET

Executives

Kimberly Maxwell – Director, IR

Bob Burke – President & CEO

Julie Bradley – CFO

Analysts

Michael Huang – Thinkpanmure

Brad Mook – MKM Partners

Jeff Van Rhee – Craig-Hallum Capital

Nathan Schneiderman – Roth Capital Partners

Shyam Patil – Raymond James

Derrick Wood – Pacific Growth Equities

Rod Ratliff – Stanford Group Company

Presentation

Operator

Good morning. My name is Tania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Art Technology Group Q3 2008 results conference call. (Operator instructions). Thank you.

Ms. Maxwell, you may begin your conference.

Kimberly Maxwell

Thank you. Good morning, everyone, and thank you for joining ATG's investor conference call, to discuss our third quarter 2008 financial results. Speaking today will be Bob Burke, ATG's President and CEO; and Julie Bradley, ATG's Chief Financial Officer.

This call will discuss information about ATG's future expectations, plans, and prospects that constitute forward-looking statements for purposes of the Safe-Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our annual and quarterly reports on file with the Securities and Exchange Commission.

Our SEC filings can be accessed free of charge from the Investor section of our website at www.atg.com. In addition, any forward-looking statements represent our views, only as of today, October 28, 2008. These statements should not be relied upon as representing our views as of any subsequent date. While we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

During this call, we will refer to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure is available in our financial results press release, which was issued this morning. A copy of this release can be accessed in the Investor section of our website.

Now let me turn the call over to Bob.

Bob Burke

Thanks, Kim. Good morning, everyone, and thanks for joining us. I'm going start off today's call with a recap of our Q3 results and business highlights from the quarter. Then, I'll hand the call over to Julie for the financial discussion and outlook for the balance of the year.

Q3 was a solid quarter for ATG, especially considering the challenging macroeconomic environment, which unfolded during the final weeks of September. Year-over-year results included revenue growth of 14% and non-GAAP net income growth of 26%. Cash flow from operations remained strong at $8.1 million, resulting in an ending cash balance of $58.7 million.

In Q3, seven new companies chose ATG's eCommerce platform solutions. Among the new and existing customers were Deutsche Post, Direct Wines, JC Whitney, Lexus Nexus, Premier Farnell, Vodafone, and Woolrich.

A leading pharmacy chain that had previously been using ATG's B2C Commerce has further expanded its investment, purchasing our full Commerce Suite, including B2B and Commerce Service Center. ATG provided the most functionality and lowest total cost of ownership and differentiated it with a very competitive – within a very competitive industry.

Another competitive win for ATG this quarter was JC Whitney. JC Whitney is a leading direct marketer of automotive parts and accessories, which does the majority of its business online. They selected the ATG platform for its scalability and multisite and multibrand capabilities.

ATG's success in the telecommunications sector continued this quarter with Vodafone Romania and Hutchison. Hutchison purchased ATG's Commerce Suite, including Commerce Service Center, and our implementation partner CGI will be working on a replatforming project that will allow them to quickly and easily promote the breadth of their products of their services.

Direct Wines, a leading UK wine distributor, was a new business win this past quarter. They purchased ATG Commerce Suite, including Commerce Service Center, to manage all orders through the call center and the website. The new web platform will allow Direct Wines to streamline its process as resulting in accelerated delivery times.

Woolrich, the outdoor apparel manufacturer, selected ATG in a competitive process to replatform its homegrown solution and significantly expand its presence online. We also had a number of significant site launches this past quarter, including CVS.com, Louis Vuitton, and bol.com, which is one of the leading retailers in the Netherlands.

Now, taking a look at our eCommerce optimization services business, eStara had another good quarter. We signed 21 net new eStara accounts in Q3. Williams-Sonoma is a good example, a new business win this quarter, including the Williams-Sonoma Home, West Elm, Pottery Barn and Pottery Barn Teen brands. It's a good example of our ability to simultaneously power multiple brands within large accounts.

We also saw increased demand for eStara across many industries. New financial services accounts included AARP Financial and Deutsche Bank, new travel and leisure accounts, including About Travel and Orient Express Hotels, and new directory and classified media accounts included AutoTrader.com, Dominion Homes Media, and Lexus Nexus.

In addition to signing new deals, we expanded our eStara footprint within a number of top tier accounts, evidence that our customers see the full value of optimizing their web experiences with our flexible On Demand service delivery platform. American Express, Best Buy, Marriott, and Sears all signed incremental deals in Q3.

