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Executives

Steve Vintz – Executive Vice President and Chief Financial Officer

Rick E. Rudman – President and Chief Executive Officer

Analysts

Tom M. Roderick – Stifel, Nicolaus & Company

Terry Tillman – Raymond James & Associates, Inc.

Brendan Barnicle – Pacific Crest Securities

Robert Breza – RBC Capital Markets

Samad Samana – FBR

Jeff L. Houston – Barrington Research Associates, Inc.

Vocus, Inc. (VOCS) Q4 2012 Earnings Call February 5, 2012 4:30 PM ET

Operator

Welcome to the Vocus Fourth Quarter Fiscal Year 2012 Earnings Conference Call. The date of this call is February 05, 2013. This call is the property of Vocus and any recording, reproduction or transmission of this conference call without the expressed prior written consent of Vocus, Inc. is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of Vocus, Inc. website.

I will now like to turn the call over to Steve Vintz, Vocus’ Chief Financial Officer.

Steve Vintz

Good afternoon. Thank you for joining us today to discuss Vocus’ results for the fourth quarter and fiscal year 2012. I will now cover the Safe Harbor statements then turn the call over to Rick Rudman, Chairman, President and Chief Executive Officer.

During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our expectations of future events and the future financial performance of the company. We want to remind you that these forward-looking statements are based on information available to us today, as of today's date and are subject to risk and uncertainty.

We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future. We encourage you to review our filings with the Securities and Exchange Commission, which are available at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations.

We also intend to discuss some non-GAAP measures. A reconciliation of GAAP and non-GAAP results is also available in the press release we issued today, which is on our website at www.vocus.com.

I will now turn the call over to Rick Rudman. Rick?

Rick E. Rudman

Thanks Steve and thank you everyone for joining us today on our Q4 earnings call. I am pleased to report a strong quarter for Vocus, highlighted by solid financial result, record customer growth, tremendous demand for the Vocus marketing suite and the successful launch of a major new release of our marketing suite. I would like to start by covering some financial and business highlights for the quarter and then review the results of our 2012 key strategic initiative and conclude with some commentary on our 2013 outlook.

Revenue for the quarter came at $47.4 million, which represents 55% growth on a year-over-year basis. Operating income continue to improve sequentially, coming in at $4.4 million for the quarter and free cash flow was also strong in Q4 coming in at $7.4 million.

In Q4, we added a record number of net new annual subscription customers, which resulted in 30% growth in net new customers on a year-over-year basis. We believe our customer growth is a testament to both the large and untapped cloud marketing opportunity and to the strong demand for our products.

Contributing to our customer growth in Q4 was the tremendous quarter for the Vocus marketing suite, which delivered 90% sequential quarterly bookings growth. We ended the year well ahead of our expectations with over $12 million in bookings for the marketing suite. We are extremely pleased with the fact that in just five quarters, bookings for the marketing suite went from zero to 12 million and are expected to more than double in 2013.

In addition to our success with new customers, we also saw a strong demand from existing customers in Q4, as renewals were better than expected with dollar renewal rates backing well above the high-end of our normal 80% to 85% range.

In Q4, we also launched the new Vocus Marketing Suite, which was released on schedule in early December and met with strong acceptance and positive feedback from customers and prospects. The new release includes integrated e-mail marketing, features for improved social and local marketing and our inclusive Buying Signals technology which identifies leads and prospects on the social network. We now have a truly unique solution that integrates the key elements of modern digital marketing, including e-mail, social searching publicity into a single solution.

In addition, we also deliver real-time marketing opportunities directly to our customers in the form of leads, prospects, social media conversation, rated content and inbound media enquiry. Based on the strong demand for our marketing software and the significant additional value in our new release, we plan to increase subscription prices in Q1. In addition we believe there is tremendous opportunity for Vocus to sell larger subscriptions to midsize companies that are looking for the functionality we offer.

