SuccessFactors, Inc. Q3 2008 Earnings Call Transcript

SuccessFactors, Inc. (SFSF)

Q3 2008 Earnings Call Transcript

November 3, 2008, 5:00 pm ET

Executives

Bruce Felt – CFO

Lars Dalgaard – CEO

Analysts

Brendan Barnicle – Pacific Crest Securities

Adam Holt – Morgan Stanley

Terry Tillman – Raymond James

Thomas Ernst – Deutsche Bank

Brad Whitt – American Technology

Michael Nemeroff – Wedbush Morgan

Fred Grieb – Goldman Sachs

Aaron Schwartz – JP Morgan

Presentation

Operator

Good afternoon and welcome to SuccessFactors fiscal third quarter 2008 financial results conference call. We have placed all lines on mute, and we'll take questions following prepared remarks. (Operator instructions) I will now turn the call over to Mr. Bruce Felt, Chief Financial Officer of SuccessFactors.

Bruce Felt

Thank you, operator. And good afternoon and welcome everyone to SuccessFactors third quarter fiscal 2008 financial results conference call. The primary purpose of today's call is to discuss our third quarter performance. However, some of our discussion may contain forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities, and other forward-looking topics.

These statements are subject to risks, uncertainties, and assumptions. Accordingly, actual results could differ materially. For a listing of the risks that could cause actual results to differ materially, please see our Form 10-K and the latest Form 10-Q filed with the SEC as well as the factors identified in today's press release.

I would like to introduce from SuccessFactors Lars Dalgaard, Founder, President and Chief Executive Officer. And I am Bruce Felt, Chief Financial Officer. Unless otherwise stated, all references to spending exclude stock-based compensation, which are non-GAAP measures, and reconciliations from non-GAAP to GAAP can be found in our press release. Following our prepared remarks, we'll open things up to you for questions and answers.

Today's call is available via webcast and a replay will be available shortly following the conclusion of the call through Friday, November 14th. To access the press release, supplemental financial information or the webcast replay, please consult our Investor Relations website at www.successfactors.com/investor.

With that, let me turn the call over to Lars.

Lars Dalgaard

Thanks, Bruce. Good afternoon and welcome. I’d like to highlight the outstanding the results of SuccessFactors’ fourth straight solid quarter as a public company despite a challenging economic environment, again beating all of our guidance. SuccessFactors had year-over-year revenue growth of 77% and again expanding gross margin, operating margin, and cash margin substantially. We believe this makes us the fastest growing software-as-a-service provider of our size and a by a factor of three, the fastest growing company in human capital management.

We are seeing the true financial benefits and cash leverage of our model come into play with the strength of new sales renewals and up-sells. At the same time, we remain fully prepared to deal with the changing economic environment. We have plans in place to respond to a wide variety of scenarios to help ensure we continue to be a strong growing and profitable business even in very difficult times. We’ve already responded to the slowing economy by being more selective in our investments. And as a result, we plan to accelerate by at least one full quarter, the timing when we become cash flow positive from operations, from the third quarter of 2009 from the second quarter of 2009.

We will continue to invest in the core value creators for growth, but do so in a highly disciplined and self-sufficient manner. SuccessFactors will continue to lead the category we created and continue to take this chance to aggressively expand our market leadership globally and in all sectors with our established and dominant scale. Clear formal discussions with customers and prospects, it is critical for companies to retool and realign strategies and costs. It is more important now than ever, especially with downsizing pressures and operating efficiencies needed to drive results in this economic setting.

SuccessFactors provides the tools that enable all the key stakeholders within a company to strategically plan and execute from executives to the Board to managers to employees, to keepers to who is in the lower 10%. The look for [ph] talent is not over because high performers always have somewhere else they can go to. Late Q3, SuccessFactors reached to over 60 of our customers and financial services, arguably hardest hit area in the economy. The feedback was when situations [ph] find real value in our products and see no plan changes in the near future.

Our Lehman Brothers contract will be assumed by Barclays despite the bankruptcy. Wachovia presented on behalf of SuccessFactors two weeks ago in an industry conference and Fannie Mae now under the control of the US government believes the succession management product they bought from us is (inaudible) in right-sizing while still maintaining current and future leaders in their organization. However, we operate in more than 60 vertical markets. No single vertical makes up more than 8% of revenue and no single customer more than 5%.

As an example, the healthcare industry is still doing very well in the current economy. SuccessFactors healthcare business has a dedicated product and a dedicated sales force, and had an outstanding quarter and signed a $1 million deal the second from the last day of the quarter. It’s because the successes such as these that we feel we are in excellent position to continue to expand our market leadership in a time when others cannot afford to replicate the significant eight-year investment we’ve already made. We’ve built the biggest, global, strategic, talent, and human capital management, sales and implementation force. And we can now leverage and selectively expand that.