Now, before turning the call over to Julie, I want to give you an updated view of what we're seeing in the market. Throughout the third quarter, we had strong demand and good visibility into our pipeline. However, the economic concerns caused a few prospects who had already selected ATG to delay their purchases at the end of September.

However, we are encouraged that some of this business has already closed in October and that expected yields for this quarter are progressing through the procurement process. We are mindful of the difficult economic backdrop and we anticipate that some companies might delay capital expenditures.

However, one month into the quarter, most companies we expect to close seem to be on track in advancing their eCommerce initiatives. Just to be clear, the tail wind in our business remains intact. ECommerce and online optimization services that drive revenues are a high priority across many industries. While the current economic environment may delay some investment decisions, it may speed others up.

For example, last week while I was in Europe visiting customers and partners, I met with a major retailer who plans to replatform his website after the first of the year. Given the economic environment, they need to better cross-sell more products into a larger bundle, even if the customer buys or picks up the merchandise in the store.

This retailer believes that providing consumers with online information and the ability to save project or cart information as they research additional purchases are key drivers for increased sales, both online and in their stores. I also met with a consumer electronics company that views the current economic environment as a boost to its eCommerce business.

Over time, they have proven that their direct online sales channel is the low cost channel to drive revenue. Given the cost advantage of the online channel and the desire to directly drive more sales, the eCommerce business group is experiencing less internal roadblocks to sell online and not go through the normal distribution channels that are indirect. They also view their website as the way to build various customer communities to increase upsell and cross-sell of its products no matter what channel they sell through.

These are just a couple of examples of companies that are planning to move forward and invest in eCommerce. Our pipeline continues to be strong and this, coupled with what we're seeing in the field, gives us confidence that the underlying market trends have not changed and will continue to fuel ATG's growth over the long-term and now I'll turn the call over to Julie.

Julie Bradley

Thanks Bob. As Bob highlighted, ATG had a solid quarter. For the third quarter, we grew revenue 14% year-over-year to $40.8 million. Geographically, Q3 international revenue accounted for approximately 28% of revenue, in line with 29% in the second quarter.

Product license bookings, defined as product license revenue recognized plus net change in deferred license revenue, was $9.5 million. As Bob mentioned, a few deals that we expected to close in the final weeks of the quarter were delayed due to macroeconomic concerns.

This past quarter, 43% or $4.1 million of product license bookings were deferred and will be recognized ratably. Year to date, we have deferred 53%, or $19.4 million of our product license bookings. For the third quarter, license average sales price, or ASP, was $452,000, representing the top end of our previously stated guidance range. We had three seven-figure license deals booked in the quarter and no customers in excess of 10% of quarterly revenue.

Recurring services revenue, which includes support and maintenance and on-demand recurring services, grew 21% year-over-year and 2% sequentially to $23.4 million this past quarter. Our support and maintenance business increased approximately 8% year-over-year and decreased 3% sequentially to $11.5 million. As you may recall, the second quarter benefited from a one-time acceleration of previously deferred revenue. Renewal rates in our support and maintenance business remains strong, in the mid-90s.

This past quarter, our on-demand recurring service revenue, which includes ATG Commerce On Demand and our eCommerce optimization services, grew 37% year-over-year and 8% sequentially to $11.9 million.

In the third quarter, we continued to see strong usage of eStara's Click To Call and Click To Chat solutions across all verticals. Recurring services gross margin increased to 63% for the third quarter, compared to 60% in the second quarter. The sequential improvement is attributable to higher revenue, and we are starting to see some benefits from the investments we've been making in people and infrastructure to manage our recurring services business.

Professional and educational services revenue for the quarter was $6.6 million, consistent with the second quarter and a decrease of 24% compared to the year-ago quarter, reflecting the success of our partner enablement program.

The professional and educational services gross margin was 3% for the third quarter, consistent with the second quarter. Gross margin stabilization is partially due to an increase in ATG utilization, offset by our continued investment in our partner enablement program. GAAP gross margin was 62% for the third quarter, up sequentially from 61% and up from 60% year-over-year.

In the third quarter, income tax expense of $65,000 was offset by a newly legislated R&D tax refund of $200,000. Non-GAAP net income grew to $3.9 million, or $0.03 per diluted share in the third quarter compared to non-GAAP net income of $3.1 million or $0.02 per diluted share for the third quarter of 2007.