So in addition to price increases on our current addition, we also plan to push further up market in Q1 with new additions and higher pricing specifically geared towards the mid market. 2012 was pivotal year for Vocus, as we embarked on a number of bold strategic initiatives to accelerate our expansion beyond PR into the large and rapidly growing cloud marketing space. With 2012 now in hand, we’re extremely pleased with our financial results, or perhaps more importantly with the successful execution of our key strategic initiatives.

During the year, we significantly expanded our direct sales capacity in order to accelerate sustainable top line growth and better position Vocus for the large market opportunity in front of us. Not only did we drive incredible bookings growth of the market fleet, we’re also now well positioned for sustainable 20% plus bookings growth going forward.

At the beginning of 2012, we also acquired iContact, in order to add e-mail marketing capability to our fleet and also to cross sell our marketing fleet to existing iContact customers and free trial use. In December we completed the product integration and successfully launched our new marketing fleet. This was a larger scale integration project, which included rewriting and integrating iContact from the ground up to produce the finished product, completely integrated across data, technology and user experience.

As we look at the current marketing landscape we remain convinced that e-mail marketing is and will continue to be a critical component of digital marketing. In fact as we look at our product roadmap for 2013, we see Greenfield opportunities in this area and plan to expand our e-mail marketing capability to include lead flow and other advanced e-mail features for the mid market which we believe is underserved.

In terms of cross-selling, we began selling our marketing fleet to iContact free trial users till mid-2012, and iContact free trials are now an integral part of the lead flow for our sales team. In December with the launch of the new marketing fleet, we began upselling existing iContact customers, which represents an incremental opportunity for us. Moving into 2013, we will have a team of dedicated sales reps, focused exclusively on selling the new marketing suite into our iContact customer base.

So in summary, 2012 was obviously an exciting year for us and we’re proud of our accomplishments and very pleased with how we are positioned going into 2013. As we look ahead, we are excited about our emergence as the leader in the cloud marketing space. Modern digital marketing has been a convergence of marketing channels. Today there are specialist that focus on one aspect of marketing such as e-mail or social or publicity, and our integrated marketing team that work together across all channels. We offer our solutions in various configurations that meet the specific needs and budgets of different sized organization to different marketing needs.

Overall, cloud marketing represents a tremendous opportunity for Vocus. The total available market for digital marketing is estimated to be $34 billion today growing to $77 billion by 2016. In fact, (inaudible) predict FY2017, this CMO will spend more on IT than the CIO. This rapid growth is being driven by changes in consumer buying behavior, which in turn have changed the way companies market their products and services. The data supporting these new digital marketing channels is incredibly compelling. For example, 50% of people now follow brands in social media and consequently 75% of companies now use Twitter as the marketing channel. 79% of a company’s Facebook fans are more likely to buy than their non-fans and 77% of online shoppers use reviews to make purchase decision.

Finally, in the midst of all these new emerging channels, e-mail is still listed as number one in terms of the most effective channel for quality of fleet.

So it’s no surprise that companies today are looking for a modern digital marketing solution that will help them navigate this new territory successfully. We are finally witnessing the marketing department automating with software, something that’s financed straight to our sales and customers for did a long time ago.

With one of the most advanced and complete integral marketing solutions available today, Vocus is well positioned to meet this demand.

In summary, we couldn’t be more excited about our leadership position in the cloud marketing space, and the large opportunity in front of us. With our successful initiatives in 2012, we created an incredible marketing product and positioned ourselves for 20% plus bookings growth and incremental market expansion in 2013.

I will now turn the call over to Steve Vintz, who will provide us with some additional information on the business. Steve?

Steve?

Steve Vintz

Thanks Rick. I am very pleased to report a very successful quarter for Vocus, highlighted by record revenue, record net customer additions, strong earnings and cash flow. Q4 also tapped a very successful year for us. This is ever as we acquired and successfully integrated iContact, embarked upon a major expansion of our sales force and released the new version of the Vocus marketing.

So while we’re very pleased to deliver strong results for the quarter, and the year as a whole, we’re excited to have built the foundation for what we believe will be over 20% annual billings growth going forward. I’ll review 2013 guidance shortly, but let’s move on to the numbers for the quarter.