Let me now comment on the strong financial results of the quarter. In addition to the 77% revenue growth, SuccessFactors executed another gross margin expansion in Q3, up 200 basis points to 67% from 65% in just one quarter, and up 14 full percentage points in less than a year. When we went public in Q4 a year ago, gross margins were 53%. We improved them, as we have promised, to 61% the following quarter and up to 65% in Q2, and now increased it to 67% in Q3. 14 full percentage points in less than one year.

Non-GAAP operating margin has improved 9% sequentially and more than 48% in three quarters. The ramping of sales, the efficiency of systems, and the leverage of scale are ultimately bringing us to a lower cost of doing business. Operating and efficiencies levers include the following, which will continue to help us achieve our new cash flow targets. A, completing a data center migration and expansion to a higher quality, lower cost facility; B, lower cost customer support operations in lower cost locations; C, development centers in India, Malaysia, and China; D, launching lower cost service packages; E, moving certain G&A functions to lower cost venues; and F, continued performance management of our existing employees using our own products rewarding top performance and aggressively managing out lower performance.

Many of these are areas we’ve been working on for the past two years. I’m sure you’ve heard about them and how they have really begun having their effect in a show in the past six months. And SuccessFactors will continue to see the full benefit of this over the next 12 months as these operating efficiencies are fully realized.

SuccessFactors experienced a substantial improvement in cash flow. Cash flow used in operations was minus $2.3 million, or an improvement of 63 full percentage points from last quarter’s use of minus $6.4 million. This acceleration of cash flow and levers available to us makes us confident we can move breakeven up at least to Q2 2009. SuccessFactors had many up-sell transactions and new customer transactions in the quarter, resulting in nearly 530 total transactions, up approximately 18% sequentially from nearly 450 in the second quarter.

Given this economy, SuccessFactors continues to maintain customer retention rates exceeding 90% and see dollar renewal rates exceeding 100%. We are able to continue to raise prices on renewals reflecting customer perception of value delivered. SuccessFactors is raising full year 2008 revenue guidance by approximately $2.5 million, an increase over previous guidance to take into consideration our Q3 performance. We are also raising full year 2008 non-GAAP EPS by $0.05 over previous guidance. Not only is our dominance of the market in our results, but it has continued being validated by industry experts.

Bersin & Associates, one of the leading industry analysts, performance and challenge management, just issued a comprehensive 271-page exam report, which detailed 25 vendors. The key takeaways. SuccessFactors’ first product, performance management, now one out of 11 because of our innovation stream, is the cornerstone of talent management, which has been one of our core strategic assumptions for the past eight years.

In addition to a fantastic product, Bersin estimates that the market should be growing 35% annually, more than twice as fast as the adjacent segments of recruitment and learning management. They conservatively estimate that the market is less than 12% penetrated in the US and less than 9% globally. The opportunity we lead is still very big across the world. And accordingly, Bersin states SuccessFactors is the leading talent management suite provider, by far the most well adopted employee performance management product on the market to day and with a market-leading 30% share.

Being a clear and validated leader extends beyond the United States. In Europe, we added some significant new customers in the UK, Italy, and Finland. SuccessFactors’ German and Austrian business had important wins at DZ Bank and Tetra Laval, plus expansion of license at Tetra Pak, Hilti, and Allianz, who has 173,000 employees worldwide in 70 countries. Asia showed strong, new and also business interiors [ph] such as Australia, Korea, and Hong Kong, among others, and in companies such as AMCO, LG Electronics, and Toyota to name a few.

Canada had its largest quarter in company history with a second larger transaction in the quarter. Canada is now up to 150,000 users and 229% year-over-year growth and well over 100 customers and 134% year-over-year growth. SuccessFactors also delivers its suite in native French, Canadian languages, our low-cost, high-profit product, but close to 100% gross margins, are now offered in 31 languages around the world, up from 22 languages. Attraction in the Middle East was surprisingly noteworthy this quarter with wins at Abu Dhabi Department of Civil Services and Dubai Maritime City.

Each quarter we almost have a star performer that stood out because of our diversification in geographies and markets. In Q1, it was the enterprise business in the US. In Q2, it was Europe. And in this quarter, it was definitely alliances. These results demonstrate the risk diversification we have secured with our traction in multiple geographies and multiple markets and multiple segments. SuccessFactors’ channel Allianz Group had an outstanding quarter with over 200% year-over-year growth.

On our Q2 call, we announced that our global partnership with IBM signed less than three months prior had resulted in a significant win with a Fortune 250 company. That customer’s catalog was sales in excess of $11 billion and products sold in more than 180 countries around the world. With such global complexity, a perfect partner for SuccessFactors. We now have approximately 90 customers with more than 10,000 users, solidifying our stronghold of the large multi-national enterprise space. We are a vendor to the largest multi-nationals, and they are moving to a focused vendor as opposed to getting it from their ERP vendors. Our press release contains other notable resale and referral wins from the quarter.

