DemandTec, Inc. F3Q09 (Qtr End 11/30/08) Earnings Call Transcript

DemandTec, Inc. (DMAN)

F3Q09 Earnings Call

January 8, 2008 5:00 pm ET

Executives

Tim Shanahan - Senior Director of Investor Relations

Daniel R. Fishback - President and Chief Executive Officer

Mark Culhane – Executive Vice President and Chief Financial Officer

Analysts

Nabil Elsheshai - Pacific Crest Securities

Terry Tillman – Raymond James

Tom Ernst - Deutsche Bank

Pat Walravens - JMP Securities

Laura Lederman - William Blair

Jeff Van Rhee – Craig-Hallum Capital

Michael Nemeroff – Wedbush Morgan Securities

Bryan McGrath - Credit Suisse

Keith Weiss - Morgan Stanley

Presentation

Operator

Welcome to the DemandTec third quarter and fiscal year 2009 earnings conference call. (Operator Instructions) Now I would like to turn the call over to Tim Shanahan, Senior Director of Investor Relations.

Tim Shanahan

Good afternoon and thank you for joining us to discuss DemandTec’s third quarter fiscal 2009 results. This call can also be accessed in the Investor Relations section of our website at www.demandtec.com. With me today on the call are Dan Fishback, DemandTec’s President and Chief Executive Officer and Mark Culhane, DemandTec’s Executive Vice President and Chief Financial Officer.

After the market closed today DemandTec issued a press release with results for its third quarter of fiscal 2009. A copy of this press release is available on our website. Please note that during this conference call we will be discussing non-GAAP results which exclude stock-based compensation and amortization of intangible assets. We refer you to our press release of today for a reconciliation of these non-GAAP amounts to their comparable GAAP amounts.

During the course of this conference call, DemandTec’s management may make forward-looking statements regarding financial projections, plans and objections for future operations and management’s beliefs about potential market size and growth as well as the company’s future performance, financial condition or results of operations.

These forward-looking statements are not historical facts but rather reflect DemandTec’s current expectations and beliefs based on currently available information. We undertake no obligation to provide updates in the future. DemandTec’s actual results may differ materially from those projected. The risk factors section of our Form 10Q on file with the SEC discloses risks that could cause these differences. Please note that any future product, feature or specifications referenced in today’s call are informational only and are not commitments to deliver any technology or enhancement. DemandTec reserves the right to modify its future product plans at any time.

In terms of the structure of today’s call, Dan Fishback will begin with a brief summary of our financial results and an update of our achievements in the third quarter. Mark Culhane will then provide more details on our financial results, after which we will take your questions.

With that, I would like to turn the call over to DemandTec’s President and CEO, Dan Fishback.

Daniel Fishback

Thanks Tim. Hello everyone and thank you for joining us today. Since our last call on October 2 there have been dramatic changes in the global economy. I am very pleased to report that despite such a dynamic environment DemandTec’s revenue, non-GAAP net income and non-GAAP earnings per share were all above the targets we shared with you last quarter.

Revenue for the third quarter was $19 million representing a 19% growth on a year-over-year basis. Non-GAAP net income was $1.5 million or $0.05 per share, $0.02 better than our guidance. We had another strong quarter of cash flow performance with $3.1 million of cash flow from operations and $2.3 million of free cash flow.

Our results for the third quarter of fiscal 2009 demonstrate our continued success at executing against our three-point growth strategy. A significant reason for the success is the nearly 80% of our retail customers sell items known as fast moving consumer goods (FMCG) which are every day items sold by grocery and mass merchandising retailers as well as their trading partners or consumer product companies.

As in past economic slow downs, FMCG retailers and consumer product companies (CP companies) have generally fared well and posted steady or increased sales even as other industries have plummeted. As a reminder, we do not sell to soft line or apparel retailers or their trading partners. The grocery industry in particular has held up very well in part because people are eating out less often. According to a recent Commerce Department report grocery retailers saw a 4.8% increase in October 2008 for sales compared with the same month last year. While sales compared with the month earlier held steady.

Meanwhile, furniture sales were down 13.5% and department store sales were down 6.9% as compared to October 2007. Given the economic uncertainty we believe that FMCG retailers and CP companies will be aggressively looking for ways they can directly affect the bottom line in 2009.

To that end during the third quarter we launched a price to win recession package. The DemandTec Price to Win recession package provides FMCG retailers with a comprehensive bundle of services to better understand changing consumer behavior and optimize pricing for ten key categories directly impacted by the current economic trends.

We continue to see our services helping FMCG retailers and CP companies to gain a better understanding of their customers via our cost effective, efficient and flexible software and service platform.

Turning now to our three-point growth strategy. The first component of our growth strategy is to continue to extend our industry lead platform solution with worldwide retailers. During the quarter Nash Finch Company, which is one of the largest publicly traded wholesale food distributors in the U.S. with annual sales of approximately $4.5 billion selected DemandTec Deal Management Software service for its online trade deal collaboration. Using Deal Management will enable Nash Finch to more effectively manage their trade promotions and help drive efficiencies into an increasingly complex process.