Operating expenses for the third quarter of 2008 decreased to $24.8 million versus $25.4 million in the previous quarter, an increase of 9% compared to the third quarter of 2007. The sequential decrease was primarily due to lower variable compensation and marketing programs, partially offset by an increase in headcount. Our headcount increased this past quarter to 506 employees from 471 employees on June 30.

Capital expenditures, or CapEx, for the third quarter was $2.2 million, or 5% of revenue. Looking at the balance sheet, our balance of cash, cash equivalents, and short and long-term marketable securities at September 30 increased 11% to $58.7 million from $52.7 million on June 30. We have not experienced any declines in valuation of our holdings. The percentage of accounts receivable that are less than 60 days old was 88% and within our target range of 85% to 90%.

Day sales outstanding, or DSOs, were 79 days, down from 87 days in the second quarter. Including net change in deferred revenue, modified DSOs were 82 days, up slightly from 81 days in the second quarter. Third quarter cash flow from operations remains strong. Cash flow from operations was $8.1 million, or 20% of quarterly revenue.

Now, I would like to spend a few minutes on our thoughts for the balance of the year. ATG continues to benefit from very strong market trends underlying our business. Companies across many verticals view their online channel with increasing importance and are choosing to invest in eCommerce.

Based on what we're hearing in the field, this has not changed. However, these uncertain times may potentially create a headwind in our business, leaving us less certain of the timing of our prospects' capital investments. As a result, we are narrowing our previously stated revenue guidance range to $159 million to $162 million.

Given that there is just one quarter to go in 2008, I am going to walk through the implications of the new full year 2008 revenue guidance and give you quarterly guidance on a dollar basis. We expect fourth quarter bookings to be in the range of $11 million to $15 million.

As previously discussed, we anticipate that greater than 50% of annual bookings will be deferred and recognized ratably due to successful cross selling of our optimization solutions. We expect approximately $3 million from previously deferred product license revenue will be recognized during the fourth quarter. Therefore, Q4 product license revenue recognized is expected to be in the range of $9 million to $11 million.

Our recurring services revenue, which includes support and maintenance in on-demand recurring services, is expected to be in the range of $24 million to $25 million. Support and maintenance growth rates remain unchanged. Historically, the eStara line of business, benefits in the fourth quarter, from additional usage during the holiday season.

Given the uncertain outlook for consumer holiday spending, we are including only minimal seasonality in our forecast. Professional and educational services is expected to be in the range of $6 million to $7 million in the fourth quarter. As discussed in previous calls, the year-over-year decrease is deliberate and as a result of our partners taking on more of our professional service projects. For the full year, we continue to expect GAAP gross margins to be in the low 60s.

Now, let me take a moment to speak about the proactive steps we are taking to more efficiently align our cost structure with the uncertainties around fourth quarter IT spending. Several weeks ago, we internally announced Project Prudence. This initiative will help us navigate through these challenging and uncertain times with minimal disruption.

A few aspects of the plan include a hiring pause where all additional and replacing staffing will be evaluated on a selective basis, prioritized by direct revenue generation and critical function backfill. We are also limiting travel to only customer, partner, and investor-related activities.

And most importantly, we have asked employees to seek out savings by treating company resources the same way they would treat their own precious household resources. This plan was well received by our employees.

They recognized that ATG is fortunate to be able to plan for economic uncertainty from a position of strength. Each one of us wants to ensure that we are able to invest when future opportunities present themselves. As a result of these measures, we now expect ending headcount to be approximately 520, down from our last forecast of 550 employees, but up from our ending headcount of 506 at September 30.

Operating expenses for the fourth quarter are expected to be approximately $25 million. For full year 2008, we expect to exceed the midpoint of our previously stated GAAP net income guidance range. We now expect GAAP net income to be in the range of a net loss of $2 million to break-even.

Non-GAAP net income is expected to be in the range of $10 million to $13 million. For 2008, we expect the cash flow from operations will be in our previously stated range of $28 million to $32 million. I would like to remind everyone that the guidance stated throughout this earnings call is based on our projections as of today, October 28, 2008.

We do not undertake any obligation to update these estimates after today's call. With that, Bob and I would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Michael Huang.

Michael Huang – Thinkpanmure

Thank you very much. Good morning, guys.

Bob Burke

Good morning.

Julie Bradley

Good morning.

Michael Huang – Thinkpanmure

Few questions for you. First of all, so given what you've seen early in Q4, what are your assumptions in Q4 with respect to close rates and sales cycles, both at the low-end and high-end of your guidance, and are they consistent with what you saw at the tail-end of Q3, or are you more aggressive or more conservative?

