Executives
Steve Vintz – CFO
Rick Rudman – President and CEO
Analysts
Tom Roderick – Thomas Weisel Partners
Laura Lederman – William Blair
Philip Rueppel – Wachovia Securities
Brendan Barnicle – Pacific Crest Securities
Robert Breza – RBC Capital Markets
Mark Murphy – Piper Jaffray
Steve Ashley – Robert W. Baird
Terry Tillman – Raymond James
Raghavan Sarathy – Dougherty & Company
Vocus, Inc. (VOCS) Q3 2008 Earnings Call Transcript October 28, 2008 4:30 PM ET
Operator
Welcome to the Vocus third quarter 2008 earnings conference call. The date of this call is October 28, 2008. This call is a property of Vocus Incorporated. And any recording, reproduction, or transmission of this conference call without the expressed prior written consent of Vocus Incorporated is strictly prohibited. The call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of Vocus Incorporated website.
I will now turn the call over to Mr. Steve Vintz, Vocus's Chief Financial Officer. You may begin, sir.
Steve Vintz
Good afternoon. We are very pleased that you could join us today to discuss Vocus' results for the third quarter of 2008. Now I'll cover the Safe Harbor statement and then turn the call over to Rick Rudman, Chairman, President, and Chief Executive Officer. During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company.
We want to remind you that these forward-looking statements are based on information available to us today, as of today's date, and are subject to risk and uncertainty. We assume no duty or obligation to update these forward-looking statements, even though our situation may change in the future. We encourage you to review our filings with the Securities and Exchange Commission, which are available at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations.
We also intend to discuss some non-GAAP measures. A reconciliation of GAAP and non-GAAP results is also available in the press release we issued today, which is available on our website at www.vocus.com.
I will now turn the call over to Rick Rudman. Rick?
Rick Rudman
Thanks, Steve, and welcome everyone to our Q3 earnings call. I'm pleased to report solid financial performance for Vocus in Q3, with strong growth across our key financial metrics, including revenue, profitability and cash flow. Revenue came in at $20 million, up 32% compared to Q3 last year. Non-GAAP operating income for the quarter was $3.7 million, up 52% year-over-year. And free cash flow followed suit at $4.6 million, which represents 49% growth.
Now I’ll take you through some of the highlights for Q3 and conclude with our read of key market dynamics. In Q3, we added 233 net new customers with balanced growth in both US and Europe. Our mix of business was also well balanced in terms of order sizes in industry segments. During Q3, we signed subscriptions with smaller organizations such as HometownQuotes.com and Yankee Magazine, and larger organizations including CIGNA, Eli Lilly, Safeway and the Bill & Melinda Gates Foundation. I think the important takeaway here is that Vocus is a valuable solution for any size organization, small, medium or larger, and we have the product, packaging and pricing to meet their needs and budgets.
I’d like to take a minute to provide an update on our emerging small business market. Our current small business target market is comprised of over 5 million organizations with revenues of less than $5 million. We’ve been selling into the small business market since our acquisition of PRWeb in 2006. PRWeb is fundamentally changing the way organizations create publicity and improve online visibility through the use of direct consumer news releases that are optimized for the Internet. PRWeb is primarily sold through an ecommerce platform on a per-transaction basis and currently has over 20,000 customers.
Less than a year ago we also launched our Small Business Edition or SBE, which is sold as an annual subscription starting at $29.99 per year and going up to 7,500 per year with add-on modules. We are extremely pleased with the continued success of PRWeb and now with the great results of our SBE pilot program. And we believe this small business market represents a large untapped and expansionary market opportunity for us. Because of our mix of ecommerce sales for PRWeb and low-cost sales and service for the Small Business Edition, this market segment is not only one of our fastest growing, it’s also one of our most profitable.
In summary, we believe this market segment will continue to grow at a fast pace as it becomes a larger part of our overall business. In terms of the economy, while we saw no impact on our business in the first half of the year doing most of Q3, in the final few weeks of Q3, we did for the first time see some impact on our business related to the global economic crisis. Going into Q3, we modeled our typical conversion rates, which held through to the last two weeks of the quarter when we saw those rates soften somewhat due to the economic crisis in September. Due to our financial model, this type of variance had minimal impact on Q3 financial results, but did cost us in terms of our ability to raise revenue guidance for Q4.
In a down economy, there will always be organizations that make indiscriminate budget cuts across the board. However, there are also many organizations that actually increase spending on PR, which has proven to be one of the more cost-effective channels in the marketing mix. Many organizations today also understand the importance of communication more, not less, during times of economic uncertainty.