Also during the quarter HEB Mexico, a wholly owned subsidiary of HEB Grocery Company and a current DemandTec customer selected one of our core software services to assist it in creating strategies that will give HEB Mexico a competitive advantage in the marketplace and offer their customers the best experience possible.

I am especially pleased about our signing of HEB Mexico because when a global customer like HEB Grocery expands DemandTec’s software solutions to a new banner it further demonstrates our ability to deliver positive results to our customers and highlights our success in partnering with a world class retailer to enhance their customer’s experience.

DemandTec retail customers now include more than 85 unique banners some of which are the largest and most respected companies in the world with more than 40,000 stores worldwide.

The second part of our growth strategy is to deliver measurable business results to our current customers in order to drive renewals as well as the adoption of our whole suite of other solutions. During the third quarter Office Depot, one of the largest specialty retailers in the county renewed its subscription to DemandTec’s Everyday Price Optimization and Everyday Price Management software services to manage and optimize prices in their U.S. retail and U.S. web businesses. Office Depot first deployed DemandTec’s solutions in 2005. Office Depot cited several factors in renewing its relationship with DemandTec including growing consumer price sensitivity due to recent macro conditions and the challenges they face managing a diverse product assortment with complex pricing relationships required a sophisticated rules engine and optimization approach. Office Depot has a long-term strategic direction to be consumer centric in terms of assortment, store layouts, new service offerings and compelling pricing that sends a value proposition message to its customers.

DemandTec’s Optimization Service and Advanced Analytics Services enable them to gain insight into consumer demand and set prices that benefit their customers.

Also during the quarter Advance Auto Parts, one of the nations largest auto parts retailers, renewed its subscription to our Everyday Price Optimization and Everyday Price Management software service. Advance Auto Parts first deployed DemandTec solutions in 2005. Advance Auto Parts has taken a sophisticated, science based approach to pricing to drive value for their customers. DemandTec’s industry and consulting expertise helps them incorporate advanced analytics into ongoing, strategic and tactical decision making processes in order to continue to keep their business ahead of the competition.

Giant Carlisle Stores, a division of Ahold USA, renewed its contract during our third quarter for DemandTec’s Everyday Price Management, Promotion Planning Optimization and Deal Management services. Giant Carlisle operates stores in Pennsylvania, Maryland, Virginia and West Virginia and has been a DemandTec customer since 2005. Giant Carlisle was able to make significant improvements in implementing DemandTec software services and we helped automate their entire price and promotion business process for all categories throughout their stores. Now 98% of Giant Carlisle vendor deals are negotiated via the Deal Management Service on the DemandTec Trade Point network.

We also augmented our relationship with Wal Mart as they look to expand their use of our services. In addition we expanded our relationship with other retailers like Safeway, Kroger and Radio Shack as they came to us for additional, professional and analytical services.

Finally, the third part of our growth strategy is to leverage our success with retailers to provide our software services to CP companies. We continue to see strong renewals with CP companies such as General Mills, ConAgra, Acosta, Campbell Soup Company, each of which renewed their relationships with us for Advance Deal Management and/or Trade Planning and Optimization software services. The combination of these services connected via the DemandTec Trade Point Network (DTN) enables a unique opportunity for our retail and CP customers to collaborate on win-win plans and greatly enhance the end to end promotion management process from a financial effectiveness, consumer centric and proficiency standpoint.

More than 2 million trade promotion deals have been collaborated or negotiated on the DTN since its inception and it is currently driven by a community of more than 6,500 end users. This dynamic network represents significant opportunity for DemandTec to deliver science based trade spend solutions that drive and quantify consumer behavior for both retailers and CP companies alike.

DemandTec is trusted by many leading retailers and CP companies for the critical mission of trade spend collaboration. As the DTN continues to grow with each new retailer and additional CP company that is invited to participate by the retailer the cost of collaboration that is shared by both parties is reduced.

In summary, in the face of macro economic uncertainty during the third quarter our results were better than our guidance as a result of continued execution against our three-point growth strategy. DemandTec has established itself as a market leader in the consumer demand management market. Our software services integrate pricing, promotion; mark down, assortment, space planning and loyalty marketing via software as a service platform.

With that let me turn it over to Mark to go through the third quarter financial results.

Mark Culhane

Thanks Dan. I will provide more details on our third quarter operating results followed by financial guidance for the fourth quarter and our fiscal year 2009 before opening the call for questions.

Let me begin with our third quarter revenues. Total revenue for the third quarter was $19 million, better than our guidance of $18.7 to $18.8 million and an increase of 19% over the comparable period last year and 2% sequentially over our second quarter of fiscal 2009.

The majority of our revenue was generated from our retail customers where agreements generally are multi-year and multi-million dollar contracts. Our revenue from CP companies relates to agreements that are typically one year and range from tens of thousands to multi-million dollar contracts.

During the third quarter we generated 86% of revenues from our retail customers and 14% of our revenues from CP customers. This compares to 92% and 8% respectively for the comparable quarter last year.

We generated $16.5 million or 87% of total revenues in the quarter from the United States compared to $14 million or 80 of total revenues for the same period last year.