Bob Burke

First of all, our sales cycles overall have really not appreciably changed. They are still in that six to nine-month range. I think the variance we saw was at the very, very end of Q3, literally in the last week or two. So we don't see deals stretching out at this point and so the – when we look at what's happening in Q4, so far it looks like things are on pace in terms of the deal. So we don't see that lengthened.

Michael Huang – Thinkpanmure

Okay. So at the lower end of the guidance, are you assuming that things don't appreciably get better from the tail-end of Q3, or can you help us understand between the low-end and the high-end of the product license booking guidance?

Bob Burke

I think the only reason for the low-end and high-end of the range is in case some deals do get pushed out beyond the end of the year. So I think it's more of an issue of – say, as opposed to longer period of time.

Michael Huang – Thinkpanmure

Okay, and then so in terms of the deals that actually slipped out of Q3, were they attached to any particular vertical and were there any kind of, product trends with respect to those type of deals?

Bob Burke

There's really no product really – they were all eCommerce related. In terms of verticals, they were primarily in the retail space.

Michael Huang – Thinkpanmure

Okay.

Bob Burke

As I indicated earlier, the positive thing is that we're seeing progression on a number of those deals already in October.

Michael Huang – Thinkpanmure

And last question for you, so in terms of product activity in general, can you update us on CleverSet and how that's doing and when you look at the various product areas, including eStara, eCommerce, CleverSet, heading into a less certain '09, which of those areas do you think would be most resilient and which ones would be most susceptible to getting cut or being pushed out? Thanks.

Bob Burke

To answer that question, first of all, we think that all of those different offerings are going to go into the next year with strengths. Obviously they have a different scale and size. ECommerce is our largest obviously and we still see a lot of strength here. People are making decisions, moving forward with very large capital projects, so while we certainly are more cautious in terms of our outlook than we were just weeks ago, we still have a lot of reason for enthusiasm. In terms of eStara, I mean it is – it does lend itself to being resilient in challenging times. We are I think cautious in terms of expecting too much seasonal overage to happen this year in the holiday season, but overall we think that that's a business that also is really purpose-built for more challenging environments.

Michael Huang – Thinkpanmure

And in terms of CleverSet?

Bob Burke

CleverSet, the good news is we've had very recent launches with that product at existing customers and we're seeing some good results. So going into next year, we also have a lot of enthusiasm about that offering as well.

Michael Huang – Thinkpanmure

Thanks very much.

Operator

Your next question comes from the line of Brad Mook.

Brad Mook – MKM Partners

Hi, guys. How are you?

Julie Bradley

Hi, Brad.

Brad Mook – MKM Partners

So just touching on the bookings slowdown, Bob, is your sense that this was a panicked pause where customers said let's kind of wait and see how this starts to shake out before we go ahead with these decisions? And therefore more temporary in nature? Or do you think that it reflects a little bit more of a structural change in terms of approvals in the decision process?

Bob Burke

Brad, so far from what we've seen, we think it's more of a temporary phenomenon. I mean including even the customers that actually did pause at the end of the quarter in terms of what's happened with progressing of deals after that happened, I do think it caught people – the depth of the news in the last part of September caught people a little bit unaware in what to do about it. But I still think, as evidenced in my examples that I gave from the customers I visited just last week in Europe, I think people do know that they have to move forward with at least a few critical initiatives and I think the good news is that eCommerce has very much moved up in the priority list over time.

Brad Mook – MKM Partners

Okay. So then you're – the range for Q4, the lower end reflects more of a cautious standpoint, because that's a very big range in terms of implied growth year-over-year.

Bob Burke

Sure. I mean we are being somewhat cautious, but I would say at the same time we're being cautiously optimistic and I do want to emphasize the optimistic part of what we've – what we're giving and also what we're seeing just this month in October. So we do have a lot of reason for enthusiasm, but obviously given the bigger picture, it does give one pause to reflect on it a bit.

Brad Mook – MKM Partners

Okay and then in terms of the professional services margin, Julie, flat sequentially. I know you continue to invest in your partner initiatives. When might we expect to see some of that pay off in terms of expanded margin?

Bob Burke

Yes, we said – I think the 3% for the results that were in this quarter were in line with what we're seeing with continued improvement and puts us well in our range for the full year and as we said in the past, we do not – we believe it will be continued investments, but as our partners become trained and referenceable, our ability to leverage them will pay off so that we should see that improvement going into 2009.