So overall, we continue to see Vocus as well positioned against economic risk due to our strong quantifiable value proposition, our diversified market segments, and a relative low price points. We believe our experience in September had some unique economic elements at work. However, we will continue to monitor the impact of the economic on our business and reflect that appropriately in our business outlook. And while the economy is certainly important, it is only one important of our success. Regardless of the economy, Vocus will continue to focus on what it does best, delivering innovating products, scaling the direct sales organization and providing a great customer experience, all while working to achieve our financial objectives and operating model.
In addition, Vocus has almost $90 million in cash, no debt, and exceptional cash flow. So we see no changes going forward to our overall strategic direction or in the investments we continue to make in sales, service, development, and other areas of the business. We believe we are favorably positioned not only from a competitive standpoint, but in terms of our overall ability to extend our leadership position in an important, large and growing market.
I’ll now turn the call over to Steve Vintz who will provide us with some additional information on the business. Steve?
Steve Vintz
Thanks, Rick. I’d like to start today by covering some detail on the income statement. I’m very pleased to report that the third quarter of 2008 was our 37th consecutive quarter revenue growth. Revenues for the quarter were $19.95 million, which represents a 32% increase year-over-year and a 5% increase over the prior quarter.
Total active subscription customers increased by 233. Please note this number represents our gross customer adds during the quarter less non-renewing customers. We ended the quarter with 3,144 active subscription customers compared to 2,214 at the end of Q3 2007 and 2,911 at the end of Q2 2008. As we've mentioned before, our customer accounts do not include any transaction-based customers from our PRWeb Service nor does it include any customers whom subscribe to our on-demand software indirectly via third-party channels.
On the cost side, our non-GAAP gross margin for the quarter, which excludes amortization of intangible assets and stock-based compensation expense, was 83%, which is the same as last year and last quarter. As we look ahead to Q4 and the rest of the year, we expect our gross margin to be 83%, which is better than our gross margin for the full year in 2007 and our initial gross margin of 82% for the full year 2008.
We are pleased with our ability to expand our gross margin in ’08 while absorbing higher cost in the second half of the year, associated with investments in building content in the United Kingdom. The expansion in our gross margin over the prior years has put us well within reach of achieving our target long-term range of 84% to 86%, and demonstrates our leverage as a pure-play software-as-a-service company whose delivery and performance costs are primarily fixed or semi-fixed.
Operating expenses for the quarter before amortization of intangible assets and stock-based compensation expense were $12.9 million, an increase of 27% year-over-year and 1% over the prior quarter. As a percent of Q3 revenue, sales and marketing costs were 40%; R&D was 6%; G&A was 19%. Sales and marketing expenses were $8 million this quarter, which is up from $6.3 million last year and $7.8 million last quarter. The increase in sales and marketing costs over the prior quarter is attributed to the continued expansion in our sales force and investment in marketing to more effectively build our brand.
We ended the second quarter with 131 quota-carrying sales reps compared to 83 this time last year and 124 last quarter. As discussed during our last call, we expect the number of quota-carrying sales reps at the end of the year to range between 130 and 135. The midpoint of this range puts us at 45% growth for the full year. We think this investment reflects the continued confidence and visibility we have in our business underscored by what we see as a large, important and untapped market opportunity.
R&D expenses were approximately $1.1 million this quarter compared to $914,000 last year and $1.2 million last quarter. R&D costs were marginally lower this quarter compared to last quarter due to the launch of our UK Media database and consequently the reclassification of R&D related costs to cross the revenues. G&A expenses were $3.8 million this quarter, which is flat from last quarter and up from $2.9 million last year.
Now in terms of profitability, Q3 non-GAAP operating income before amortization of intangible assets and stock-based compensation expense was $3.7 million, a notable increase compared to $2.4 million for the same period last year and $3 million last quarter. Our operating margin was 19% for the quarter, a record for us, compared to 16% last year and last quarter.
The expansion in our operating margin over the past few years is certainly noteworthy and worth highlighting on the call today because it does demonstrate our ability to drive leverage in our business. In fact, if you look at our trend line since going public, you will see that our operating margin was negative 2% in 2005. We increased our operating margin to 7% in 2006, 13% in 2007, and now estimate 17% for the full year 2008.
Vocus is one of the most profitable SaaS companies in the market today, and we believe the ability to balance significant top-line growth with margin expansion demonstrates the strong financial discipline that we’ve maintained over the years and certainly is a proxy for potential leverage in our model going forward.
Non-GAAP net income before amortization of intangible assets, stock-based compensation expense, and the reversal of the valuation allowance was $4.1 million for the quarter compared to $2.7 million last year and $4.2 million last quarter, which includes approximately $700,000 tax benefit. Non-GAAP diluted earnings per share was $0.20 for the quarter compared to $0.14 last year and $0.21 per share last quarter, which again includes a tax benefit.
