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Vocus, Inc. (NASDAQ:VOCS)

Q4 2008 Earnings Call

February 3, 2009 4:30 pm ET

Executives

Steve Vintz - CFO

Rick Rudman - Chairman, President and CEO

Analysts

Tom Roderick - Thomas Weisel Partners

Laura Lederman - William Blair

Brendan Barnicle - Pacific Crest Securities

Robert Breza - RBC Capital Markets

Richard Baldry - Canaccord Adams

Brad Whitt - Broadpoint AmTech

Mark Murphy - Piper Jaffray

Steve Ashley - Robert W. Baird

Terry Tillman - Raymond James

Raghavan Sarathy - Dougherty & Company

Operator

Good day, everyone, and welcome to the Vocus fourth quarter and fiscal 2008 Earnings Call. The date of this call is February 3, 2009.

This call is the property of Vocus Incorporated, and any recordings, reproduction or transmission of this conference call without the express prior written consent of Vocus Incorporated 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 Incorporated's website.

I will now turn the call over to Steve Vintz, Vocus' CFO. You may begin, sir.

Steve Vintz

Good afternoon. Thank you for joining us today to discuss Vocus' results for the fourth quarter and fiscal year 2008. I will now cover the Safe Harbor statement, and then turn the call over to Rick Rudman, Chairman, President and Chief Executive Officer.

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

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

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

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

Rick Rudman

Thanks, Steve, and welcome everyone to our Q4 earnings call. I'm pleased to report solid performance for Vocus in Q4 with continued growth in our key financial metrics, including revenue and profitability.

Revenue came in at $20.6 million, up 26% compared to Q4 last year, and non-GAAP operating income for the quarter was $4 million, a 75% increase on a year-over-year basis.

Now I'll take you through some additional details on Q4 and conclude with our read of key market dynamics and our 2009 plan highlights.

In Q4, we added 235 net new subscription customers with a healthy mix in terms of geographic areas, order sizes and industry segments. During the quarter, we signed subscriptions with smaller organizations such as Handwriting University and Pet Sitters International, and larger organizations such as Bank of America, Equifax, Major League Soccer, SanDisk, Volvo and Xerox.

We were particularly pleased to see customer renewals bounce back into our target range in Q4 after a brief downward tick in Q3. Renewals are a good proxy for customer satisfaction, the strength of our value proposition and our ability to withstand budget scrutiny in these tough economic times.

So we feel good about Q4 and about the progress we made through 2008. For the full year, we grew revenue 33%, increased non-GAAP operating income by 75% and increased free cash flow by 38%.

As we look ahead now to 2009, I'd like to walk everyone through our approach to planning for the year and outline some of our key assumptions and investments. Clearly, there is unprecedented uncertainty about the economic environment in 2009 on a worldwide basis, which makes planning extremely challenging.

Nevertheless, we've worked hard over the past few months to determine the right plan for Vocus. We spent most of our time insuring the alignment of resources to proven elements of our business that have shown the ability to do well even in a weak economy.

And conversely, we also believe we've minimized risk in the 2009 plan by taking a conservative approach to our financial modeling assumptions and by limiting investment in lower potential return areas.

We believe our 2009 plan strikes the right balance between investing for growth, expanding profitability, and managing risk.

I'd like to spend a few minutes highlighting some of our key 2009 investments. First, we plan to make continued investments in our core direct sales team. With approximately 3,000 large and mid-market subscription customers, Vocus is less than 2% penetrated into a very large and untapped market, both in the U.S. and Europe. We ended 2008 with 133 quota carrying sales reps, and plan to expand the direct sales team by approximately 25% in 2009.

Second, our e-commerce platform continues to be a strategic, fast growing and profitable part of our business. Today, that platform is used exclusively to sell PRWeb news releases on a transaction basis. It's a portion of our business that is growing approximately 30% to 35% per year and is expected to become a larger part of our overall business.

We'll be making additional investments in our e-commerce platform in 2009, which will include a move to sell e-commerce subscriptions for news release distribution, news monitoring and media relations. In Q1, we'll also be launching our e-commerce platform in the UK.

Finally, we'll continue to invest in the small business market through the expansion of our small business direct sales team. We believe that Vocus offers a compelling value proposition for small businesses that want to promote their business online in both search and online news sites.

Today, almost $15 billion a year is spent in traditional Yellow Page advertising and we believe Vocus small business addition offers a unique and effective alternative for those advertisers.