Brad Mook – MKM Partners

Okay. So flattish Q4 and then some improvement next year is what I'm hearing?

Julie Bradley

That's right.

Brad Mook – MKM Partners

Okay, and then last– I'm sorry?

Julie Bradley

Consistent with our previously stated range.

Brad Mook – MKM Partners

Okay and then last quarter you had indicated on the product license bookings, the higher ratable percentage might reflect better cross-selling initiatives and I'm wondering if the decrease this quarter says anything about that or whether it's a function of those large deals and how those came in, in terms of ratable versus upfront.

Julie Bradley

I think there were couple of deals that have slipped were interested in our other eCommerce optimization services and will be deferred, so that would increase our percentage to more align the 50%. We say from the north of 50% for full year guidance just based on what we had seen at the first half of the year.

Brad Mook – MKM Partners

Okay, and then last, any change to your three-year plan?

Bob Burke

We are currently working on the three-year plan right now. We are looking for a November-December timeframe to get that finalized with the board, and per what we've done in recent years, we will be communicating what our outlook is at our next earnings announcement call.

Brad Mook – MKM Partners

Okay. Thanks, guys.

Bob Burke

Thank you.

Operator

Your next question comes from the line of Jeff Van Rhee.

Jeff Van Rhee – Craig-Hallum Capital

Good morning, guys. Couple questions for you. First, I guess the pushouts at the end of the quarter, can you help us understand the magnitude of what pushed out and also the scope of the closures that you've gotten so far? And then, second, Julie, just to follow up a bit on Brad's question, the target margins on the professional services side – you've invested and continued to invest in partners. At the margin, any changes in terms of where you think those target margins could be 12 to 18 months out or any thoughts along those lines? And then I had one follow-up.

Bob Burke

I'll respond first to that. First of all, the close rates in terms of those deals that got pushed – we still expect that ATG will close all those deals. So that's our current assumption with each one of those deals. They were literally in the last minutes of the procurement process, so it's not an issue that we're in some loss situation with any of those. So in terms of what we've been able to see already in this quarter as I've mentioned in my comments, some of the business we have already closed a number of those other deals are well along in terms of progression towards closure as we speak.

Jeff Van Rhee – Craig-Hallum Capital

Can you give us just in terms of the scope of how many – the dollar amounts we're talking about without being precise, as you know you would like to stay away from being exact? Can you give us a sense of the dollar amount that was pushed out in a broad sense of percentage wise, how much of those dollars have been closed?

Bob Burke

We obviously don't give stats inside the quarter in terms of dollar amounts, but I will share with you that in fact the largest of those deals has already closed.

Jeff Van Rhee – Craig-Hallum Capital

That's – is that a seven-figure deal?

Bob Burke

It is a very large deal.

Jeff Van Rhee – Craig-Hallum Capital

Okay, all right and then I guess professional services, Julie?

Julie Bradley

So professional service gross margin guidance for the year is break-even to 3%. The results of past quarter and year to date set us up to achieve that and looking into 2009 and 2010, target gross margins definitely in the high teens to 20% range over the long-term is where we see that business going.

Jeff Van Rhee – Craig-Hallum Capital

Has anything changed there? It seems to me that at some point, maybe it was even over further out turn, that the thought had been that might get a little higher. Is there anything at the margin here where you expect there will be more of a sustained investment in the partner channel?

Julie Bradley

I don't think there's anything that changed. We are still very dedicated to training our partners and getting them referenced, getting them reference able and on accounts. As we said before, we think this is going to be an ongoing activity that we won't be able to cross some bright line where we will have – everyone will be trained sufficiently. It will be iterative, which will always have an impact on our margins as we continue that activity.

Jeff Van Rhee – Craig-Hallum Capital

Okay and I guess lastly, then, just in terms of the expenses related to the data center consolidations, I know you had some redundant costs. Can you give us a sense of where we are in that transition?

Julie Bradley

Yes, we're still in the process of making that transition – as we had said, it would probably go through the end of the year on our last call and that we hope to cross over in the first quarter of 2009.

Jeff Van Rhee – Craig-Hallum Capital

Okay. So right on schedule with previous thoughts?

Julie Bradley

I think we were on schedule.

Jeff Van Rhee – Craig-Hallum Capital

Okay. Thanks, guys.

Bob Burke

Thank you.

Julie Bradley

Thanks.

Operator

Your next question comes from the line of Nathan Schneiderman.

Nathan Schneiderman – Roth Capital Partners

Hello. Thanks very much. Can you hear me okay?