Now onto our balance sheet and cash flow statement. Our balance sheet remains very strong. We closed the quarter with $89.6 million in cash, cash equivalents and marketable securities, up from $81.4 million at the end of Q2. We generated $4.6 million of free cash flow this quarter compared to $3.1 million last year and $5.9 million last quarter. Investments in property and equipment were $204,000 this quarter and capitalized software costs were $23,000.
Our cash receivable increased to $10.7 million from $10.4 million last year, and DSOs for the quarter were 49 days. Deferred revenue totaled $37.9 million at the end of the quarter, which represents an increase of $8.5 million over the last year. The impact of foreign exchange rate on our deferred revenue at the end of Q3 was approximately $300,000. So please note that our deferred revenue would have been higher by this amount have we not seen such a precipitous drop in the exchange rate during the quarter.
Now let's turn to the guidance for the third [ph] quarter and full year 2008. The fourth quarter 2008 revenue is expected to be in the range of approximately $20.5 million to $20.7 million. Non-GAAP EPS, which excludes the amortization of intangible assets and stock-based compensation expense, is expected to be in the range of $0.20 per share to $0.21 per share, assuming an estimated weighted average 20.3 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 2%.
Amortization of intangible assets and stock-based compensation is expected to be $0.17 per share. GAAP EPS is expected to be in the range of $0.03 per share to $0.04 per share, assuming an estimated weighted average 19.5 million diluted shares outstanding. The impact of the exchange rate, specifically the stronger dollar against the British pound which is our primary FX exposure is worth noting because it is impacting our guidance for Q4.
To give you some context, the fluctuation in the exchange rate has been dramatic since we last provided guidance on July 22. We assume exchange rate for the British pound has dropped from 1.97 to what we now model to be 1.5 by quarter-end. This resulted in a $300,000 reduction in revenue, a $900,000 reduction in deferred revenue, all of which aggregate a $1.2 million reduction in bookings for the quarter.
For the full year 2008, revenue is expected to be in the range of $77.4 million to $77.6 million. Non-GAAP EPS, before amortization of intangible assets, stock-based compensation expense and the reversal of the valuation allowance, is expected to be in the range of $0.75 per share to $0.76 per share, assuming an estimated weighted average 20.1 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 1%.
Amortization of intangible assets and stock-based compensation is expected to be $0.69 per share, and the reversal of the valuation allowance is expected to be $0.26 per share for the full year. GAAP EPS is expected to be in the range of $0.32 per share to $0.33 per share, assuming an estimated weighted average 19.2 million diluted shares outstanding. Free cash flow is expected to range from $19.7 million to $20.7 million, which includes investments in property and equipment of $1.8 million for the full year.
As I discussed earlier, our non-GAAP EPS does not include stock-based compensation expense, amortization of purchase intangible assets and the reversal of the valuation allowance. In the press release that we issued today, we provided our guidance both on a GAAP and non-GAAP basis for earnings per share for the fourth quarter and the full year 2008. Please refer to the press release for details.
At this time, I'd like to turn the call over to the operator so we may take your questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of Tom Roderick with Weisel Partners. Your line is open.
Tom Roderick – Thomas Weisel Partners
Hi, guys, good afternoon. Thanks for the chance to take question here. So I guess I’ve heard from lots of folks that the end of September was tough everywhere. Can you just give a little bit of commentary about what happened post the end of the quarter into October? And as your customers are sort of making some chances in their own purchasing patterns, can you just comment on which products you find them gravitating towards? And is PRWeb in fact gaining some market share as a lower-priced solution in this environment? Thanks.
Rick Rudman
Tom, this is Rick. I think the best way to characterize it is, as you said, the tail end of September, there really seemed to be – the market kind of froze for a couple weeks where a lot of buying decisions were just simply put on hold. In October we’ve actually seen business return to somewhat of a normal pattern for us and seen buying return to normal although with still some uncertainties at the economy hanging over people, but not like what we saw in September. In terms of what people are gravitating to, not a whole lot has really changed for us. So the demand is about the same across the board. PRWeb and SBE are better products for the small business market, and then we have professional and enterprise for the mid and large market. So it’s really just more of a function of what the better product is for each buyer.
Tom Roderick – Thomas Weisel Partners
And when you take about the environment getting a little bit tougher out there, can you just characterize what specifically does that mean? Does that mean your customers aren’t coming back and purchasing additional seats or more modules, or does that mean that the subscription renewal process is getting tougher and customers may actually be asking for more lenient payment terms?