Revenues for the quarter were $47.4 million, which represents a 55% increase year-over-year and a 4% increase over the prior quarter. For the full year, revenues were $173 million, which represents a 50% increase over the prior year. Please note that non-GAAP revenue excludes the effects of the write-down in deferred revenue of $270,000 for the quarter related to the iContact acquisition.

I’ll reference to revenue, on a non-GAAP basis, which we believe more appropriately reflects the economic realities of our business and the revenue that otherwise would have been recognized from acquired companies on a standalone basis. This is important to keep in mind as we provide yearly comparisons, growth rates and margin.

Calculated billing defined as revenue plus the change in deferred revenue were $58.3 million for the quarter and grew 52% year-over-year. Overall, we are very pleased with billings for the quarter as sales of the marketing suite grew 90% sequentially over third quarter. Additionally, France and large market PR which underperformed in Q3 were back on track and performed as expected for the quarter.

In terms of customer demand, we are pleased to report our best quarter ever with total active subscription customers increased by 1363, but was driven by strong demand for the Vocus marketing.

We ended the quarter with a record 16,494 active subscription customers, which is up 9% over Q3 of 2012 and almost 40% over the same period last year. And it’s important to note that our net adds in customer counts only include active annual subscription customers from our direct sales organization and do not include customers from our e-commerce channel such as PR web transaction customers and monthly subscription customers from North Social, HARO and iContact which in aggregate with our annual subscription customers represents over 127,000 paying customers for Vocus.

We are pleased with our customer growth this quarter and believe it speaks the compelling value, our integrated marketing suite offers both small and mid size businesses.

Now, on to the cost side of our business. Our non-GAAP gross margin for the quarter was 84%, which is flat compared to last quarter and up slightly compared to last year. For the full year 2012, our gross margin was also 84%, which is up from 83% in 2011 and 82% in 2010. We’ve added over two full percentage points in gross margin over the last year and have one of the highest gross margin in the entire SAS universe today. Looking forward, we expect our gross margin to remain essentially flat next year, as we expand our service offerings to marketing fleet to drive higher ASPs and optimize penetration in the vast, but underserved mid market.

Total non-GAAP operating expense for the quarter were $35.7 million, an increase of 77% year-over-year and 4% over the last quarter. As the percentage of Q4 revenues, sales and marketing cost 55%, R&D was 5% and G&A was 15%. Sales and marketing expenses were $26.2 million this quarter, which was up from $14.2 million last year and $24.6 million last quarter.

Sales and marketing expense in the quarter includes a 370,000 charge in connection with the termination of our Chief Operating Officer, and also higher sales commissions from significantly higher sales force during the quarter. As a reminder, we expense all of our commissions as they’re earned in the period of sale, rather than amortize the expenses over the periods in which we recognize the rate of revenue.

We ended the fourth quarter with 489 quota carrying sales reps, compared to 279 last year and 474 last quarter. This represents 81% growth in quota carrying sales reps year-over-year on an FTE basis, and more importantly 20% plus growth in sales quota capacity.

We believe that our large insight sales organization is now a major competitive advantage for Vocus. While we’re activity developing alternate channel strategies we plan to continue to grow the direct sales organization going forward to support our goal of achieving over 20% annual billing growth.

However, due to the increasingly competitive nature of the cloud marketing space and our belief that our go-to-market model is a competitive differentiator for us. We will no longer be disclosing the number of total quota carrying sales reps on future calls.

We will continue to provide net customer adds, total subscription customers, renewal rate ranges and total employee counts, which together with other financial statement information will provide a lot of visibility to our business.

R&D expenses were approximately $2.2 million this quarter compared to $1.5 million last year and $2.6 million last quarter. R&D cost decreased sequentially due to $160,000 of capitalized software cost associated with the Q4 release of the integrated marketing suite. G&A expense was $7.2 million this quarter compared to $4.5 million last year and $7.1 million last quarter. In terms of profitability, our Q4 non-GAAP operating margin was 9%, but flat compared to Q3 2012.