In terms of the competitive environment, we've seen no significant changes and continue to believe we are the clear market leader in terms of product innovation, customer satisfaction and overall growth.

In fact, with almost $90 million in cash, no debt and exceptional cash flow, we believe the current economic environment favors Vocus and may even provide us with the opportunity to further extend our leadership position at the expense of our competitors, who lack similar resources or staying power.

So, in summary, we remain excited about our market opportunity and our long-term prospects. We're changing the way organizations create, distribute and analyze news, to promote their business online, with the media, and directly with the public.

We've created a sensible plan for 2009 that provides expansion in operating income and positions us for continued growth. We remain favorably positioned, not only from a competitive standpoint, but in terms of our overall ability to extend our leadership position in an important, large, and growing market.

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

Steve Vintz

Thank you, Rick. I am very pleased to report another successful quarter for Vocus, in which revenues and operating income all achieved record levels, not only for the quarter, but also for the full year.

I'd like to start my review today by covering some detail on the income statement. The fourth quarter of 2008 was our 38th consecutive quarter of revenue growth. Revenues for the quarter were $20.62 million. This represents a 26% increase year-over-year and a 3% increase over the prior quarter.

For the full year, revenues were $77.52 million, which represents a 33% increase over the prior year. The impact of the exchange rate, specifically the strengthening of the U.S. dollar against the British pound, which is our primary FX exposure, is worth noting because it unfavorably impacted revenue by approximately $400,000 in the quarter in comparison to the prior year.

Our total active subscription customers increased by 235. We ended the quarter with 3,379 active subscription customers, compared to 2,427 at the end of Q4 '07 and 3,144 at the end of Q3 '08.

For the full year 2008, total active subscription customers increased by 952, compared to an increase of 700 for the prior year. We more commonly refer to the increase in total active subscription customers as net adds, which grew 36% year-over-year.

On the cost side, our non-GAAP gross margin for the quarter, which excludes amortization of intangible assets and stock-based compensation expenses, was 83%, compared to 83% for the same period last year and last quarter.

Now for the full year, our gross margin was 83%, compared to 82% last year. We are pleased with our ability to expand our gross margin in '08 despite absorbing higher costs in the second half of the year, attributed to investments in building and maintaining our UK journalist content.

The expansion of our gross margin over the prior year is certainly noteworthy and reflects a cost basis, highly leverageable because of the relatively high percentage of fixed and semi-fixed posting in data cost and our cost to revenues.

Looking ahead to 2009, we expect 50 to 100 basis points in expansion, which puts us at the low end of our long-term target range of 84% to 86%. This is well ahead of our initial schedule.

Operating expenses for the quarter before amortization on the tangibles assets and stock-based compensation expense were $13.1 million, an increase of 16% year-over-year and 2% over last year.

As a percent of Q4 revenue, sales and marketing costs were 42%, R&D was 4% and G&A was 17%. Sales and marketing expenses were $8.6 million this quarter, which is up from $7.2 million last year and $8 million last quarter. Sales and marketing expenses for Q4 reflect greater investments in marketing and higher sales compensation from sequentially higher bookings.

We ended the fourth quarter with a 133 quota carrying sales reps compared to 91 last year and 131 last quarter. This represents over 46% growth in our sales force for the full year.

R&D expenses were approximately $889,000 this quarter compared to $902,000 last year and $1.1 million last quarter. The decrease in R&D expenses over the last quarter is primarily attributed to the launch of our UK Media database, whose maintenance costs are now included in cost to revenues.

G&A expenses were $3.6 million this quarter, compared to 3.2 million last year and 3.8 million last quarter. The decrease in G&A expenses due to higher professional fees in the proceeding quarter related mostly to the evaluation of certain tax planning strategies.

Going forward, we expect G&A expenses to increase in absolute dollars year-over-year, as we continue to invest in our infrastructure to keep pace with the growth of our business, but do expect such amounts to decrease as a percentage of revenues.

For the full year 2008, operating expenses were $50.7 million, which represents an increase of 26% over the prior year. As a percent of revenue, sales and marketing costs were 41% for '08, compared to 43% for '07, R&D was 5% for '08 and 6% for '07, and G&A was 19% for '08 compared to 20% for '07.