Moving from enterprise to one of our other sectors, SMB, adding to our partnership with TriNet, Cerulean [ph], and Gevity, SuccessFactors signed one of the most dominant challenge in the SMB market and many staff with 130,000 employees. SuccessFactors has dominated in the SMB channel market further diversifying our risks. SuccessFactors’ professional services team implemented 232 go-live [ph] this quarter, bringing the year-to-date go-live total to approximately 772 or approximately four go-lives per business day.

In Q3, Mars with sales in excess of $22 billion and operations in 66 countries, Windlife with succession and an additional performance management process, very important in today’s macro environment. Mars made a decision to expand use of SuccessFactors to help identify their top performers. As we know, successful implementations lead to up-sells, as we have proven over the last four or five years.

In Q3, up-sells included Ingersoll-Rand who purchased 23,000 seats and four products back in 2006. In Q3, they purchased additional seats to accommodate their new employee from the acquisition of Trane Corporations. To accelerate company performance in the tough environment, Ingersoll also purchased SuccessFactors’ business transformation consulting. And over 30,000 Ingersoll employees will participate in the upcoming performance management process.

Two weeks from today we are hosting our first European Users Conference in Paris. We are thrilled and surprised to have to expand our venue because of demand. Lastly, SuccessFactors’ profile in Workforce Management Magazine in a lengthy cover article had the details to revolution we are building in bringing people productivity value to customers. A reprint of this article is available on our website.

At SuccessFactors, we have a culture of getting things done. You won’t find a company that works harder for our customers and our investors than SuccessFactors, and that’s across the company. We fully expect to outperform in a challenging economic environment, because what we do is essentially to our customers in this environment and we are ready for it. Bruce?

Bruce Felt

Thank you, Lars. In spite of the economic concerns, we still had a solid Q3. We were able to close new business and therefore increase our customer account, continue to up-sell into our installed base, renewed our customers resulting in again greater than 100% dollar renewals and continue to retain over 90% of our customers.

Third quarter revenue was $29.7 million, a year-over-year increase of 77% and 16% sequential growth. We had greater than expected revenue because we were able to deliver our software to our customers quicker than we had in the past, and therefore commenced revenue recognition sooner. This contributed to approximately $700,000 of revenue over plan. On spending, total spend for Q3 ’08 was $47.9 million, a 10% sequential increase from Q2 ’08 as invested in core value drivers. Since revenue increased 16% sequentially, we were able to realize gross margin and operating margin improvement during the quarter.

Gross margins again expanded from 65% in Q2 to 67% in Q3, up 200 basis points and even better than anticipated results due to our revenue over-performance. We expect gross margin in Q4 to continue to show sequential improvement. Operating expenses increased 10% sequentially to $38 million. As we highlighted on the Q2 call, we plan for the spending as we expanded our sales and marketing efforts and also our development capabilities.

In addition, we saw an increase in G&A expenses that were largely related to litigation costs associated with claims we are pursuing. We are highly confident we will prevail in these efforts. And consequently we expect to recover these costs through the adjudication process. Then results of strong renewals, new sales, and up-sells, combined with the operating efficiencies Lars mentioned, has resulted in year-over-year revenue growth of 77%, while expense grew only 37% year-over-year.

Total headcount was up 6% from 724 employees at the end of Q2 to 768 at the end of Q3. In Q4, we plan to hire employees in areas that drive growth or value, and we’ll be staffing more aggressively in high quality, lower cost locations. At the same time, we have used our products to manage out our lower performers, as we did last year and as we do every year. On balance, we do not expect to see a net higher headcount in Q4.

For Q3 ’08 earnings per share, our GAAP net loss per share was $0.37 and our non-GAAP net loss per share was $0.33, which excludes stock-based compensation expenses of $2.2 million, flat from a non-GAAP net loss per share of $0.33 in Q2. We are using 55.4 million weighted average shares outstanding during the quarter.

Next, cash flow in the balance sheet. We have communicated that we have always had the ability to accelerate positive cash flow from operations by allowing for the profitability of the renewal stream that flow to the financial statements by moderating our spending. Cash flow used in operations was $2.3 million, a 63% improvement from Q2 ’08 $6.4 million use.

We’ve decided to bring forward cash profitability at least one full quarter by leveraging the renewal stream and through more selective spending. As Lars mentioned, we expect negative cash flow from operating activities in Q4. We reiterate that the Q2 $6.4 million cash use has been high for the year. And therefore, Q4 is not expected to exceed that amount and therefore will be less than half of the prior year seasonal quarter, Q4 ’07.