Revenue from international operations was $2.5 million or 13% of our total revenue compared to $1.9 million or 12% of total revenue for the same period last year.

Turning to costs and profitability for the third quarter we will be discussing our results on both a GAAP and non-GAAP basis. Please be sure to look at our press release for a reconciliation of non-GAAP to GAAP amounts.

I will begin with a summary of our non-GAAP results which exclude non-cash expenses associated with stock based compensation and amortization of intangible assets. Non-GAAP gross profit excluding $152,000 of amortization of intangibles and $389,000 of stock based compensation was $13.7 million in the third quarter representing a year-over-year increase of 24%.

Non-GAAP gross margin was 72.1% compared to 69.5% for the same period last year and up 20 basis points from last quarter’s 71.9%. We expect non-GAAP gross margin to be in the 71-72% range for the remainder of this fiscal year.

Turning to non-GAAP operating expenses for the third quarter, non-GAAP R&D expense excluding $509,000 of stock based compensation was $6.2 million, a 23% increase year-over-year and represented 32% of total revenues. As we have said in the past over the long-term we expect our R&D expense to decline as a percentage of revenue even as it grows in terms of absolute dollars as we continue to invest in both science and software developments to extend our value proposition.

Non-GAAP sales and marketing expense excluding $488,000 of stock based compensation was $4.4 million during the third quarter, a 6% increase year-over-year and represented 23% of total revenues.

Non-GAAP G&A expense excluding $424,000 of stock based compensation was $2.2 million, a 38% increase year-over-year primarily related to first year costs associated with becoming a public company, particularly Sarbanes Oxley compliance costs.

G&A expense represented 12% of total revenues. Our non-GAAP operating income in the third quarter came in above our guidance at $957,000 primarily a result of continued expense management as compared to $352,000 in the year-ago quarter.

Non-GAAP operating income excludes $1.8 million of stock based compensation expense and $483,000 of amortization of purchased intangibles.

Total other income was $437,000 in the third quarter as compared to $1.2 million in the year-ago quarter and $335,000 in other income last quarter. Going forward we continue to anticipate approximately a 2% rate of return on our invested cash and investment portfolio.

Non-GAAP net income was $1.5 million or non-GAAP earnings per share of $0.05 based on 31.8 million fully diluted weighted average shares outstanding compared to non-GAAP net income of $1.3 million or non-GAAP earnings per share of $0.04 in the year-ago quarter.

Non-GAAP earnings per share in the current quarter was benefited by recent tax law changes that resulted in a non-recurring tax benefit that reduced our projected annual tax expense producing a $0.01 positive impact to our non-GAAP earnings per share.

Looking at our results for the third quarter on a GAAP basis including stock based compensation expense and amortization of intangibles GAAP gross profit was $13.2 million. Our operating loss was $1.3 million. Net loss was $808,000 and GAAP loss per share was $0.03 based on 27.7 million weighted average shares outstanding. This compares to a GAAP loss per share of $0.04 in the year-go quarter.

Turning to our balance sheet we had $85.7 million in cash and marketable securities at the end of the third quarter fiscal 2009, an increase of $2.2 million when compared to the $83.5 million at the end of the previous quarter primarily as the result of cash flow from operations. Accounts receivable balance at the end of the third quarter was $12.4 million representing an adjusted DSO of 59 days taking into consideration the change in deferred revenue given our subscription based business model. This compares to 65 days at the end of the second quarter.

We ended the quarter with short-term deferred revenue of $45.6 million, a 15% year-over-year increase and a 1% increase over the previous quarter. Long-term deferred revenues decreased slightly coming in at $4.5 million about $400,000 less than the previous quarter. As a reminder, our multi-year, multi-million dollar retail customers are generally billed on an annual basis. Prior to being public we would bill certain of our retail customers for the entire multi-year contract value upon signing resulting in long-term deferred revenues. Going forward as we anticipate continuing to bill our retail customers on an annual basis long-term deferred revenues are expected to eventually decrease to zero.

Finally, looking at our cash flow for the third quarter of fiscal 2009 we generated $3.1 million in positive cash flow from operations and used $810,000 on capital expenditures resulting in $2.3 million of free cash flow for the quarter compared to the year-ago period where we generated $2.6 million in cash from operations and used $679,000 on capital expenditures resulting in $1.9 million of free cash flow.

For the first nine months of fiscal 2009 DemandTec has generated $10.8 million in cash from operations and used $2.3 million in capital expenditures resulting in $8.5 million in free cash flow or 15.3% as a percentage of revenue. This compares to the nine month year-ago period where we generated $8.2 million in cash from operations and used $2.9 million in capital expenditures resulting in $5.3 million of free cash flow or 12% as a percentage of revenue.

Before turning the call over to questions I will finish by providing guidance for the fourth quarter of fiscal 2009.

Operating income and earnings per share guidance I am going to give are non-GAAP and exclude stock based compensation expense and amortization of intangibles. From a high level perspective we continue to expect a very challenging macro economic environment and do not anticipate any improvement in sales cycles or approval levels required to sign and close transactions. We are uncertain as to whether the economic environment has hit bottom or will deteriorate further and the resulting impact it may have on our customers and prospects.