Rick Rudman
Yes, it’s – I mean, for us, it was just best characterized as kind of softness across the board, although I will say on payment terms, in particular, we didn’t have any issues there and had no changes to our payment terms or contract lengths or discounts. So –
Tom Roderick – Thomas Weisel Partners
Okay. That’s good news. Steve, last question for you. Can you just repeat the number of sales heads that you finished the quarter with? And it sounds like you are reaffirming the guidance for the year at 130 to 135 heads?
Steve Vintz
Yes, it was 131.
Tom Roderick – Thomas Weisel Partners
Okay. Okay. Very good. That’s it for me. Thanks.
Operator
Your next question comes from the line of Laura Lederman with William Blair. Your line is open.
Laura Lederman – William Blair
Thank you for taking my questions as well, and good quarter in a difficult environment. Can you talk a little bit about the visibility for ’09 now that the business seems to be getting a little bit better? Steve, what kind of visibility do you enter ’09 with in terms of whatever revenue you want to give guidance to, which leads to my next question, which I know was hard to answer? But the street right now – you know I was going to try. The street right now has 24% or so revenue growth for ’09. Can you give us a rough feel of whether that’s reasonable to have growth about 20, something like that? And also, would you also look to have profitability increases in ’09? And I recognize your profitability growth has been so high, but would you still look for increases in ’09? And I hate to ask, but no one seems to care about 2008 any more. They only seem to care about ’09. So, sorry to ask, but somebody have to.
Rick Rudman
I think in terms of visibility, not a lot of change. As we enter a year over the next 12 months, we have approximately more than 50% on the 55% of our total expected revenue sitting on our balance sheet and deferred revenue. And as we roll into a particular quarter, that visibility increases to what’s north of 70%. If you fact in the effect of renewal rates, that revenue coverage would exceed 80% or even approximate 85%. So regardless of economic conditions, our business model hasn’t changed. It’s very predictable and very visible. In terms of 2009, obviously we have not provided guidance for 2009 on this call. It’s probably a little premature to talk about ’09. And largely we want to complete the quarter. We want to see how the economy plays out in Q4, and then we can offer more precise guidance for the year ahead. However, we’ve always talked about 25% top line growth. And with that, some years may be higher, some years may be lower. I think one of the things that we have to look at is how the economy is really impacting our business specifically in Q4, and what impact that has, if any, in 2009.
Laura Lederman – William Blair
Can you talk a little bit about Enterprise versus middle market? You mentioned in the quarter that it was strong across the board and then kind of weakened a bit across the board. As we are in October now, the bulky enterprise in the middle market pickup back to normal, so with both of the enterprise and middle market weaken and then did both pick up in October?
Rick Rudman
Yes, I think it’s good characterization.
Laura Lederman – William Blair
And one final question from me is, if you look at duration I'm surprised given the cash crunch that a lot of companies ran into in September that there was no desire on customer’s part to pay maybe six months instead of one year in advance. Can you talk a little bit about was there any discussion of that in the quarter? Was there really no desire on the part of clients to do that?
Steve Vintz
Laura, this is Steve. As Rick commented earlier, we saw significant changes in payment terms. In fact, we saw very little of that, if any. So, no changes in payment terms, no changes in contract lengths, or our average selling price for that matter.
Laura Lederman – William Blair
But was there any discussion with larger customers saying I’d rather pay six months in advance, or did no one even ask?
Steve Vintz
No, we didn’t see that.
Laura Lederman – William Blair
Great. Thanks a lot, guys.
Operator
Your next question comes from the line of Philip Rueppel from Wachovia Securities. Your line is open.
Philip Rueppel – Wachovia Securities
Great. Thanks very much. Could you dig a little bit deeper into renewal rates? Could you just comment about – did you see any change or any issues with renewal rates in those last two weeks? And given that Q4 has a typically seasonally high amount of renewals, is the pipeline – are you comfortable with the pipeline there, the knowledge that those customers are still using the product etcetera?
Steve Vintz
Well, as Rick discussed earlier, we did see some slowness in the last two weeks of September due to the global economic crisis. And this had no impact on our guided numbers for Q3, but did indeed skew some of our financial metrics lower. And most noteworthy of which here is our dollar renewal rate, which did fall below our normal range. However, it’s not a trend we expect to see going forward, and we attribute this specifically to the events of the last few weeks of the quarter. And all of which is really baked into our business outlook and our guidance for Q4.
Philip Rueppel – Wachovia Securities
Okay. Is that dollar renewal rate falling? Is it more – I know Rick said and we’ve heard from a lot of other folks that just customers froze. Is that really what drove that, or did you see customers that are really just pulling back and not going to use the product going forward?