In terms of profitability, Q4 non-GAAP operating income before amortization of intangible assets and stock-based compensation expenses was $4 million, a significant increase compared to $2.3 million in the fourth quarter of '07 and up from $3.7 million last quarter.

Our operating margin was 19% for the quarter, compared to 14% last year and 19% last quarter. For the full year, our operating margin was 17%, compared to 13% last year.

Non-GAAP net income before amortization of intangible assets and stock-based compensation expenses was $4.5 million for the quarter, compared to 2.8 million last year and $4.1 million last quarter.

Non-GAAP diluted earnings per share was $0.23 for the quarter, compared to $0.14 per share last year and $0.20 per share last quarter.

Our Q4 results include a modest tax benefit of $21,000, which is slightly less on an absolute dollar basis than our anticipated provision for the quarter. So lower tax expense and fewer diluted shares outstanding in the quarter due to a lower stock price positively impacted EPS by $0.01 per share.

It's also worth noting that we announced a stock repurchase program in late November and was able to repurchase approximately 400,000 shares of common stock in the open market at an average price of $18.36 per share. To-date, we've repurchased 7.5 million of the 30 million authorized.

Now on to our balance sheet and cash flow statement. Our balance sheet remains very strong as we closed the quarter with $87.2 million in cash, cash equivalents and marketable securities, up from $67.5 million last year and down from $89.6 million last quarter.

As discussed earlier, we repurchased shares of common stock during the quarter, which lowered cash on hand by $7.5 million. Excluding the effects of the stock repurchase program, cash and short-term investments increased during the quarter due to strong free cash flow.

During the quarter, we generated $4.8 million of free cash, compared to $6 million last year and $4.6 million last quarter. For the year as a whole, we generated over $20 million of free cash flow, which represents a 38% increase over last year.

Accounts receivable was $14.7 million, essentially flat from last year, and DSOs for the quarter were 65 days. Deferred revenue totaled $42.9 million at year end, which represents an increase of $7.9 million over last year.

Now I'll spend some time reviewing our guidance for the first quarter and full year of 2009. For the first quarter of 2009, revenue is expected to be in a range of approximately $20.4 million to $20.6 million.

Non-GAAP EPS, which excludes amortization of intangible assets and stock-based comp, is expected to be in the range of $0.13 to $0.14 per share, assuming an estimated weighted average 19.8 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 24%.

Amortization of intangible assets and stock-based comps are expected to be $0.18 per share, of which $0.14 per share is specifically attributed to stock-based compensation. GAAP EPS is expected to be in the range of a loss of $0.05 per share to a loss of $0.04 per share, assuming an estimated weighted average 18.1 million basic and diluted shares outstanding.

For the full year of 2009, revenue is expected to be in the range of $88.5 million to $89.5 million. Non-GAAP EPS before amortization of intangible assets and stock-based comp is expected to be in the range of $0.61 per share to $0.63 per share, assuming an estimated weighted average 20.2 million diluted shares outstanding, and an estimated non-GAAP effective tax rate of 24%.

Amortization of intangible assets and stock-based compensation expense is expected to be 76% per share, of which $0.67 per share is attributed to stock-based comp.

GAAP EPS is expected to be in the range of a loss of $0.15 per share to a loss of $0.13 per share, assuming an estimated weighted average 18.2 million GAAP diluted shares outstanding.

Free cash flow is expected to be in the range of $19.5 million to $20.5 million, which includes approximately $2 million of CapEx for the year and depreciation and amortization expense of $2.2 million.

Now at this point, I'd like to provide some additional color or commentary on our 2009 guidance.

At the midpoint of our range, revenue is expected to grow 15% for the year. There are a few factors impacting top-line growth that I'd like to highlight for you today. First, we're seeing significant headwinds from the exchange rate, which is skewing growth lower by over two percentage points for the year.

Next, we're expecting lower revenue from third-party channels due to the expiration of our resell agreement with Business Wire, which expired this past December. The exchange rate and the expiration of the Business Wire partnership are discrete events that are estimated to unfavorably impact revenue by four full percentage points for the year.

Finally, our guidance does reflect the current state of the economy and the potential impact from a more challenging macro-environment. As a result, we're using more conservative modeling assumptions versus previously achieved rates.

As Rick discussed earlier, we are committed to continuing to expand our annual operating margin, so our guidance today implies an 18% op margin for the full year. However, with regard to the earnings per share, we expect to earn $1 million or $0.05 per share less of interest income for the year, due to ever contracting yields in short-term investments.