Therefore we continue to take a cautious and conservative outlook to our business. With that as our operating assumption we expect our fourth quarter revenue to be in the range of $19-19.4 million. Our non-GAAP operating income to be in the range of $600,000 to $850,000 and our non-GAAP net earnings per share to be $0.03 based on fully diluted weighted average shares outstanding of approximately 33.6 million.

With the ranges I just mentioned for our fourth quarter our fiscal 2009 expectations are for revenue to range from $64.7-75.1 million. Our non-GAAP operating income increases from our prior guidance of $2.6 to $2.9 million to now be in a range of $2.9 to $3.1 million. Our non-GAAP net earnings per share increases from prior guidance of $0.13-0.14 to now being $14.-0.15. This assumes fully diluted weighted average shares outstanding for the year of approximately 32.2 million.

While we focus our guidance on non-GAAP metrics because we believe it is the most helpful to investors in evaluating our financial performance and it is how we measure ourselves internally, I’d like to provide some perspective on the two expenses we currently exclude from our non-GAAP results for those analysts modeling our business on both a GAAP and non-GAAP basis.

First, we expect total amortization of intangibles expense for the fourth quarter of fiscal 2009 to approximate $480,000. $150,000 in cost of revenue and $330,000 in operating expense. Second, we currently expect our stock based compensation expense to run at approximately $2 million in the fourth quarter of this fiscal year.

In summary, our third quarter results were strong and we remain focused on delivering solid financial results in our fourth quarter of fiscal 2009 while expanding our market leadership position to drive enhanced growth and margin expansion when the economic environment improves.

We believe continued execution on our three-point growth strategy will enable us to achieve these goals and ultimately deliver significant value to our shareholders. With that we will now open the call up to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

On the customers I think you set previously a goal of something like 8-12. Is that something you are still comfortable with?

Daniel Fishback

I think we are going to be on the low end of that range but we are comfortable with that range.

Nabil Elsheshai - Pacific Crest Securities

You have made some good progress with Trade Point on the consumer product side. Have you made progress in getting some more anchor retailers signed up that obviously then network into some of the consumer products guys and related to that can you give me a percent of revenue from the trade point side?

Daniel Fishback

I’ll speak first to the momentum on the retail side relative to deal management. We made that announcement in our opening comments regarding Nash Finch and so that is another example. We continue to see what I would call strong pace of new retailers adopting Deal Management and certainly the emphasis on cost reduction, efficiency and collaboration is going on right now. We continue to see a lot of momentum there and candidly a lack of a commercial alternative to Trade Point is an advantage to us as well right now.

Mark Culhane

We said our CP revenue was 14% of revenue in the quarter.

Operator

The next question comes from Terry Tillman – Raymond James.

Terry Tillman – Raymond James

I know you were talking about unprecedented economic environment and I know Mark mentioned you were going to be towards the lower end of the 8-12. Is it safe to assume in terms of a 3-point growth strategy the biggest impact you see is on getting new logos, new large retailers? How does that relate to the resiliency and getting the add on sales whether it is the analytical packages or just the new CP relationships? I’m trying to understand the three growth strategies and what is more resilient in terms of getting business?

Daniel Fishback

Clearly in our Q3 that we just wrapped up we had a great quarter regarding renewals. So in a market of uncertainty going out into the market to get new customers in this kind of environment is always going to be more difficult not only for DemandTec but any technology company or for that matter any. So the fact that our customers are coming back and voting with their check book and renewing and buying add-on services we think is very, very key to the long-term viability of our franchise. At the same time to get back to growth rates that we believe we can sustain obviously we have got to hit on all three points of our strategy.

The first one is new banners. As I mentioned I think we will come in at the low range on the customer count. That being said I think we are over-executing on potentially the other parts of our three point strategy.

Terry Tillman – Raymond James

Dan, in terms of when you had talked about uplift in the analytical services you mentioned Wal Mart again. I thought on the last quarter call one of the optimization add-on packages they had bought as well. So maybe you can’t talk about them specifically but I would love to get some sort of general sense on the economics and incremental uplift from some of these analytical packages. Is this a couple hundred thousand dollars on average? Could it be as high as $500?

Daniel Fishback

Keep in mind that once we have rationalized and collected and scrubbed and organized this quantitative data behind consumer behavior the analytical services are scalable ways to deliver insight from that data in effect. Those economic or analytical services can be anywhere from $30,000 to $40,000 on the low end to over $1 million on an annualized basis depending on the scope and recurrence of that analytical service. Over time many of those become functionality in our product or add-on features we can sell once we have productized that analytical service.

Terry Tillman – Raymond James

On the financial side you had good leverage in the quarter and you beat my margin pretty handily. It seems like you were definitely controlling costs well. Anything incremental in the fourth quarter or into next year in terms of maybe the sales rep headcount or sales support? Are you paring back or are you actually doing discretionary cuts in certain areas? Anything you can provide at all on that front?