Bob Burke

Yes, we can.

Nathan Schneiderman – Roth Capital Partners

Okay, great. Bob, I wanted to just follow up on the line of questioning about the dynamics at the end of the quarter. It certainly sounds encouraging that you booked a big deal thus far in October. Can you give us some sense, even if we don't want to talk about the dollar amount, perhaps of the approximate number of deals that slipped?

Bob Burke

If you look at our bookings, our bookings actually did increase over last year. So, the number of deals that we needed to actually get into the quarter to have had a great year-over-year number as well as even more sequential growth wouldn't have been large, especially given the average sales price. So you can assume that it was a few deals or a handful of deals that were in play. I will say, by the way, that since the end of the quarter, we have seen in fact deal flow pickup. While we've already closed some of the business, we've also seen I think a good pace to the rest of it. So that's, to me, even more encouraging than just the fact that we were able to close some of the business that slipped from one quarter to the other.

Nathan Schneiderman – Roth Capital Partners

Can you – you reference a few deals or a handful of deals that slipped. Is it, is it safe to assume these were primarily large deals or were you seeing the deals slip across the typical ASP range that you would experience? And then anything you can say about whether the slippage was geographically focused Europe versus US or was it pretty balanced?

Bob Burke

Most of the geographically was in North America, so that's from a geography standpoint. That's where it was located at. Like you mentioned, some of it involved retailer, for example, that were taking pause in terms of – or retail manufacturers that were taking pause in terms of what they were doing. The deals, since many of these were prospects, these tend to be a little bit larger deals in the average ASP in nature. As we've indicated before, our average sales price for license includes not only new sales to customers, but also existing customers coming back and buying a few seats or a few CPUs of commerce, so it tends to be that newer prospects or new customers tend to be a larger sales price than the ASP.

Nathan Schneiderman – Roth Capital Partners

Got it, and you're encouraged on October because of the one deal you closed and the progression, or is it that you've had multiple deals close or something other than that?

Bob Burke

As I mentioned earlier, we're encouraged by the pace of other deals that were not slipped from Q3, so we're talking about deals that were expected to be closed in the fourth quarter that in fact are on good progression.

Nathan Schneiderman – Roth Capital Partners

Okay, and are you – just to clarify, have you closed multiple deals that slipped or just that one large deal you referenced?

Bob Burke

We have certainly closed more than the one deal that slipped.

Nathan Schneiderman – Roth Capital Partners

Okay, great and Julie, I was curious if – some of the other companies we cover have spoken to customers hoarding cash at the end of the quarter are trying to stretch payment terms, trying to reduce upfront payments and pay on a more periodic basis. Have you seen any similar dynamics due to the credit crisis?

Julie Bradley

AR is something that we've always been focused on, we – looking at our accounts receivable that's less than 60 days old or for this last year or so been within that target range. I would say we are becoming even more aggressive on evaluating credit for our customers to ensure that we can continue to support our cash flow from operations and cash balance targets that we have.

Nathan Schneiderman – Roth Capital Partners

But you're not – just to clarify, you don't see – you haven't seen customers that are asking to pay on a more periodic basis or to stretch payments?

Julie Bradley

Typically our customers on the license – payments is due shortly after the invoice is sent out on some of our recurring services. They pay on more of a monthly basis.

Nathan Schneiderman – Roth Capital Partners

Okay, and final question area for you, I'm just curious if there are any changes to the competitive environment or the pricing environment that you feel are noteworthy. There's just general chatter across the space about more aggressive price-based competition in general, and so I'm just curious if you've seen any changes there or any shifts in your competitive position you would like to highlight. Thanks very much.

Bob Burke

This is Bob. No, we have not. This has always been a very competitive space, continues to be that, I'm sure will continue to be that, and so we really have not seen really any change in our competitive position. If anything, I would say that with some of the products that we have come out with in the last year or two like our commerce service center, it's definitely helped us from a product competitive standpoint. But in terms of pricing pressure, it has not materially changed at all.

Operator

Your next question comes from the line of Shyam Patil.

Shyam Patil – Raymond James

Hi, good morning.

Bob Burke

Good morning.

Shyam Patil – Raymond James

Focusing first on the deals that did close – of the seven-figure deals that have closed, could you just provide some color on what verticals these deals are in, how many were deferred, and how they were split out between geographies?