For the full year, our non-GAAP operating margin was 7%, which is above our target margin of 6% that we provided at the beginning of the year. Non-GAAP net income was $3.9 million for the quarter compared to $4.8 million last year and $3.5 million last quarter. Non-GAAP diluted earnings per share of $0.16 for the quarter which includes severance related charges discussed above.

Now on to our balance sheet and cash flow statements. We closed the year with $34.1 million in cash, cash equivalents and investments up from $30.6 million last quarter. During the quarter, we generated $7.4 million of positive cash flow compared to $5.8 million last year and $2.8 million last quarter.

For the year, we generated over $16.2 million of positive free cash flow, which is net of $5 million of one-time non-recurring payments related to the iContact acquisition.

So, on a normalized basis free cash flow for the year would have been $21 million, which results from the $17 million in 2011. The strength of our cash flow in 2012 demonstrates the accretive nature of hiring sale reps and the potential future leverage in earnings.

Accounts receivables $29.8 million and DSO’s for the quarter was 37 days. Non-GAAP deferred revenue totaled $79.4 million at year-end, which represents an increase of $16.4 million over last year.

Before I turn to the guidance, I want to discuss the positive change we’re seeing in our mix of business. The value in our marketing be combined with our larger sales force is driving a higher annual subscription adoption rate among monthly point product and e-commerce transaction customers.

As you may recall, we use our e-commerce platform as an effective lead gen channel. Our sales force now has the capacity to immediately call those sign-ups and convert a higher percentage into annual subscription customers, who offer us higher billings per customer, a better ROI and more attractive customer lifetime value. We started seeing this dynamic in 2012 and our 2013 revenue guidance will flex the prioritization of converting e-commerce transaction sales into annual prepaid subscriptions. We believe this dynamic is good for business overall as our momentum in the marketing we build, and as a greater portion of our billings are expected to come from annual subscription customers.

Additionally, the elasticity of our pricing model sales to date from the marketing suite and enhanced functionality of the new suite clearly suggests that we can successfully raise prices. As a result we plan to roll out new packaging in the first quarter of 2013, which will include adding $15,000 and $35,000 of (inaudible), and a 20% general price increase across the board on existing packages.

As a point of comparison, the ASP for the marketing fleet in 2012 was approximately $4200 with an entry point of just shy of $3000. So this is clearly an exiting opportunity for us going forward.

Now, I like to move on to the guidance for the first quarter and full year 2013, which we are providing for the first time, based on information as of February 5, 2013, that’s today’s date. For the first quarter of 2013, revenue is expected to be in the range of $46.3 million to $46.7 million. It’s important to note that our business is very well diversified and with revenue from annual prepaid subscription, monthly subscriptions, e-commerce transaction, consulting services, most notably or no social, and also e-mail pay per send customers. As a result, quarterly billings and revenue could fluctuate quarter to quarter depending on this mix of business.

Non-GAAP diluted EPS is expected to be in the range of $0.09 per share to $0.10 per share, so we estimated weighted average 24.9 million diluted shares outstanding and an estimated tax provision of approximately $550,000. Non-GAAP adjustments are expected to be $0.35 per share. GAAP EPS is expected to be in the range of a loss of $0.26 per share, to a loss of $0.25 per share, assuming an estimated weighted average 20 million basic and diluted shares outstanding.

For the full year of 2013, we expect billings trough to be in the range of 22% to 23% over 2012. In terms of billing trough please note that we acquired iContact in February of last year. So billings growth was slightly higher in Q1 then settling at approximately 20% per quarter for the remainder of the year, as the quarters become more comparable.

Revenue is expected to be in the range of $200.3 million to $201.8 million, which represents 16% to 17% growth year-over-year. Now keep in mind that revenue through our billing and our revenue guidance today reflects the 14% full year billings growth for the combined companies in 2012 and the 22% to 23% of active billings growth in 2013.