CapEx was $1.6 million for the quarter, down 37% from $2.5 million in Q2. This spending was primarily related to equipment and leasehold improvements. We expect CapEx during Q4 to be lower. On the balance sheet, total cash, cash equivalents, and marketable securities ended the quarter at $101.5 million. We have a very strong balance sheet to provide substantial stability and protection. Our marketable securities are invested in secure US treasury bills and we have seen no investment exposure to the distressed financial markets, credits or auction rate securities.

Accounts receivable increased from $32.5 million in Q2 to $40.6 million in Q3. Our adjusted DSOs increased four days to 87 days and is within our normal historical pattern. Despite the economic uncertainty, we have not seen a deterioration in terms or in our accounts receivable aging. We have a very strong collection history. And even in the worst case scenarios like bankruptcy in Lehman’s case, we are still getting paid. As a reminder, SuccessFactors bills one year in advance and collects cash upfront. We have not seen a shift in the customer pattern regarding invoicing terms and cash collections, we believe, because of our attractive price points and deal sizes related to the value we bring to our customer.

On our outlook, we are initiating guidance for the fourth quarter of fiscal 2008. We expect revenue for Q4 ’08 to be in the range of $31 million to $31.5 million, which equates to approximately 63% year-over-year revenue growth. Excluding the impact of stock-based compensation expense, we now expect Q4 ’08 non-GAAP net loss per share to be in the range of $0.32 to $0.34. This estimate assumes an average weighted average share count for the quarter of approximately 56 million shares. The implied spending in our guidance provides very modest increase in our expenses. However, we will be carefully monitoring the environment and adjust our spending according to the opportunities. This is also consistent with our objective of achieving positive cash flow from operations by the second quarter of next year.

For the full year 2008, revenue is expected to be in the range of $109.9 million to $110.4 million, up from our prior guidance of $107 million to $108 million coming into Q3 ’08. Non-GAAP net loss per share, excluding stock-based compensation expense, is now expected to be in the range of $1.32 to $1.34, better than our guidance going into Q3 ’08 of $1.39 to $1.43. This estimate assumes the weighted average share count for the year of approximately 54 million shares. As you can see from the presented data, Q3 was a solid quarter.

With that, let me turn the call back to our operator and open things up for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Brendan Barnicle. Your line is open.

Brendan Barnicle – Pacific Crest Securities

Thank you, guys. I was wondering as you look out to increasingly as you look out to next year and then cash flow positive standpoint, what sorts of changes and how quickly can you make them in the model if you start to see some change in sort of how revenues or bookings are coming in relative to where your expectations are now?

Lars Dalgaard

Hi, Brendan. So, first of all, we’ve already made changes and they are already impacting us extremely strongly. And we’ll see the full benefit of that in 2009. Secondly, we have many both tactical and I would say more general tools that we can quote. So whether this is – marketing obviously is discretionary, but just in terms of how we are getting very clear indications from everybody in the organization around where we need to invest and where we should not invest, we are being very careful upfront and very selective right now in how we are investing. And to start out with, I would say we are specifically in the process of having moved a lot of cost. I went through six examples of that from whether it’s a data center that we are moved into, that first of all is higher quality, but also significantly lower cost for us and we have completed that; whether it is our continued ability to find, frankly, in some cases stronger people and lower cost people in other countries and building a great culture of execution there to continue our development of products. And in addition to that, we were able to find the ability to do G&A in other countries at lower cost, and that is already having an impact. And there is such motivation around that in the company that we are continuing to find new ways of doing that because it’s just sort of a mantra across the company. Addition to that, we are becoming much more efficient in our way of selling. We are actually getting much better. Our sales school is getting much more efficient in training people up. Our reps are really beginning to ramp and we are seeing that come through. And the diversification we’ve done allows us to invest selectively in geographies that are winning and not in geographies that aren’t, and in segments that are winning and not in segments that aren’t winning.

Brendan Barnicle – Pacific Crest Securities

And if you think about ’09 and particularly with the cash flow breakeven – the cash flow positive, what sort of underlying assumptions are you working off in terms of either GDP or unemployment or pipeline, or what’s the core that goes into how you think about how that will roll out in this environment?

Lars Dalgaard

Well, as you might know, Brendan, we aren’t tied to employment because we really focus on how companies just focus on getting more performance on who they have, which is an applicable theme no matter what’s going on in the environment, no matter what growth is going on in the overall economy. So we have that. I guess it’s just pretty good a support for kind of our general business planning. I would also just say we have generally taken a pretty conservative view and the outlook and what it takes to become cash flow positive at that timeframe. So I think that’s a prudent thing to do in these times, and so that’s why we are extremely comfortable with moving the date from Q3 to Q2.