Daniel Fishback

There has been no cutting from that perspective. I think it is just prudent expense management. We added sales people in the quarter. We have 18 sales people, up one from where we were last quarter. We continue to hire it is just we continue to monitor our business closely given the uncertainty in the economic environment and manage it accordingly. So I don’t think there was really anything incremental that drove the upside in the operating profitability this quarter other than I think we do a good job of managing our expense base and clearly our revenues came in a little higher than where our guidance was and obviously that contributes to some of that operating profit number as well.

Operator

The next question comes from Tom Ernst - Deutsche Bank.

Tom Ernst - Deutsche Bank

I think you highlighted profiles on a number of high profile renewals. What was your overall renewal rate and what were the renewals like in terms of pricing and difficulty or either relative to what you have seen previously?

Daniel Fishback

We don’t speak specifically to specific bookings overall. What we see is our renewals are strong on both a current and dollar value. If in some cases those renewals will be for more or for less if the scope changes but candidly we are not seeing a tremendous amount of negotiation price on our renewals.

Tom Ernst - Deutsche Bank

So to reiterate your renewal rates stay consistent with what you have seen over the last couple of years?

Daniel Fishback

Yes. Without a doubt.

Tom Ernst - Deutsche Bank

The previous question you mentioned you have been hiring sales people and you continue to hire. It looks like you have been able to flatten out or even reverse a little bit your spending margin in the last couple of quarters. What is your posture towards investing over the next quarter and if the environment continues to be tough for the next several months do you continue to expect to expand sales capacity or is that something you would hold flat?

Mark Culhane

Let me address the anomaly over the last two quarters compared to the first quarter just in terms of the absolute dollars or sales and marketing. Some of the increase experienced in Q1 was the departure of our former head of sales, John Crouch, and the costs associated with that along with the recruiting costs we incurred in our search for what we were looking for from a head of sales and so forth. Those impacts were largely felt in Q1 and Q2. In Q3 we tended to get back to a more normalized rate from that front.

The other thing that impacts the trends a little bit are our marketing programs. Our marketing trade shows which tend to be heavy in Q4 and Q1. One of the biggest trade shows we attend is the announcement we put out this morning of attending the National Retail Federation (NRF) next week. That is a big one and then of course we have our large user conference in the April/May timeframe which lands into our first quarter as well. Then from an ongoing what we are doing in sales and marketing spreads I will let Dan address that question.

Daniel Fishback

My perspective right now on hiring sales people is really twofold. First, as our customer base has grown we have added and allocated key sales executives to manage our customer base. Clearly we are able to drive value and provide insights they need now more than ever. Based on our renewals and some of our other strategies we are seeing them vote with their check book and buy those services from us in this time of uncertainty. So we are going to continue as our customer base grows to add more what I would call customer success partners but dedicated sales people. The other side is we see this as a real opportunity to take advantage of the lack of any measurable success in our mind by the big players in the space, AP, Oracle and alike to really make any meaningful end roads into this space. We said if they are distracted and we are going to be cautious as we hire but we are hiring sales people.

Operator

The next question comes from Pat Walravens - JMP Securities.

Pat Walravens - JMP Securities

If we look out a little bit to fiscal 2010 I know you don’t want to guide yet, but if the economy sort of stays where it has been in the last quarter can you maintain this sort of growth rate?

Mark Culhane

I can’t comment on guidance for fiscal 2010, but we have a three-point strategy that from the beginning has been to leverage our unique assets. One is we feel we have the best mouse trap in the space so when new customers want to buy the technology we feel we are going to win our fare share there. Clearly throwing add on services and functionalities for our current customers. We have the best in almost every segment of retail that we call on as a customer and they are trying to gain share as well. Lastly is the network. So, I can’t comment to our guidance again but I feel good that our strategy is balanced across new customer acquisitions, leveraging our great customers and a unique asset that again doesn’t have a commercial competitor called the DemandTec Trade Point Network.

So I feel balanced. I feel like we are uniquely positioned. That being said we operate in the same macro economic environment everybody else does and it puts a premium on execution. Period.

Pat Walravens - JMP Securities

Have you thought at all about sort of a downside case? Sort of like a reasonable downside? Can this thing grow 10% even if things sort of fall apart economically?

Daniel Fishback

Since August of 2007 we went public. I didn’t have any insight into what the last six quarters were going to be. Clearly if we a continued deterioration in the market that will affect us at some point like it has already. Again, certainly we are going to evaluate downside scenarios as we prepare our plan but like Mark had commented, we’re not sure we have seen the bottom of the macro economic environment yet and how that is going to affect the consumer and what impact that is going to have on the biggest retailers around the globe.

Pat Walravens - JMP Securities

You played head of sales for awhile now. What is your plan for fiscal 2010? Are you going to stay in that role or are you guys looking for someone?

Daniel Fishback

I am always adding for key executives we can add to this team. I think there is a role for a key sales executive on a worldwide basis either internally or an external candidate but I am always looking to evaluate. Candidly given the breadth and depth of the current management team we have I have a luxury where I can get out in the market and actually visit with our customers or prospects and partners. Today I really have two sales executives on a global basis that report to me. One runs our CP Companies business and the other our retail and I like being able to kind of cut through the noise right now and understand what is going on. I continue to look for a candidate but candidly less the amount of travel I have to do being closer to the market is an asset right now.