Non-GAAP diluted EPS is expected to be in the range of $0.50 per share to $0.53 per share, assuming an estimated weighted average 25.4 million diluted shares outstanding and an estimated tax provision of $1.8 million. Non-GAAP adjustments are expected to be $1.24 per share. This implies a non-GAAP operating margin of 7.5%, which is up 50 basis points from the 7% margin last year.

GAAP EPS is expected to be in the range of loss of $0.74 a share to a loss of $0.71 per share, assuming an estimated weighted average, 20.2 million basic and diluted shares outstanding.

Free cash flow is expected to be in the range of $24.5 million to $25.5 million, will reflect our continued investment in expanding our sales force and it also assumes depreciation and amortization expense of $5 million and CapEx of $6.5 million for the year.

Before I turn the call over for questions, I want to remind everyone about our Digital Marketing Day at the NASDAQ market site on February 27, where we have a very exciting agenda which includes a demo of the new Integrated Marketing Suite, a preview of our 2013 product road map and some customer success stories among other things.

If you have an RSPV gap and want to do so or have questions about the event, please e-mail vocus@blueshirtgroup.com, also in the press release that we issued earlier today we provide our guidance on a non-GAAP basis for earnings per share for the first quarter and full-year 2013. Please refer to the press release for details.

At this time, we'd like to turn the call over to the operator, so we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Tom Roderick of Stifel, Nicolaus. Your line is open.

Tom M. Roderick – Stifel, Nicolaus & Company

Hi guys good afternoon. So listen, when I'm going through the quarter itself here, I’m getting a very bullish picture of the business, your bookings at about 18% organic or kind of high teens if I'm doing the math right. You're projecting those to accelerate as we get into next year, your renewals are improving, the net ads will get a pretty clear inflection point.

So in light of all those positive developments of the business, I'm really struggling with where the guidance is set and Steve I understand there is a compliment here, whether you’re trading off some near terms e-commerce revenue, since you changed your subscriptions, but walk me through that because when I do the math here for Q1, it looks like the organic revenue growth is 10% or less than that, so maybe just help me out there.

Steve Vintz

Sure, Tom a couple of things. In terms of revenue growth for the year, I did mention earlier on the call that there is a prioritization of selling annual prepaid subscription for cloud marketing company. So the point of emphasis here is not selling e-commerce point products which in essence our regen channels would offer rather converting them in to annual prepaid subscriptions. So for the first time, we now have the sales capacity to call in on those sign ups and call in on the e-commerce customers and aggressively convert them into annual prepaid subscriptions customers.

So that's certainly one positive dynamic that I talked about earlier. However, with regard to revenue guidance for 2013, I think it really comes down to this. Last year, we grew billings 14% for the full year, that’s for the full year. This year we are targeting 22% to 23% billings growth, which is better than what people were expecting. On a whole that is 16% to 17% annual revenue growth. So I think if you look at given the prepaid nature of the model, billings of last year, projected billings for this year, and then obviously, what we are expecting for full year in the revenue growth.

Tom M. Roderick – Stifel, Nicolaus & Company

Okay. And Steve if you got the point number, can you share with us what iContact contributed in the quarter both GAAP and non-GAAP?

Steve Vintz

We did not disclose that and we haven’t disclosed iContact, I think for a couple of quarters now. The only comment I will make about iContact that in Q3 we did see higher revenue from papers and customers. So Q3 was a particularly strong quarter for us and then starting in Q4, you really started to see the effects of the prioritization of selling annual prepaid subscription customers. So combined with all of those dynamics, the pay per send, the prioritization of annual prepaid and then the guidance that we are giving here today, you see the revenue that’s contemplated in 2013.

Tom M. Roderick – Stifel, Nicolaus & Company

Okay. And then just last one from me, when you talk about e-commerce historically where you still supplying products and generated near term revenues from that. What is that percentage of the business that you are trading off here, just we have a magnitude if we know – how much is going to shift and over what timeframe that happens?