Brendan Barnicle – Pacific Crest Securities

Perfect. And then just one last one. Now that we will see you guys not meaning to burn cash and given where the stock is and the amount of cash you have on hand, would you think about a buyback at these levels?

Lars Dalgaard

We do not view that as a good use of cash that we have. I think we are extremely comfortable with $100 million level. I think we’ve outlined before that we’d have certainly opportunities, tactical opportunities and content to technologies where we could acquire them. It won’t necessarily be a large use of cash, but we think it’s extremely prudent in today’s time to have very healthy cash balances, and we expect to maintain that posture.

Brendan Barnicle – Pacific Crest Securities

Great. Thanks, guys.

Lars Dalgaard

Thank you.

Operator

Thank you. Our next question comes from Adam Holt of Morgan Stanley. Your line is open, sir.

Adam Holt – Morgan Stanley

Good afternoon. First question has to do with the revenue per customer. It looked like you saw a nice increase there. Could you give a little bit of detail as to whether that was driven primarily by some of the up-sell activity or continued through new customer – larger new customer wins? And I guess along that line, I missed it if you gave it, but the split between enterprise and SMB customers on the new customer add front.

Lars Dalgaard

We are able to see a substantial increase sequentially to 530 transactions in the quarter as well as nice growth in new customers. And we were, you’re right, able to see a strong pricing across the board. And in fact, we were able to continue to increase pricing and that’s beginning to have effect on all of our deals everywhere in the world.

Adam Holt – Morgan Stanley

And I guess the second question would be on the sales and marketing side, you talked about being discipline on the cost front, but your sales and marketing is also decreasing in terms of the pace of year-over-year increases. Are you starting to actually see improved yields on your sales and marketing dollars? And in particular, can you talk about the trends you are seeing in terms of the sales yields in the mid-market area?

Lars Dalgaard

Yes, exactly. So we – our growth in the financial year ’07 on sales and marketing was 115%. And Q2 quarter-over-quarter was 8% and year-over-year was 26%. So, a mass of slowing, but actually as you can see, the top line two or three times that at 77% revenue growth. So we are getting extremely good at understanding, having – and we’ve built some very substantial tracking systems internally, early winning systems on what marketing works and what marketing we should throw out completely. And it’s beginning to be of a scale now globally in geographies across the world as well as in the small market and the enterprise market, and as well in channels that we really understand which dollars works and which ones we should never ever touch again. And that’s I guess one of the big advantages of having had the opportunity to invest aggressively. But we are seeing a lot of programs and opportunities that simply are worthless, and we are throwing it all out immediately and very quickly. And so we’ve done that across the board, particularly for this quarter, managing our programs that don’t work at any level and being – I’d say, we think that – and speaking to CEOs across the world who run much bigger businesses than ours and have done so far a while, whether it’s at J.Crew or whether it’s at companies like Pepsi et cetera, you get a very clear indication that you want to do with these things quickly and effectively from the start and not once it’s too late. And so we are very apparent and aware of that. And so we are putting a filtration where we can go out and win even more market leadership in this market than we have now because of the weakness of others. And that’s what we are doing with our investments.

Adam Holt – Morgan Stanley

If I could ask just one final question on the balance sheet, it sounds like you’ve had resilient – the ability to be resilient to your billing terms and you obviously just mentioned the pricing has been strong as well. It looked like long-term deferred was down sequentially. Was there anything unusual in that line item in the quarter? Thank you.

Lars Dalgaard

Thank you, Adam. So I think – Bruce, why don’t you take that one?

Bruce Felt

Yes. I mean, nothing in particular happened with long-term deferred – I mean, for those who have been following us, it’s just a lot of factors that cost swings between short-term and long-term. And it’s not really a pattern that you could distill anything. So there was nothing actually unique about this quarter that cause that to – no other explanations, just normal kind of variability in those balances.

Adam Holt – Morgan Stanley

Terrific. Thank you.

Lars Dalgaard

Thank you. I just was fed with the information on the specific sales force you asked for. And you’re right that their average deal size, of course, almost doubled in Q3 ’08 compared to Q3 ’07. Next question?

Operator

Thank you. Our next question comes from Terry Tillman of Raymond James. Your line is open.

Terry Tillman – Raymond James

Yes, good afternoon, guys. Thanks for taking my questions. First I was hoping you guys could talk a little bit about the tone of business bill throughout the quarter. I mean, your metrics seem to show you are doing a lot in a tough market, but did you see anything notably start to slow down at the end of the quarter, like some other vendors have talked about? And then secondly, for our models on the bookings front, should we assume a slower sequential build in what’s typically a strong seasonal period in the fourth quarter for bookings?