Rick Rudman
Yes, I think we saw both. And as I said in my script, in the top economic times, you’re certainly going to see customers that just cut across the board. At the same time, however, we do have customers that are actually coming in specifically because of the economy and increasing their subscriptions. So, netting it all out, I think, as Steve said, it’s baked into our guidance and the general sense is that Q4 in that respect is going to be better than Q3. And we see people returning more to their normal patterns for us.
Philip Rueppel – Wachovia Securities
Okay, great. And then final question is sort of on the competitive environment, any change with (inaudible) in this kind of environment? Does it give you any particular additional advantages? Thanks.
Rick Rudman
I think it does potentially give us some additional advantages, and I can't speak to their financial condition for them or any other competitor. But I do know that for Vocus anyway, once again, we have strong balance sheet, strong cash flow, one of the more profitable SaaS companies. And from our perspective, we have an opportunity to continue to invest where others may not be investing and continue to grow the business. So, also I think just given the diversity of our product suite and our ability to, once again, sell large, mid and small, that’s something that we’re not seeing a lot of other competitors doing. So I think that works in our favor as well.
Philip Rueppel – Wachovia Securities
Great. Thanks very much.
Operator
Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is open.
Brendan Barnicle – Pacific Crest Securities
Thanks so much. I had a couple questions. Steve, you reiterated the 25% long-term growth rate that you guys have talked about repeatedly. We’ve seen at least 100 basis points of margin – gross margin improvement a year on growth rates higher than that. Is that 100 basis points a year, is that the right way to think about how these gross margins would improve? And would there be any slowdown in that margin improvement as if we went to a slower revenue growth rate?
Steve Vintz
Just a clarification there. I think when we talked about our long-term financial framework, we talked about not only topline growth which we are targeting at 25%, but also the expansion in operating margins. So, just a point of clarification – not the operating margins. So the expansion in the margins of the past for years has been obviously noteworthy as something that we’ve talked about earlier. And I think on a go-forward basis, we would expect to expand those margins over the next couple of years. So we don’t see any change in that pattern. The degree in which we do so may change. Obviously we’re not expecting 400 basis points improvement on a year-over-year basis given the market opportunity in hand, but do expect to expand the margins.
Brendan Barnicle – Pacific Crest Securities
I guess I was specifically talking about gross margins.
Steve Vintz
So with regard to gross margins, I think – in terms of the target range of 84% to 86%, I think we are a tad shy of that. But long-term range, I do expect to expand our gross margins maybe by 100 basis points on year-over-year. There may be some peaks and valleys there, but we don’t see any significant changes. There is the potential, given our cost base here and our move towards owning a lot of our content to drive margins much higher than what we have talked about on this call. But I think at this point it’s little premature. But we feel very good about our long-term target range of 84% to 86%.
Brendan Barnicle – Pacific Crest Securities
Great. And then in ’09 if you think about the tax rate, are we returning to sort of a normalized 30% tax rate?
Steve Vintz
Well, obviously – for the full year 2008 we’ve talked about a non-GAAP tax rate of roughly 2%. I think next year what we expect to see is something a little higher, but not quite in the 30% range, probably between 20% and 30%, and the cash tax rate will probably track a little lower than that.
Brendan Barnicle – Pacific Crest Securities
Great. And then the FX had a pretty big impact about $1.2 million, I think the impact of bookings overall. What have we used for your pound assumption going forward in the Q4 guidance?
Steve Vintz
1.5.
Brendan Barnicle – Pacific Crest Securities
Okay. So just staying where we are right now?
Steve Vintz
That’s right.
Brendan Barnicle – Pacific Crest Securities
Okay. And then lastly, do you mention you didn't have any difficulty with collections or changes in terms, did you have any credit issues at all come up with any of your smaller customers who had difficulty – may think not just because of the size of the ASPs. But did those credit issues of any sort of crop-up?
Steve Vintz
No, I did not. And that's mitigated in part by our financial model or how we transact business. We require payment from customer generally in advance of how we recognize revenue. So even if there was an impact, it would be nominal on the results of operations, but to answer your question more bluntly, no.
Brendan Barnicle – Pacific Crest Securities
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Robert Breza with RBC Capital Markets. Your line is open.
Robert Breza – RBC Capital Markets
Hi, thanks. Steve, maybe just quickly on the FX side of things, when you look at FX, how much did you benefit from the higher dollar from a cost perspective? And then maybe can you help us think about -- how we think about the FX impact relative to bookings? I mean, is the revenue proportionate to bookings? How should we think about the bookings relative to the impact to FX so we can just kind of put that into our future model? Thanks.