We are also expecting a higher effective tax rate in 2009. We are assuming a 24% pro-forma rate, which is consistent with our previous discussions, but significantly higher than our 2008 rate.

That's primarily related to reversal of our valuation allowance against our U.S. deferred tax assets. This results in a $4 million provision for the full year '09, up from just $50,000 in '08, which consequently reduces our estimated EPS by $0.20 per share in '09.

So taxes and interest income combined will impact earnings per share by $0.25 for the upcoming year.

Moving to a more normalized tax rate in the U.S. will result in more cash tax in '09. Our cash tax rate is expected to be roughly half for a book rate for the year. And while again it's consistent with our prior discussions, it does skew our cash flow lower for the year in comparison to '08. So our free cash flow guidance includes $1.5 million of incremental cash tax and $1 million less of interest income for the full year.

Further our guidance for 2009 reflects continued investment in sales and marketing, particularly in our direct sales organization. Currently, we anticipate we'll end the year between 160 to 165 quota carrying sales reps, which is up 22% from the prior year.

We wanted to provide you with these data points to give you some color and perspective on our guidance for 2009, but please note that we do not expect to provide this level of detail in future calls.

Finally, in the press release that we issued earlier today, we provided our guidance both on a GAAP and non-GAAP basis for earnings per share for the first quarter and full year 2009. Please refer to the press release for details.

At this time, I would like to turn the call over to the operator, so we can take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). At this time, we will take our first question from Tom Roderick with Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

Hi guys, thanks and good afternoon. So, I wanted to just review what looks like a slight disconnect between a real solid quarter, particularly, on the bookings versus your guidance for next year, taking a bit more cautious stance.

Can you talk a little bit, you've given us your assumptions as far as sort of the exchange rates and the Business Wire impact, but maybe some of the assumptions you're making about renewal rates, what if any part of your business, you're feeling particularly bullish about and then which ones you're feeling a bit more concerned about them. How do you think about the installed base going forward into next year? Thanks.

Rick Rudman

This is Rick. I think we feel good about renewals based on what we saw on Q4 as I mentioned in my script returning to our normal levels. However, in terms of our planning for 2009, I think we're making assumptions across the Board that it will be a more difficult environment.

So that's just a planning assumption that we're taking as we go into the year. That's for both new business and renewal business both here in the U.S. and overseas.

Tom Roderick - Thomas Weisel Partners

When you look at your dollar rate of renewals, can you provide any further granularity about what happened to those in the fourth quarter? Did they stay consistent or are there elements of pricing discounting or just a lower dollar rate of renewal that you saw during the quarter? Thanks.

Rick Rudman

We are real pleased with what we saw in Q4 for renewals. We had a great renewal quarter, our dollar renewals returned to the normal range that we had seen historically, bouncing back from the dip that we saw in Q3. So, I think this is probably just a planning exercise that once again, is trying to take into account the unique environment that we see as we go into 2009.

Tom Roderick - Thomas Weisel Partners

Okay. And then, just a quick question for Steve. Just a further question on, further detail on the assumptions. Can you give us what assumption you're using for the exchange rates on the British pound for next year in your guidance? And then also what interest rate assumption you are using for your other income?

Steve Vintz

On the exchange, we are using 1.4.

Tom Roderick - Thomas Weisel Partners

Okay.

Steve Vintz

And on interest income, we're assuming that yields contract to about 1% by the end of the year.

Tom Roderick - Thomas Weisel Partners

Okay. Okay, it's very helpful. Thanks, guys.

Operator

We will take our next questions from Laura Lederman with William Blair.

Laura Lederman - William Blair

Yes. Thank you for taking my questions. Following up on what Tom said, can you talk about expectations for the PRWeb business versus the core business, because one would think that if the PRWeb is growing faster, obviously without the $2 million it had from Business Wire that the revenue growth will be a little bit faster or that you are assuming that the core Vocus business deteriorates a lot from what you saw in Q4?

Also, can you talk a little bit about the Business Wire relationship and what happened there and what they are doing instead of using you? Thanks.

Rick Rudman

Sure. Well, I think I talked a bit in my script that the e-commerce business, which is basically PRWeb, that's sold on a transaction basis, has been growing about 30% to 35% and that was for 2008 and that's expected in 2009. So that excludes the Business Wire relationships. So that's kind of on an organic basis, excluding Business Wire.