Lars Dalgaard

Yes, we did see a slowing in the last two weeks of the quarter. That being said, we are still able to do several great deals and in particular a $1 million deal, the second from last day of the quarter. We have a strong pipeline. We have a phenomenal brand. We really are the de facto choice if you wanted to do anything in talent management, age [ph] or performance. We see that particularly across the globe now. Proven market leadership and then the diversification across geographies, the renewal base with a 64% net income, and that renewal base is now over 100 million. So that 64%, that’s equivalent to net income. And then the people on scale were the biggest to manage (inaudible) than anyone. We feel that that puts us in a great position to continue to do what we’re doing well.

Terry Tillman – Raymond James

Okay. And then just as a follow-up, I’m curious that if you have been able to – also you talk about staying nimble with your marketing and your messaging and the value proposition you portray. Have you all been able to kind of shift your messaging a little bit to where this product – not the pigeon hole and just a small silo, but you’re almost saying about [ph] position it in a restructuring play, a restructuring tool to help those companies that are more struggling than other industries, actually say, hey, for doing revs these tools can actually help us with that? Thank you.

Lars Dalgaard

Yes, Terry, that’s exactly what we are doing. And it’s – we do so many very efficient, low cost, super high value to the customer, webinars. And these ones that have that theme have more than tripled in attendance. And we’ve got a whole little package and design of the product because it’s so nimble our on-demand product, we can really configure and give the experience and appearance of a new product whenever we want. And so particularly we’ve created one that speak to downsizing and how to do that. And we have seminars that are extremely well sort out that talk to that story. And our customers have learnt to trust us as an advisor in these things. And so a very strong professional services team we have and customer services team is extremely able to help these customers do more with it, which allows us to do quick our up-sells. And that in turn for things like our user conference, like the one in Europe coming up next week, could put you in a situation where you can invite prospects and they get a lot of confidence in making the choice and pulling the trigger because there is other people around them that know how to make this work internally in a tough market like this, how to downsize, how to get goals rewritten for everybody, how to get people replaced when you need to fire, which people should you fire, which ones should you keep. And we’re using our own tools and have done as we do every year our annual bottom performer management out with our tools. And then that is also an element that allow us to have a strong effect and confidence in getting to where we need to get to.

Terry Tillman – Raymond James

Thank you.

Operator

Thank you. Our next question comes from Thomas Ernst of Deutsche Bank. Your line is open.

Thomas Ernst – Deutsche Bank

Good afternoon. Thanks for taking my question.

Lars Dalgaard

Thanks, Tom.

Thomas Ernst – Deutsche Bank

Guys, I’m wondering if there is a trend in your renewal and retention – renewal rates both on a unit and dollar basis. And then, Lars, I know you track carefully and monitor your customers’ usage. How many of your customers would you say are – that are licensing the product are already actively using the products so that they pass that point where you consider them purchase but not really engaged yet?

Lars Dalgaard

Yes. The scenario is that the trend to renewal rates has been even between these two quarters, and last quarter it was off net-net. So we’re seeing extremely strong renewals and we track, as you say, for the tool we’ve built ourselves operationally how exactly our customers are using it. And we are seeing – it’s really a lot of fun to watch this tool because we’ve seen phenomenal increase in the usage, particularly at this time. So it’s a refuge. It’s a place where people go to help manage their business. And having the 4 million users, which is so much more than anybody else in understanding how they use the product and what they are doing with it has become extremely important for us to assess the health of the implementations. And the pace at which we implement them, I’m very impressed that the team is able to continue the scale in this area. And they are, as we described, doing four implementations per day. So, really accelerating through these new customers given them the time they need, but getting them quickly to success, which is what we are absolutely expert at and nobody has done as quickly as we are doing. This is a revolution that we’re bringing to this market.

Thomas Ernst – Deutsche Bank

Okay, thanks again.

Lars Dalgaard

Thank you, Tom.

Operator

Thank you. Our next question comes from Brad Whitt of American Technology. Your line is open.

Brad Whitt – American Technology

Hi, good afternoon, guys. Thanks for taking my questions. Bruce, I was wondering what impact – first, I understand [ph] your business was international, represents your revenue, and then what impact you saw from the strengthening of the dollar for this quarter as well as next quarter’s guidance? And how should we think about on the deferred revenue next quarter?

Bruce Felt

Yes. So basically we’ve been – you know, we’ve been investing in international in European, APAC, and we have consequently seen the increase in business in those areas. So year-to-date that’s about 18% of the business. And that’s up from about 12% last year and I’m talking about new business what I’m speaking of that. In terms of the dollar impact, there is not a lot. We tend to close in local currencies. So, people just buy that way, so the fluctuating dollar does not have much impact on our business. We collect in local currencies, we pay in local currencies. There is a slight impact for just the timing from when we book a deal, that is we have a receivable. And when it gets paid, that does flow through our income statement. That was about 300,000 this last quarter, just to give you an idea. I mean, that’s not a significant impact, we don’t believe given how much the dollar moved over this timeframe. And I don’t know that I can give you much color on what’s going on with deferred revenue with respect to that. I mean, that’s just kind of a normal flow of how our financials work and how we get new sales, and just all of it flows through deferred revenue and to revenue.