Pat Walravens - JMP Securities

Were there any non-renewals in the quarter?

Mark Culhane

We don’t comment specifically. Our renewals are continuing and consistently in the high 90’s.

Operator

The next question comes from Laura Lederman - William Blair.

Laura Lederman - William Blair

One of the things that is interesting is that customers are still willing to pay one year of cash up front and thoughts on whether or not you think that is going to continue going forward and what are the customers saying about that? It was a lovely DSO number and kind of surprising and I was wondering your thoughts on cash whether a customer’s willingness to pay one year going forward or also DSO’s? You would think a lot of the retailers would want to hold on to their cash a little more. Then I’ll come back with another question.

Mark Culhane

We have not seen any significant trend in changes in payment terms to the transactions we are doing. Whether that will change going forward time will tell. Right now there is not enough data points to suggest any meaningful change on that front. Second, to your comment on DSO’s I think we continue to do a very good job on the collection front. Our collections group has just been executing very well and staying on top and as we all know a lot about that is just the day to day blocking, tackling and making sure you get your invoices out on time and correct and following up and doing all the kind of collection hygiene you need to do. We are extremely pleased with that group’s performance in the current quarter.

Daniel Fishback

I would add our software as a service model as it has matured and our time to benefit for our customers is in some cases weeks. I think altogether with good AR hygiene is the reasons the DSO went down.

Laura Lederman - William Blair

Can you talk a little bit about the health of retailers U.S. versus internationally? What differences you might see in the U.S. and Europe in terms of the pipeline, the new potential customers, sales cycle? Just give us a sense of what things look like domestically versus overseas?

Mark Culhane

Unfortunately they all kind of look the same to me today. Having traveled around the country and around the world, I have been to Europe a couple of times since Labor Day weekend. The worldwide impact in my opinion is being evenly shared by retailers from Japan to France to the UK. Unlike maybe a couple of years ago where we saw more strength in some European markets that is not the case today. I see a pretty consistent retail market around the globe that I would characterize as is if you are in apparel, jewelry or any kind of luxury item that is a tough market today. Certainly we think fast moving consumer goods and health related items those retailers are going to continue to do well and they are trying to figure out how to leverage in many cases their own private label brands. They are trying to learn how to negotiate with their vendors better to shape demand from maybe in a scenario where you have good, better or best to shape demand toward an item in a range of items where the margins are better for them.

It all looks the same to me today.

Laura Lederman - William Blair

High level modeling, for revenue to be flat sequentially is not your usual pattern. Would that be that maybe there was a lot more analytical revenue this quarter? I’m just trying to understand why it would be flat sequentially.

Mark Culhane

I think our guidance for Q4 is just taking our cautious and conservative outlook to the business in light of what has been transpiring out there in the macro economic environment. I don’t think there is anything other than we are just being prudent.

Daniel Fishback

My only comment to add on is Q3 looked to us much like…our fiscal Q3 kind of looked like the majority of the year. Certainly since the end of that and with retail numbers being announced today the last 35 days or so or nearly 40 days the economy looks like it is getting worse. We’re sitting here saying Q3 we feel pretty good about. That looked like the other quarters where we laid down our guidance in the spring of 2008. It kind of feels right. That being said the last 40 days or so I think everybody would agree the economy has gotten worse so Mark’s comments I think are right on. We are taking a cautious approach to what that is going to mean for the next 65 days of the quarter or whatever the case may be.

Operator

The next question comes from Jeff Van Rhee – Craig-Hallum Capital.

Jeff Van Rhee – Craig-Hallum Capital

In terms of the banners, if I have it right and I want to confirm this, last quarter you had said you had 79. You are saying 85 retail banners, obviously the net is 6. You have talked about this 8-12. Are those apples to apples? That is what you are talking about when you say 8-12 new banners?

Daniel Fishback

No. Not at all. I’ll give an example. Wal Mart has multiple banners around one customer.

Jeff Van Rhee – Craig-Hallum Capital

Could you give us a sense then in terms of these 8-12 new customers how many added this quarter or last quarter? Give us some sequential sense of what is done and what needs to be done.

Daniel Fishback

We feel like we will fall within the range of the low end of that range of 8-12.

Jeff Van Rhee – Craig-Hallum Capital

I’m just talking by quarter. Did you close a new customer this quarter or a new banner as you would deem it?

Daniel Fishback

Yes we did. We talked about it in the prepared remarks. Nash Finch.

Jeff Van Rhee – Craig-Hallum Capital

So there was one this quarter or are you just not willing to give those numbers?

Daniel Fishback

We don’t disclose those numbers on a quarter by quarter basis.

Jeff Van Rhee – Craig-Hallum Capital

In terms of the customers that are working through the pipeline if you look at the scope of the transactions is there anything notable about the size and scope of the deals? Specifically obviously you mentioned and everybody is well aware the economic conditions are what they are. Are you seeing a lot of people that may be working through the pipeline also considering significantly smaller deals or any other notable deals along those lines within the pipeline?