Steve Vintz
On the cost side, there wasn’t any significant impact on the exchange rate to earnings or even on the expenses. That’s because we generally run or operate our internationals subs at or near break even. So, that's not a significant driver that would skew results. And Rob, I want to make sure I understand the second part of your question, could you clarify?
Robert Breza – RBC Capital Markets
Just trying to get a better picture from a bookings perspective. I think maybe how much FX is impacted so that we just kind of formulate that into our thought process? Is revenues proportionate to bookings overseas, or just looking for some variation maybe in the business model overseas relative to the US side?
Steve Vintz
We’ve talked a little bit about the impact of the exchange rate. Just to be clear, in Q3 -- and hopefully I’ll answer your question here. But in Q3 alone, the impact in revenue due to the stronger dollar was approximately $100,000 in revenue and $300,000 in deferred revenue or bookings. That’s something that I commented on. Now in Q4, the impact on bookings in our guidance here is $1.2 million. And that’s – we’re expecting approximately $1 million lower in deferred revenue due to the exchange rate alone and approximately $300,000 of lower revenue as a result of the exchange rate as well, of which aggregate $1.2 million, $1.3 million. So that’s the impact in the second half of the year in the exchange rate. And as a result, we are modeling something a little more conservative. What we are seeing now, I think the exchange rate is 1.55 plus or minus. We’re assuming 1.5 by year-end, and we think this is appropriate.
Robert Breza – RBC Capital Markets
Okay, thanks. Rick, maybe just a quick follow-up for you. As you look at the close rates or the deterioration in the environment the last part of September, could you maybe tell us that you see it more on the large enterprise, the more SMB segment? Just relatively where did you see it, and was it customer – I think you said freezing budgets, but did people choose lower solutions? I know you outlined a little bit in your prepared remarks around people moving from SMB possibly to Small/Medium business edition, maybe to PRWeb. I’m not sure if that outline was commentary directly to what you saw, but any color there would be helpful.
Rick Rudman
Sure. I think probably – once again, across the board is probably the best characterization, although maybe a little bit more of the softness in the large and mid. So I think the small business market, both PRWeb and SBE may be slightly less impacted. And in terms of people switching in or out, once again, there are companies that cut back or look for ways to downgrade. And there are other companies that where we saw people come in and actually double their subscriptions with us. And similarly on the new sales side, I mean I can cite one example of a mid-sized company that struggled themselves for the first half of the year, and in the mid year, they made a decision to reduce their expense run rate by 15%. And basically management came back with a plan that included terminating their $180,000 a year PR firm and buying a $24,000 subscription to Vocus. So they saved $156,000, we picked up a new $24,000 a year customer. So I think those were the types of puts and takes that we saw during the quarter.
Robert Breza – RBC Capital Markets
Great. Thank you very much.
Operator
(Operator instructions) Your next question comes from the line of Mark Murphy with Piper Jaffray. Your line is open.
Mark Murphy – Piper Jaffray
Thank you, Steve. Of the 233 new customers, how many of those were Small Business Edition?
Steve Vintz
Approximately 60.
Mark Murphy – Piper Jaffray
And then how about – on the topic of PRWeb, any commentary on ASPs or ASP per press release?
Steve Vintz
No significant changes to speak off.
Mark Murphy – Piper Jaffray
So, sequentially consistent?
Steve Vintz
In terms of the average selling price of PRWeb, it’s not something we disclose, but it’s not noteworthy on the call today.
Mark Murphy – Piper Jaffray
And then, Rick, what is your read on why conditions were more challenging in late September than so far in October, rather than vice versa? Just given that, it seems that macro still seems to be deteriorating.
Rick Rudman
There are certainly probably better opinions on this than mine, but I guess as it specifically relates to Vocus, once again, we just saw a little bit more of a – I guess I would call it more of a panic at the tail end of September when the economic crisis was really seemed to be at its peak and people were waiting to see what Congress was going to do. So we saw, once again, almost a freeze-up of decision making. In October, we’re seeing more of, once again, normal commerce with just the overhang of a kind of a bad economy over us. So that’s what we see from our perspective anyway.
Mark Murphy – Piper Jaffray
And finally, Rick, you commented that you have not yet seen any change in the payment terms. But what do you think is likely here as you look at the number of customer renewals that you will face here going into Q4, which should be a large number and those being one-year invoices? Do you expect any pushback on that invoicing duration as a couple of the other on-demand vendors have seen so far?