Steve Vintz

We haven’t disclosed the changing mix of this and I think it’s really difficult to project at this time, given all the variables, monthly prepaid subscription customers, annual prepaid, the e-commerce customers, but what is clear is that we’re starting to see that shift now, even though we haven’t quantified it for people and what you have (inaudible) customers a sizable sales force that’s aggressively coined in, not only to the sign off, but also the customer base themselves. For the first time, this year we had a deferred dedicated team as aggressively coined into the customer base. So revenue has been moved to really bookings growth and that’s the sudden change that you are seeing this year.

Tom M. Roderick – Stifel, Nicolaus & Company

Okay, thank you.

Operator

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

Terry Tillman – Raymond James & Associates, Inc.

Yeah, thanks. Can you hear me, okay?

Steve Vintz

We can.

Terry Tillman – Raymond James & Associates, Inc.

Okay, so a variety of questions. In terms of – on the iContact front, you’re talking about the installed base and buying to upsell in those broader marketing suite, could I get any kind of appreciation either on the dollar value or a percentage basis in terms of – what kind of the lift to the contract value would you see from the iContact customer, if you are upselling marketing suite?

Steve Vintz

Probably about 2000 to 3000 per customer is probably what the uplift is from what they are paying for the average iContact customer base.

Terry Tillman – Raymond James & Associates, Inc.

In the average customer, I know there is a couple of different versions, there is a full service version and a self service version. Could you help me Rick in terms of where roughly that average contract value is now?

Rick E. Rudman

Sure, well the team that’s going after the upgrade business is focusing right now on the – what we call the self served business. Right so that’s the lower end of our cyber base, so we’re trying to upgrade the plus business at this time. The average – service customer is probably paying us about $500 a year.

Terry Tillman – Raymond James & Associates, Inc.

Okay. And I guess further you guys in terms I mean I guess I shouldn’t call this a transition if it’s evolution, maybe that’s the way to think about it, but in terms of this e-commerce business and really trying to monetize that with this broader set of capabilities. I mean when we talk to customers in the past, some of these folks very much are just looking to buy a press release or a couple of press releases or a bundle. Have you tested this in terms of this broader marketing suite that obviously has a lot more capabilities but tested the ability to convert those folks that will be helpful? Thank you.

Rick E. Rudman

Sure, well – I mean this has been our model for quite some time and we have been selling into people signing up for PR web press releases beginning in our small business teams. So and we’ve now been doing it with the iContact sign up. So we view the process of taking people that are signing up or sending press releases, they are signing up for e-mail and then converting them into somebody who wants broader marketing suite to be pretty much our standard go-to-market model. In essence regardless whether they are signing up for press release or e-mail or social media product, these are people that want to do marketing. So we think they’re good prospects for the marketing.

Terry Tillman – Raymond James & Associates, Inc.

Okay. And just my last question is on the sales and marketing side. I understand you're not going to give us quota carrying reps each quarter going forward, but sales and marketing as a percentage of revenue is high over 50%. I guess going forward this is more of a longer-term question, I mean is it going to stay over 50% if the top line growth is in that kind of low 20% range or then maybe help us appreciate kind of the balance there of investing for growth, as opposed to trying to enhance profits. Thanks.

Rick E. Rudman

Sure, well for the full year as a whole as we mentioned earlier, we are growing top line which is 1.12 billion, between 22% to 23%. That's the first time we have 20% plus growth, I think in four years. So we're really excited about the growth that we're discussing today for 2013. So we're not doing that at the sake of margins, we are also delivering 50 basis points of improving the margins.

Specifically sales and marketing cost, our expectation this year specially remain essentially flat, maybe didn’t take up slightly this year as we fully absorb the cost from the sales expansion last year. Keep in mind we hired over 200 sales reps in 2012, so we are going to realize a full year of those costs in 2013. However, going forward, we do expect these costs, sales and marketing costs as a percent of revenue to decrease overtime as we continually improve margins and work towards our long-term target operating margin.

Operator

Thank you. The next question is from Brendan Barnicle of Pacific Crest Securities. Your line is open.