Bob Burke

Sure. So if you look at the bigger deals that we got this last quarter, first of all, they were split between geographies, so we had a couple of North American. We also had one in international. They were in diverse industries, so it included industries like retail, like consumer packaged goods, and also telco. So we had good diversity across industries.

In terms of the deferrals around those, Julie?

Julie Bradley

So we never give out the exact number of deals that are deferred, but I will tell you that two of our seven-figure deals are in the deferral category. We saw then the deals that are deferred are both in North America and EMEA.

Shyam Patil – Raymond James

Got it, and which – do they purchase CleverSet in addition to eStara or were they eStara only?

Julie Bradley

So in the deals that were deferred, there was eStara and there was also Recommendations formerly known as CleverSet.

Shyam Patil – Raymond James

Got it, got it. In terms of the deals that slipped and that did close already or that have closed already, Bob, what do you think changed in the mindset of these customers who pause at quarter end, then came back in early 4Q?

Bob Burke

Well, I think it was just people were able to take stock. I think they basically – it was a very compressed timeframe in terms of news and events at various companies. So I think that they were just able to take stock and spend a little bit more time in evaluating their options and at the end of the day, they came back and said, gee, the reason that we planned to make this investment to start off with still stands and so they moved forward. So I think it was, it was more of a pause or temporary scenario than an ongoing trend.

Shyam Patil – Raymond James

Were they – were they trying to ramp this site in order to get it ready for the holiday season, or was it more of a '09 initiative?

Bob Burke

No, not at all. They generally buy – in the retail space or consumers, they would have to have the site locked down somewhere in the September or October timeframe. So usually as you know, it takes a while to build out a site, so this is definitely more of a 2009 initiative for them.

Shyam Patil – Raymond James

Okay, and then just my last question – you guys have a pretty strong cash balance. How should we think about the usage of that cash, one, given the stock and then, two, given that private valuations are coming down for a lot of potential acquisition candidates?

Julie Bradley

As we said in the past, we evaluate uses of cash on a quarterly and annual basis. We opportunistically use our stock buyback program and we are also actively looking for the right type of M&A opportunities and given that that across the landscape there could be some depressed values, especially in the private sector, our activities around that area are definitely ongoing.

Shyam Patil – Raymond James

Great. Thank you.

Operator

(Operator instructions). Your next question comes from the line of Derrick Wood.

Derrick Wood – Pacific Growth Equities

Thanks.

Bob Burke

Hi, Derrick.

Derrick Wood – Pacific Growth Equities

Hi. So I'm just trying to reconcile. You had a lot of deals that pushed out of Q3 and they are looking to close in Q4, including a large deal. Do you think – the change in close rates are temporary and that deal flow is already improving, so just curious why you feel like you had to lower your license bookings growth for the year, given some of the optimism you're talking about in Q4?

Bob Burke

So first of all, by the way, we only had a few deals that were pushed from the third quarter to the fourth quarter, not lots. I think, again, we are just being somewhat cautious in terms of our outlook.

As I mentioned earlier, we are being cautiously optimistic. At the same time, I think to remain at the very high end of the range in terms of bookings would have implied something greater than obviously the top of our range. So we are I think just making sure that we are commiserate with what the factors are out in the market right now. But if you look at it in terms of the middle point of our range, it still is in that broad kind of range. We're still looking at having our license bookings increase at a pretty nice pace.

Derrick Wood – Pacific Growth Equities

Okay, and maybe you were just conservatively taking close rate assumptions I guess down a little bit?

Bob Burke

Well, close rate in the quarter.

Derrick Wood – Pacific Growth Equities

Yes.

Julie Bradley

So our range now is our original range that we had at the beginning of the year.

Derrick Wood – Pacific Growth Equities

Sure, okay.

Bob Burke

I mean if you look at that range, it's 10% to 20% as opposed to – we raised it at one point in time to the 15% to 22%.

Julie Bradley

We brought it back down to that original thought.

Derrick Wood – Pacific Growth Equities

To be clear, there's no competitive issue? You haven't lost any of these deals? You still feel strong that you're going to close all the deals that – the handful of deals that pushed out?

Bob Burke

Absolutely.

Derrick Wood – Pacific Growth Equities

And then in terms of the eStara business, it looks like there's been somewhat of a slowdown in new customers. Is that a reflection – is there any churn element happening there? I mean I know last year probably was a lot of low-hanging fruit after the acquisition, so if you could give color as to where those new customer trends are going – is it more seasonal, is there a churn rate element, that would be helpful.