Brad Whitt – American Technology

Sure. Okay. And also, Bruce, how should we think about DSO trends going forward? It looks like they are coming down.

Bruce Felt

They’ve been within a range, 78 to 88, just roughly speaking historically. I mean, there is just normal variability associated with the collections. We haven’t been really providing guidance on that other than we actually think we can do over time better than these rates. I think just with whether economy is down, I think we shouldn’t necessarily expect dramatic improvement, but we do see a path for improvement over time. So we’re looking forward to that. But what we are reporting this quarter is just within our historical range at this point.

Brad Whitt – American Technology

Okay. Thanks for taking my questions.

Bruce Felt

Thank you.

Operator

Thank you. Our next question comes from Michael Nemeroff of Wedbush Morgan. Your line is open.

Michael Nemeroff – Wedbush Morgan

Hi, good afternoon. Thanks for taking my questions.

Lars Dalgaard

Thank you, Michael.

Michael Nemeroff – Wedbush Morgan

Lars, a couple of quick ones for you and then a follow-up for Bruce. Lars, what percent of the new sales are for multiple products? And which combinations are the most popular these days? And what would you expect the combinations to look like as we go into next year with a struggling economy?

Lars Dalgaard

We are still seeing about the same as we have historically. Those moves – I’ve tracked that now for 7.5 years. And it has increased obviously on the up-sell, but for at least three to four years it’s been 2.3 on average in our larger markets and something around 1.5 for the smaller markets. And then we see on average that within six months people buy more seats and more products from us. Definitely still there’s no doubt that our core products that results illustrated in the global industry survey that was done, the most important and the cornerstone of what people make decisions around. So, performance, goal alignment, succession planning, those types of products are by far being welcomed the most. But learning and recruiting and sometimes compensation are also selling, but it’s definitely a lot less than the other products thought that seemed to be much more relevant in this market. So we’re lucky we started out on that.

Michael Nemeroff – Wedbush Morgan

Has there been any change in the competitive landscape?

Lars Dalgaard

Absolutely not. If anything, we definitely hadn’t seen any pressure. We see a lot of weakness, lot of match rambling from our competitors and we’re taking advantage of it. We’re taking share.

Michael Nemeroff – Wedbush Morgan

How is pricing held up? Are the customers pushing back a little bit more on price these days?

Lars Dalgaard

Yes. I’d say the only thing we’re seeing is that we need to be clever around pricing negotiations and you need to talk to them longer about it. But I’ve been impressed with some of the pricings we’ve been getting in this market, I have to say, but definitely the reps are ending up having to be clever about how they get the deal done. But we’re pretty strong on our pricing. We know the value. We’ve got in a classic argument for losses. Okay, well then go somewhere else and we’ll see you in two weeks or in two months or in two years when you find out that it didn’t work. And we have a very nice long track record of customers that tried something else because it was cheaper and ended up getting egg all over their face. And then we don’t have to deal with that. We’ve got the brand of having done thousands and thousands of implementations on time. The reps sold what we’ve got and they became successful with it. And that’s why we’ve built the brand that we have today and we plan to really leverage that in this market to take massively even share.

Michael Nemeroff – Wedbush Morgan

That’s great. And Bruce, if you could tell us what we should be thinking about for CapEx in 2009? And then also, I think I’d be remiss if I didn’t ask you about what you are expecting in terms of the growth targets for 2009 and how should we think about the model going forward, especially relative to the consensus estimates that are out there currently? Thank you.

Bruce Felt

Right. On CapEx, I mean, as you may recall, we are not a capital intensive company. That is, as we acquire customers who really does not require investment just from time to time. We obviously like to invest in – we invest in infrastructure from time to time. The latest one was really simply to just get a high quality, low cost facility, which we think is just a great move. And we are going to leverage that more and more. Investments that we’ve made going forward certainly will be – and open up these remote offices where we are moving at the lower cost centers. So those would be leasehold improvements, equipment for those employees. So that would be what we’ll be using it for. And the magnitude won’t be much different than – I mean, we’ve been running 1.4 million, 1.5 million a quarter general speaking. It extremely shouldn’t be any more than that, as we go into 2009, just to give you direction on CapEx.

Lars Dalgaard

Yes. I think that’s probably a good way to say it. I mean, we just had a massive data center change, and you practically didn’t notice that in CapEx. It was just a blip. And that’s kind of how we like to run everything.