Steve Vintz
Hi, this is Steve. No, we are not expecting that in Q4. It’s something that we watch closely. But I think one of the things to note is that we are a little different from some of the other SaaS players that are out there. I know some companies will invoice not one year, but two years in advance. And the price points are much higher as a result. So that’s a big commitment not only for one year, but also two years for our customer to absorb. I think what makes us a little insular -- or more insular from what you see with other companies is the fact that we have smaller price points, the one-year subscriptions. And as a result, it’s just something that we have not seen over the last nine months, not something we’re expecting over the next three months.
Mark Murphy – Piper Jaffray
Thank you.
Operator
Your next question comes from the line of Steve Ashley with Robert W. Baird. Your line is open.
Steve Ashley – Robert W. Baird
In terms of PRWeb, can you just maybe comment on how fast that business grew versus or relative to the core or relative to maybe how fast it had been growing here recently?
Rick Rudman
Sure. We’ve consistently said since we acquired that, the PRWeb tends to grow slightly ahead of our core business.
Steve Ashley – Robert W. Baird
Okay, great. And in terms of renewal rates, I know, Steve, you said below the dollar, renewal rate was below the normal level of 85 to 90. I was wondering if you could provide more color or maybe quantification on that.
Steve Vintz
I’m not sure there's really much to say in that regard. It’s just something that skewed a little lower in the quarter. It’s not something we’re expecting to have modeled in Q4. And based on what we’ve seen in October, I think that that thinking in rationale is appropriate. So the only comment about renewal rates is that we do expect that to skew down probably 2009 and beyond, not due to pricing pressure, not due to customers not renewing, it’s more due to the changing mix in our business.
Steve Ashley – Robert W. Baird
Great. Thank you.
Operator
Your next question comes from the line of Terry Tillman with Raymond James. Your line is open.
Terry Tillman – Raymond James
Yes, good afternoon, guys. Thanks for taking my questions. The first question is just related to PRWeb in terms of what kind of attach rate – I know you all were talking about some different leverage you could pull to try to actually get PRWeb more of an attach rate into your enterprise business on the (inaudible) Vocus side. Could you update us on where you are in that initiative, or is that not a priority right now or where that stands in general?
Rick Rudman
No, it’s – I mean, PRWeb has been integrated our traditional subscription products. And we’ve been selling PRWeb into our subscription base for the last year and a half or so. And it’s one of the add-on modules that we sell into our base. So I don’t think – I think we just view it as being another grade out on module for our customers.
Terry Tillman – Raymond James
In terms of just economic sensitivity, though, some of these larger – mid to large enterprise traditional Vocus customers, are they – because of the macro situation, are they not buying like a bundle, like let’s say 12 press releases for a year and just doing more ad-hoc, or do you not really see any change on that front, in terms of when they understand the value properly, they are still willing to buy a bundle or a lot upfront?
Rick Rudman
Sure. That’s one area we really didn’t see a lot of change. I think we are seeing the same attach rates and same buying patterns from our subscription customers as it relates to buying the PRWeb bundles. I think – keep in mind, a lot of our customers really view that as just a very cost effective way of promoting their business and gaining online visibility.
Terry Tillman – Raymond James
Okay. Just one follow-up. It relates to potential cash usage with another strong cash flow quarter and the net cash balance continuing to grow, maybe weigh the prioritization of maybe acquisitions, technology tuck-ins as opposed to maybe even thinking about a buyback program? Thank you.
Rick Rudman
This is Rick. On the acquisition side, we are taking a fresh look at that to see if there may be any additional opportunities due to the economy. And Steve, I’ll let you answer just the buyback.
Steve Vintz
With regard to the buyback, even if you assume that we use a third of our cash to buy back stock at current prices, the math really doesn’t work for us. You're talking about maybe a penny or two accretive on a post-tax basis in 2009. So I think at this point we must rather have the cash to transact potential acquisitions.
Operator
Your next question comes from the line of Raghavan Sarathy with Dougherty & Company. Your line is open.
Raghavan Sarathy – Dougherty & Company
Good afternoon. Thanks for taking my questions. Steve, could you update us on the PRWeb contribution in the third quarter, your 15% to 20%, is it still doing?
Steve Vintz
No significant changes. 15% to 20%.
Raghavan Sarathy – Dougherty & Company
All right. And then in terms of the PRWeb 360 [ph], is it still 10%?
Steve Vintz
I would say there’s no significant changes in mix of business or even average selling prices for PRWeb that would include the $360 release.
Raghavan Sarathy – Dougherty & Company
Okay. And then one final question. In terms of the PRWeb press release’s volume, just looking at the numbers, it seems like July and September were good, August probably seasonally slow. What do see for October thus far?
Steve Vintz
I think it’s a little premature to comment on transaction volume for PRWeb in October. We’ve talked a little more about our business in broader terms. And obviously, the results of Q3 have all – and what we would expect to see in Q4 have all been baked into our guidance for the rest of the year.