Daniel Fishback

We have not seen a material change in our average sales price for our analytical products. That has always been approximately $2 million ACB annual contract value range. We have been on record for the entirety of calendar year 2008 we anticipate deals would take longer to close. We clearly have seen deals take longer to close but not a decrease in the average sales price of those items candidly. So, today that continues to kind of track. We did make an announcement and I spoke to it in my opening remarks that we have packaged a Price to Win package, kind of a recession kit if you will to go after fast moving consumer goods retailers and pre-package offering our ten key categories that are statistically very sensitive to the average consumer today. We have not seen one of those close yet just because we released it late in the quarter but that could drive down our average sales price but drive up our customer count which we think there is an opportunity to drive up our customer count in fiscal 2010 with some more discrete packaging of our offer.

Jeff Van Rhee – Craig-Hallum Capital

You have been making a pretty steady mix shift towards the CP side of things albeit not dramatically. That reversed this quarter. Is there anything there worth calling out?

Mark Culhane

No, I think it is an anomaly just due to timing. We would expect that CP as a percentage of revenue over time is going to continue to grow. We feel that there is lots of opportunity on the CP side of our business.

Jeff Van Rhee – Craig-Hallum Capital

If you said it I missed it, what was the Q4 capEx expectation? Lastly, the assortment optimization any update there as to when we might see some news around bookings and potential revenue?

Daniel Fishback

We originally built no sales or revenue into our 2009 plan based on assortment. That being said retail is detail and the ability to localize not only the assortment but the pricing of those items is more important than ever so we would anticipate fiscal 2010 to have material contributions from our assortment product.

Mark Culhane

On capEx we don’t guide capEx. I don’t think we will see capEx being any different than being consistent with what we have seen over the last couple of quarters.

Operator

The next question comes from Michael Nemeroff – Wedbush Morgan Securities.

Michael Nemeroff – Wedbush Morgan Securities

Given now you say you will be at the low end of that 8-12 new customers I imagine you are seeing sales cycles extending. Can you quantify or provide some anecdotal color both here in the U.S. as well as internationally how you think that is progressing in terms of sales cycles?

Daniel Fishback

Clearly what we are seeing is it just takes more approval process to get a transaction done. What might have been three signatures and didn’t need the CEO of a major retailer for a multi-million dollar transaction in this environment takes six or seven signatures and in some cases they are not even going to the board of directors or committees that have been formed to evaluate every expense. In those cases those committees don’t meet every day and if you miss one of those meetings it drops to the next quarter. Certainly more resistance in the system across the board. More structure around these kinds of things. That being said it is front of mind. How do you price your items in a marketplace where the consumer is more cautious than ever before is front of mind? So I like the interest in the market. Unfortunately the economy is just dragging out the contract process.

Michael Nemeroff – Wedbush Morgan Securities

Would you say it is extending by an extra quarter, two quarters? For each contract?

Daniel Fishback

If just kind of feels like a quarter. I think that is about right. I wouldn’t say it is going out two quarters certainly but it feels like a quarter and I don’t know why but it seems like everybody wants to make a decision the last week of a quarter and sign it even though it doesn’t matter that much to us. So if it is a quarter you are onto the next quarter and the way our revenue model works is there is only 9/12 left for us to drop into the year.

Michael Nemeroff – Wedbush Morgan Securities

Mark, the marketable securities was up sharply that came out of cash. Can you just comment on what the strategy is there? Also on the long-term deferred how should we think about modeling that going forward? Obviously as the old contracts fall off and you start to go annual on the new ones, but it has been pretty consistent and down sharply over the last couple of quarters sequentially and this quarter it seems to drop off a little bit if you could just comment on that too.

Mark Culhane

The marketable securities is just a shift from the cash and cash equivalents into marketable securities to pick up a few basis points of return. We got pretty conservative through the third quarter at the start, towards the end of the second quarter as well just because of all the issues around money markets and what was going on so we went to some pure straight cash stuff and then we moved that back once that settled down and the Fed came back and said they would stand behind and support the money market funds so they wouldn’t break a dollar. So that is really what is the shift there. Nothing more than that.

The long-term deferred that is going to continue to roll down towards zero over the next probably eight quarters give or take. It depends on which customer and when that comes up for renewal to know what impacts that are because that is made up of a handful of deals that happened prior to us going public.

Michael Nemeroff – Wedbush Morgan Securities

When I look at the revenue for the first three quarters this year compared to last year obviously the environment is different but it seems to have flattened out and then leveled off. Is that characteristic of one or two larger customers that have dropped off and then churn coupled with some of the customers you are signing? How should we be thinking about that leveling off with the deferred revenue this year?

Daniel Fishback

I don’t think that is a churn issue at all. I think deferred revenue will fluctuate depending on the size and number of new retail deals in any particular given quarter. Clearly we are now forecasting to be at the lower end of our range from 8-12 so that is having some impact on that but it is not a churn issue. Then ultimately it depends on when stuff we have previously sold in which quarter do those come up for an additional payment for year two or three. So the deferred revenue on a quarterly basis can fluctuate somewhat depending on the mix of what is happening there and the biggest impact really is just overall the economic environment and what is happening there in terms of customer acquisition and so forth.