Bruce Felt

Now in terms of 2009, that guidance we’re giving at the Q4 call. So I guess we’d just have to postpone that discussion until that point in time. And we really haven’t commented on 2009 at all even this whole year. So I think we’ll just have to defer that for a tough Q4 call.

Lars Dalgaard

But I would tell we can live a long time after this massive data center that we build and the capacity we now have in other countries.

Michael Nemeroff – Wedbush Morgan

Thanks, guys. Nice quarter.

Lars Dalgaard

Thank you.

Bruce Felt

Thank you.

Operator

Thank you. Our next question comes from Sarah Friar of Goldman Sachs. Your line is open.

Fred Grieb – Goldman Sachs

Hi, guys. It’s Fred Grieb on behalf of Sarah Friar.

Lars Dalgaard

Hi, Fred.

Fred Grieb – Goldman Sachs

Hi. One quick question on gross margins. If they’ve been doing nicely recently, is any of this maybe partners trying to do more with the professional services or have your slowed your hiring for professional services? Just curious about, a little color there?

Lars Dalgaard

No, it’s – simply these systems we’ve put in place in the efficiency with which we do things and the lower cost data centers and the better way we talked about how we’ve moved support to higher quality, lower cost locations. And also it’s a hell of a transition to go through so many customers from almost nothing over five years that we’ve done. I mean, we get 4 million users, the biggest on-demand one-code user base in the world life. But we’re getting really good at it. And so, sort of classic Toyota, Kaizen, that we go in every quarter and find out how can we cut more cost everywhere. And the team is just phenomenal there. They are executing on so many new systems and new ways of doing things more efficiently, leveraging each other in the way they are doing things. And that’s why we are getting this (inaudible) purely execution benefit.

Fred Grieb – Goldman Sachs

Great. And then I guess one question on G&A. It was a touch higher than we had expected in the quarter. Was there anything extraordinary there, or should we thinking about that sort of level going forward?

Bruce Felt

Yes. I commented that we did have legal expenses associated with the claims we are pursuing that we’re highly confident of prevailing. And therefore we fully expect to get those reimbursed, but obviously we have to expend them on the front end. Those won’t necessarily repeat in Q4. They shouldn’t. But –

Lars Dalgaard

We intend to prosecute anybody that gets in our way unethically and go after them hard. So if we need to, we’ll do it, but it doesn’t seem like it.

Fred Grieb – Goldman Sachs

Okay, great. Thanks a lot.

Bruce Felt

You’re welcome.

Operator

Thank you. (Operator instructions) Our next question comes from Aaron Schwartz of JP Morgan. Your line is open.

Aaron Schwartz – JP Morgan

Good afternoon. If we look at some of the trends that you’re benefiting from including pricing, the fast you delivered your customers that you mentioned off of seasonality, it looks like the Q4 guidance is a little bit conservative with revenue. And I’m wondering if that’s just some conservatism given the environment. And if it is, if you can just walk us through some of the conservative assumptions that you’ve put in the plan?

Bruce Felt

Yes, I think it’s prudent to be conservative in these times. And I’d just say we had that filter on, we provided it. I mean, as you also know, we have pretty good visibility into Q4 even at this point in time. But with that visibility, we’re pretty much sticking to what we see and we aren’t extrapolating much how. We just again think we should be very prudent. But we are at the same time therefore highly confident of being able to reach these targets.

Aaron Schwartz – JP Morgan

Right. I guess was there anything specific (inaudible) assumptions due to the background for the lower revenue yield assumption or anything that you can walk us through?

Bruce Felt

Well, one thing, we did get the benefit of provisioning customers quicker in Q3. We aren’t assuming that same degree of acceleration, as really we’ll call a conservative assumption. We don’t think we should because it was something that we did in the quarter. We can’t necessarily count on it happening again. So that’s just one of the – I guess one of the many kind of elements of conservatism that we have in the numbers for Q4.

Aaron Schwartz – JP Morgan

Okay. Thank you very much.

Bruce Felt

You’re welcome.

Lars Dalgaard

Thank you, Aaron.

Operator

This concludes the question-and-answer session. I’ll now turn it back over to you for any additional or closing remarks.

Lars Dalgaard

The only thing we want to say is we are very proud of our employees, how they are executing in this market. They are doing phenomenally well. We have an extremely strong sales force. Our pipeline is up. Our forecast is good. There is a lot of deal activity. We believe that we can execute better in this market than anybody we compete with because of our brand, because of our diversification, because of our extremely strong and referenceable customer base, and frankly because we fully expect that the customers will continue to really get good use out of these systems in this environment. And based on our latest studies on that with customers intimately qualify us to be correct in that assessment. So, we look forward to the next quarter. And thanks for taking your time today.

Operator

Thank you for your participation. This concludes today’s conference. You may now disconnect.

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: [e-mail]. Thank you!