Raghavan Sarathy – Dougherty & Company
Okay, thanks.
Operator
(Operator instructions) Your next question comes from the line of Laura Lederman with William Blair. Your line is open.
Laura Lederman – William Blair
Hi, thanks for letting me circle back. You talked about the dollar renewal rate being down. Is the customer renewal rate down as well? And secondly, when you talk about October being normal commerce with an economic overhand, would that be that like business was not as strong as it was in, let’s say, the first half of the year? I’m trying to get what that means that it’s more back to normal commerce with the economic overhang. Thanks.
Rick Rudman
Sure. Laura, this is Rick. The customer – the dollar rate and the customer renewal rates were both down about the same. So – which means for us it was once again fairly well balanced, the softness of both large and mid. In terms of trying to add some more context, I think that once again I drawing a contrast to September where we think it was somewhat unique and saw some unique events on the economy. And October has now returned somewhat back to normal. But obviously the economy is still tough going. And other than that, it’s really a little early to say. We’re working through the quarter and we’ll see. We’ve given the guidance based on what we think is going to happen. And we’re happy to see that we’ve moved off of kind of the September lockup, and we’re going to work our way through the quarter.
Laura Lederman – William Blair
Final question from me which is, you mentioned that you’d rather potentially use cash for acquisitions instead of buyback. Can you talk about the type of things because it seems like there is nothing obvious out there? So, would you consolidate the market, would you move into areas that are more tangential? Kind of give us a sense of the type of things in general that you would look at from an acquisition. But would they be highly tuck-ins or larger, just give us any color you could.
Rick Rudman
Sure. I don’t think you’ll see us going general – you know, I’ll never say never, but I don’t think you’ll see us going out of our market. We are committed to the space we’re in. We believe it’s a large, important and untapped market, and that we can grow very large in it. So I don’t – we don’t plan to go outside of our space. And I think generally speaking, we don’t really see anything out there that’s large that we have any interest in. So I think we are left by default with what we would consider to be tuck and runs. There is a not a lot out there, and most of the companies that we might be looking at will probably be pretty unknown to most of the investment community, just based on the industry that we’re in and the size of these organizations. But they are out there. There are companies out there that are $5 million to $10 million in revenue that we’ve had ongoing dialogs with, that once again we’re going to take a fresh look at based on the economy.
Laura Lederman – William Blair
Any discussions you have, is it the sense that pricing is coming down out there or do the private companies still think they are worth what they thought they were worth a year ago?
Rick Rudman
Well, it’s coming down from our side, I can tell you that, in terms of what we want to pay. So, it's hard to tell with some of the smaller privately held companies what their expectations are, and of course, that’s one of the difficult hurdles often to get over when you are negotiating. So I do think generally, though, people understand that the multiples have comes down.
Laura Lederman – William Blair
Thank you so much.
Operator
Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is open.
Brendan Barnicle – Pacific Crest Securities
Thanks. I just had a couple of quick housecleaning questions here. You mentioned the 60 new Small Business Edition customers. Can you remind us again what those numbers were in Q2 and Q1?
Steve Vintz
It was – in Q2, it was approximately the same. And the important thing to note there is that we have 10 SBE reps. Most, if not all, of those reps were hired at the beginning of the year, maybe the tail end of last year. So as a result, our plan doesn’t have any continued or further investment in the second half of the year. So we don’t expect to see any expansion in units as we look at how in the Q4 just based on production and quotas.
Brendan Barnicle – Pacific Crest Securities
You mean, you don’t expect any expansion in new customer adds or new expansion in additional sales adds?
Steve Vintz
Yes. I think the number of customers we add in the SBE segment is really going to reflect the size of the sales team. The size of the sales team is not going to increase in the second half of the year. So we would expect roughly 60 plus or minus in Q4.
Brendan Barnicle – Pacific Crest Securities
Great. And then what was –
Steve Vintz
What we saw in Q2 as well.
Brendan Barnicle – Pacific Crest Securities
And the number in Q1 again? Is that in the 30s? I can’t remember that.
Steve Vintz
A little more than 30 in Q1.
Brendan Barnicle – Pacific Crest Securities
Okay, great. And then also, international revenue this quarter, what was that as a percent?
Steve Vintz
10%.
Brendan Barnicle – Pacific Crest Securities
10% again. Okay, great. Thank you.
Operator
That concludes today’s question-and-answer session. I would now like to turn the call over to Mr. Rudman for closing remarks.
Rick Rudman
Great. Well, thank you all for joining us here today. We look forward to speaking to you soon. Thank you very much.
Operator
This concludes today’s conference call. You may now disconnect.
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