Brendan Barnicle – Pacific Crest Securities

Thanks so much guys. Rick, who are you taking share from the most with the move to the marketing suite?

Rick E. Rudman

I think similar to what we saw in the PR product, I would say that half of our opportunity is for Greenfield. So again you are talking about a marketplace that is still in many ways shifting away from direct mail and yellow pages and print ads and all of that type of marketing to the modern digital online channels and they are really still trying to figure out how to do social marketing and how to do even e-mail marketing, obviously use search marketing. So a lot of the times we go in and people are just looking for the new digital marketing suite.

The other half of the time I would say, it’s predominantly point product competitors again that are doing one of the things that we do, they could be using somebody for e-mail, they could be somebody using somebody for social, obviously our publicity features fairly unique in the market, so we are usually bringing that table.

But it’s more Greenfield and just selling people on the value of moving to this integrated suite. I think the competitors that most people are familiar with are either very high up in the enterprise stage and we don’t see them or they are very low in the kind of the micro-businesses and we don't see that much either so again I mean, our thesis here has been that the mid-market in particular we think is largely underserved.

Brendan Barnicle – Pacific Crest Securities

And then you mentioned lead gens in, only nurturing in your prepared comments, how do you plan to go into that market, you're going to build something, buy something. I mean, lot of things that you could pick up just to get that functionality.

Rick E. Rudman

Sure, our approach at this point is to build it. I would never rule out opportunistic acquisitions if they made sense, but at this point we have a very large customer base and many mid-market customers that are using various aspects of our products. So it's not a huge leap for us to have these mid-markets features that we're looking at rolling out, being driven by our own customers and their needs and the feedback that we're getting from them, so that's the path that we're going down right now.

Brendan Barnicle – Pacific Crest Securities

Great and then last one from me. When that suite made us to move up market several years ago which you did quite successfully, one of the things that ran as is needed to sort of have more vertical isolations and more sort of industry specific, are you thinking about that at all, do you look at as you look at scaling up market?

Rick E. Rudman

We haven't seen that yet so we may run into it down the road, I mean we do see a distinction between B2B and B2C and in fact we serve both of those customers very well right now, we're almost split evenly between B2B and B2C customers as usually the differentiator in marketing, but beyond that at least for now we haven’t seen the need to go vertical on the feeds.

Brendan Barnicle – Pacific Crest Securities

Great thanks guys.

Operator

Thank you the next question is from Robert Breza of RBC Capital Markets.

Robert Breza – RBC Capital Markets

Hi thanks for taking my questions, Rick just want to get your view as you look at the different market segments specifically geographically how are you thinking about the investments from a quota carrying rep perspective knowing that you are not going be giving those numbers going forward, how do you think about your investments geographically? Thanks.

Rick E. Rudman

Yeah, I am not sure if I completely understand the question. I mean, if it’s about investments in the sales force going forward, generally speaking, we will make investments to maintain the sales capacity to 24% plus sustainable growth going forward. So people should assume that our investments will be in line with that. If you are talking geographically in terms of fiscal geography, I mean most of our investments are still going to be focused on the U.S., we have rolled the marketing suite out in the UK, or it’s doing extremely well. And in fact, international continues to grow slightly ahead of the U.S. which we see continuing as we go into next year.

Robert Breza – RBC Capital Markets

Great, that’s helpful, thanks.

Operator

Thank you. (Operator Instructions) The next question is from David Hilal of FBR. Your line is open.

Samad Samana – FBR

Hi, this is Samad Samana for David. I have a couple of questions. The first one is, that 20% capacity increase, does that reflect 100% productivity out of the new hires in 2012 or should there be some more natural lift in the amount of capacity as those new hires become more productive?

Rick E. Rudman

Well, we were hiring sales reps all the way through the year, so obviously people that were hired in Q4 and even some of the people in Q3 are not yet at full productivity.

Samad Samana – FBR

So what do you think that the capacity increase should be one day get to full productivity on a year-over-year basis?