Michael Nemeroff – Wedbush Morgan Securities

Do you anticipate a little bit of a seasonal bump in Q4 for you?

Daniel Fishback

If we have had a seasonal bump in the past it traditionally has occurred in our Q4. Time will tell how the rest of our fourth quarter plays out. So we will just have to wait and see.

Operator

The next question comes from Bryan McGrath - Credit Suisse.

Bryan McGrath - Credit Suisse

The last couple of quarters you talked a lot about inflation and how that was impacting retailers and maybe a few manufacturers and how you guys were able to help them with that and now it seems maybe deflation is probably their next fear. I’m wondering how does that play into your hands? Are you able to help them through that scenario as well or is it just going to be the volatility that goes on drives more demand and more need for your analytical services?

Daniel Fishback

That is a great question. I think volatility…who would have thought 90 days ago or 120 days ago when we were looking at price increases and $4.00 per gallon gas that we would be sitting here today talking about deflation and consumables? That is the reality. So that volatility candidly puts more of an emphasis on a lot of products in the analytical services that we sold to both retailers and CP companies but candidly the CP companies because they are trying to reconcile at what point do they pass along cost or do they lower their costs to the retailers? We see the volatility as a really, really good sign for particularly our business with the network and our CP companies business. Just the pure volatility of it. It puts a premium on getting the price right [inaudible] ultimately profit in the business.

Bryan McGrath - Credit Suisse

As far as your customers go from a U.S. and international you talked a little bit earlier about it but I just want to kind of circle back on it. Are you seeing any real discernible differences in the way U.S. customers or retailers are acting versus international? Is there any lag there or any sort of trend you are able to kind of pull out and share with us?

Daniel Fishback

Specific to the economy no. I am candidly still surprised by how quickly this economic situation spread around the globe. I think mid-September I traveled around the globe going west and literally it was just fascinating. Really there was no part of the market from Japan to France to eastern Pennsylvania by the time I got home to Florida. I don’t see any material difference between any of the markets. They are all dealing with the same volatility in costs and they are all dealing with a consumer that is more cautious than ever.

I think almost every major economy around the globe has this huge overhang on de-leveraging their own economies and then subsequently staring at probably an increased unemployment rate. It is almost consistent. I see it exactly the same. I’m sure there are folks that have opinions but I don’t see any difference.

Operator

The next question comes from Keith Weiss - Morgan Stanley.

Keith Weiss - Morgan Stanley

This is more a color question but when I talk to people in the channel I see the strong interest in price optimization and your technology as well. But it seems like the new customer transactions aren’t occurring at the same kind of rate. I was wondering if you could give us some visibility into your pipeline? I would assume that where that builds up, especially contract times getting longer as it built up in your pipeline. Is that true? Is your overall pipeline getting larger as interest builds up and people just are less willing to pull the trigger?

Daniel Fishback

Yes. Let me take a shot at that. Again I think it is really important when you look at our business and bookings and how that fuels our income statement with revenue is we are investing in that three-point strategy. Clearly we are out trying to get new business every single day. At the same time we have made a tremendous effort to provide one of a kind value added services to our current customers and then leverage the collaboration with a one of a kind network that connects those parties. We are going to continue to invest in trying to get those new customers. I have seen no material decrease. I have seen zero decrease in the overall health and size of our pipeline. If anything, I have seen a slight uptick in just the number of companies that are in our pipeline today. It is just taking longer to get them through the system and subsequently I think it puts the burden on us that we have to be more creative of how we leverage our assets.

We have this unique offering of software as a service, network and science combined and one of the things we did with this Price to Win recession package is to say hey how do we bring this bear on a discrete number of categories and make the decision easier for a retailer, potentially having an impact on our short-term average sales price but drive up our customer count. We have had a lot of interest in that and we have yet to see one actually be booked yet but so far we are seeing positive feedback on that.

That is something we can do because our software services has this network that would be very, very difficult for a behind the firewall perpetual software company to do to come in and say hey come in and install the computers and all the gear. I was speaking to one of our customers the other day and they said the allocation of internal IT resources to the DemandTec project ongoing was 1/10 of one FTE a year. That is a very compelling economic case for us to be able to go in and sell a discrete offering and we are going to give this a roll and see how it works in calendar year 2009.

I like in a period of uncertainty where we have a unique asset to increase our customer count if at all possible.

Operator

We have no further questions at this time. I’d like to turn the call back to Dan Fishback, President and CEO for closing comments.

Daniel Fishback

Thank you again for joining us today. In summary our results for this quarter and for the full year have been at the high end or above our guidance. I believe we are well positioned to leverage our investments and our one of a kind science based solutions to deliver solid financial results during the fourth quarter of our fiscal year 2009.

In the long-term perspective we are confident in our three-point growth strategy, strong competitive position and proven value proposition. We look forward to updating you on our next quarter’s conference call. Until then thank you.

Operator

Ladies and gentlemen that does conclude our conference for today. You may now disconnect.

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