Julie Bradley

No problem. So we did – we do continue to sign lots of new customers, hence healthy enterprise level customers. I think as we said on the last couple of quarters, though, we are culling those original, some of those original private, preacquisitioned smaller companies that – upon the expiration of their contracts and we will continue to do that. I think you'll see – we've seen it more in 2008 than immediately after the acquisition closed because if you recall, we let them primarily run as a stand-alone entity as they were completing their earnout. So we're more focused on making sure that we have the right customers in the base and that they will continue to grow with us and that can be evidenced by the average revenue per customer has been going up the last couple of quarters.

Derrick Wood – Pacific Growth Equities

Okay. That's really helpful and then back on the commerce side, I know you're not giving '09 guidance yet, but there's no evidence at this point that there's any change in the trend of moving off of homegrown. In fact, you may even see some acceleration in that just because it's so costly to run homegrown eCommerce systems, so I mean is everything you're seeing today intact relative to the medium-term outlook?

Bob Burke

Yes. So, I mean, if you look at what people are doing, you're absolutely right. People are trying to figure out how to cut costs and at the same time develop their online channel more. So, the obvious way to do that is to replatform and so those overall trends, both in the medium-term and in the longer-term we think are very much holding true.

Derrick Wood – Pacific Growth Equities

Okay. I guess, last question would be, I guess we know your presence in North America, I think there may have been some potential increased traction or opportunities in Europe, especially with new partners. If you could just give us your sense of the state of the opportunities, internationally, that would be great.

Bob Burke

Just being over there, and seeing what kind of opportunities – we do have a tremendous opportunity internationally. As you know, we have not had offices in a lot of various locations for the past five, six years in Europe. So we are going to have to do some buildout of our capabilities over time.

But there is a tremendous opportunity, even still in Western Europe, not to mention Eastern Europe or Asia and beyond. So, I think it's across all sectors over there. There is good opportunities in retail and consumer products, certainly we've exploited telco this last year to two years, and I think those opportunities are even more in the future as we go forward.

Derrick Wood – Pacific Growth Equities

Okay, thank you.

Operator

Your next question comes from the line of Rod Ratliff.

Rod Ratliff – Stanford Group Company

Thank you.

Julie Bradley

Hi, Rod.

Rod Ratliff – Stanford Group Company

Julie, any foreign exchange effects on the outlook, or do you still think that the tailwind is enough to overcome any effects there?

Julie Bradley

Yes – our practice is to keep as much cash in US dollars as expense possible, which really reduces our exposure to foreign-exchange – this past quarter the impact was minimal.

Rod Ratliff – Stanford Group Company

What's driving the pickup in ASP, Bob?

Bob Burke

Well, I think the overall trend there, Rod, is we are definitely selling a broader suite of products. As mentioned earlier that Commerce Service Center is definitely something that I think is a product that is more being universally purchased, and I think also, people are getting more of a robust set of CPU licenses to start off within the initial deals.

So I think we're seeing larger sites and I think we're seeing broader product sale and that's partially evidenced by the fact that while we had seven-figure deals certainly last quarter, that ASP number was not boosted because we didn't have a 10% deal.

Rod Ratliff – Stanford Group Company

Gotcha. Referencing one of Nate's questions earlier, slipped deals – it appeared from what you said, Bob, that you indicated for the most part that those were – new customers. Did you see any indication from existing customer who had planned to expand across product line, any sort of hesitation there?

Bob Burke

It was only one customer that I can recollect that was in that category, and we fully expect that they will make an acquisition this quarter.

Rod Ratliff – Stanford Group Company

One last kind of, general one here, historically something that we've discussed on the quarterly calls is that third quarter tends to be a little bit more backend loaded than the other quarters of the year. Given that as an underlying assumption, you say you're overall happy with the results of the third quarter?

Bob Burke

Yes, I mean we basically – we actually had good linearity in the quarter. So, it was not as completely backend loaded as it had been in some prior Q3s.

So the linearity, like I mentioned, was good, cash collections were good, so overall it was a more even quarter, even though it certainly is our most seasonal quarter that we have in the year.

Rod Ratliff – Stanford Group Company

Okay, great. Thanks, guys.

Bob Burke

Thank you.

Operator

At this time, we have no further questions.

Bob Burke

Okay. I just want to summarize by saying that we appreciate your support. We definitely see a lot of trends in our direction and we look forward to talking to you on our next earnings announcement and also giving you the outlook for 2009. Thanks.

Operator

That concludes today's conference call. You may now disconnect.

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