Rick E. Rudman

I don’t know productivity is the right word, I mean what you have, we are hiring sales reps and they have a natural ramp up period, so when we refer to productivity internally, it’s really about the efficiency in which sales reps contribute to top line growth and the productivity model for Vocus it’s very efficient.

Keep in mind that in 2012, cash flow increased, right and cash flow is clearly a leading indicator of sales, but it was in 2012. Our cash flow went out from $17 million in 2011 up to $21 million normalized in 2012. Finally, it’s a point of reference to make sure it’s clear. It was a $1.9 million payment in Q4 related to contingent considerations on the earn out in connection with the North Social, which has to be added back to cash flow on Q4 to get the $7 million plus in free cash flow to get to the back to the $60 million cash flow for the full year and the $21 million normalized for the year.

Samad Samana – FBR

Okay.

Rick E. Rudman

What you see here is that, we have the benefit of ramping reps that were hired in 2012, which is contributing to the 22% to 23% growth, so the 22% to 23% growth billings trough for the year is a function of the hires that we made in 2012.

Samad Samana – FBR

Okay.

Rick E. Rudman

Well, we need to hire sales reps in 2013 which will help, which has helped and will help lay the foundation for a 20% plus sustainable growth going forward.

Samad Samana – FBR

Okay. And then one more question. For the 2000 plus digital marketing suite users that were booked before the integrated suite was released in December, what’s the upgrade path for them and will they have to pay more or they will be allowed to upgrade for free, how about the dynamic work?

Rick E. Rudman

Most of them will move over to a comparable addition of the new marketing suite. Although some of them what it may have to pay to upgrade to get them of the additional features that have been added, so we are still kind of working through the upgrade plan for existing customers.

Samad Samana – FBR

Okay. A final question, of that 100% digital Marketing Suite billings growth for 2013, how do you see that driven between pricing and unit growth?

Steve Vintz

A combination of both. We are rolling out new pricing, which on average will be about 20% increase with some skews as high as 15% or even higher than that, $25,000 and then also, we plan to continue the momentum selling more units in the Marketing Suite, so billings stays a little bit above.

Samad Samana – FBR

Okay, thanks guys.

Operator

Thank you, the next question is from Jeff Houston of Barrington Research. Your line is open.

Jeff L. Houston – Barrington Research Associates, Inc.

Hi thanks for taking my questions. Could you update us on your progress with the alternative sales channels, the type of partnerships you're looking for and any that you've actually in so far?

Rick E. Rudman

Sure. Up until this point, we’ve had limited alternate channels, we do a partnership with Horus and with a resell part of our digital Marketing Suite bonded with some of their services, beyond that, this is probably the first year where we're starting to look at expanding beyond the direct approach into more alternate channels. So for obvious reasons, I don't want to go through our target list of people that we're talking to or looking at to be partners, but there is broad appeal these days across many different companies for integrated Marketing Suite and we are having conversations and we hope to be able to expand our alternate channel network, but I don't really have anything more concrete than that at this point.

Jeff L. Houston – Barrington Research Associates, Inc.

Okay. And switching gears a bit, regarding your 489 reps, how many of them are focused on up selling the iContact customers?

Rick E. Rudman

Yes, we have – well the plan for 2013 takes us to about 35 reps. They are not all fully on board yet but that will give people an idea of the team that we're going to have focus on the opportunity this year.

Jeff L. Houston – Barrington Research Associates, Inc.

Just on the iContact opportunity?

Rick E. Rudman

Right.

Jeff L. Houston – Barrington Research Associates, Inc.

Got it. Okay thank you.

Operator

Thank you, there are no further questions at this time, I'll turn the call back over to Rick, for closing remarks.

Rick E. Rudman

Thank you. I just want to thank everybody for joining us on the call today, we remind everybody about our upcoming event at the NASDAQ, please e-mail us if you'd like additional information. Thank you very much.

Operator

Ladies and gentlemen this concludes today's program, you may now disconnect. Good day.

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