In terms of the Business Wire relationship, the contract expired at the end of 2008. PRWeb is now generally regarded by independent third parties and even by some of our own competitors as the true leader in online news release distribution. And we just didn't think it made sense to provide that platform to organizations that might potentially become competitors in exchange for some short-term revenue. So, that's why we decided not to move forward with that.

Laura Lederman - William Blair

Can you talk a little bit about what you mean about being at an e-commerce platform because, obviously today we view it as Internet-based press releases. But how do you see the product broader than that when you talk about it as an e-commerce platform?

Rick Rudman

When I talk about it as an e-commerce platform, I am speaking specifically to the fact that the business that comes in through that channel has no sales reps involved in it. So, we drive people to the site via a variety of marketing channels, and they pay via credit card and send press releases, once again, without any interaction by sales people. So, in terms of the type of sales that we're making or speaking of it as a distribution channel that I won't talk about it.

Laura Lederman - William Blair

Now, when people usually talk about e-commerce platforms, they talk about it in a sense of a platform someone else can use to build an e-commerce application. That's my confusion.

Rick Rudman

Okay.

Laura Lederman - William Blair

My final question for Steve, which is, it is the same question Tom was trying to get at is, you know why such a conservative stance and why would it deteriorate so much off of Q4 because the environment was pretty difficult in Q4? So, I am just trying to better understand why Q4 was good and why things would deteriorate after that? Thank you. And then, I'll pass on the baton.

Steve Vintz

Well, I'm not sure we would characterize it as deteriorating, but there are factors influencing and tempering our growth for next year. We've discussed a few of these. Obviously, the currency fluctuations are working against us and that certainly has to be considered, and we've talked about the Business Wire partnership.

And collectively that's four percentage points of growth. So at the midpoint of our range, we're guiding to 15%. Those discrete items alone would probably have resulted in about 19% growth.

And then, of course, the difference there between our long-term target growth rate of 20% plus and the growth irrespective of those two events is attributed to the economy. And obviously, we're trying to factor in any potential impact from a more challenging business climate. So we felt it was appropriate to use more conservative assumptions.

Laura Lederman - William Blair

Thank you very much. I'll pass it on.

Operator

We will take our next question from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks, guys. I wanted to just follow-up on the increase in the sales force and the 25% increase. I was wondering where you are planning on deploying those folks.

Rick Rudman

The largest concentration is in our, what I would describe as our core mid-market of our inside sales team. We're also adding a number of reps in our small business market, and the balance of the reps are across all the rest of the areas. We're adding a couple of field sales reps and some account executives and some international reps as well.

Brendan Barnicle - Pacific Crest Securities

Great. On that small business part of the equation, you've given us some other metrics around that before, I think, in terms of maybe customer adds and things in that. Can we get those metrics again?

Rick Rudman

Yeah, we gave those out for the first few quarters as things were ramping up and really don't have plans to break out those units just as we don't break out large and mid-market units going forward and I don't have that information.

Brendan Barnicle - Pacific Crest Securities

Okay. Great. Thank you, guys.

Operator

We will take our next question from Robert Breza with RBC Capital Markets.

Robert Breza - RBC Capital Markets

Hi. Quick question Rick, if you look at the PRWeb business excluding the Business Wire portion of it, can you talk about the linearity and what you saw during the quarter and maybe talk to us about how PRWeb has kind of started here after this year? Are you seeing good transaction volumes, ASP holding stable, any kind of qualitative color around PRWeb would be helpful? And then I have a follow up for Steve.

Rick Rudman

Sure, PRWeb is doing great, it's growing 30% plus last year and we think we're off to a similar pattern for this year, the volumes are in line with that and our ASPs, which have been rising for the last couple of years, are holding, which is what we expect going forward.

Robert Breza - RBC Capital Markets

Great. Steve as you look at the cross side of the business, as we look forward to 2009, can you help us understand maybe your hiring plans, do you see your kind of front-end load, the hiring in the beginning of the year, middle, latter part of the year, I know you guys have historically hired more sales people to front-end load there. So any dynamic along the hiring the sales and other people would be helpful? Thanks.

Steve Vintz

Sure, when we build our business plan, a lot of the investments that we bring online for the upcoming year come online in the first half of the year. So, the 165 quota-carrying sales reps, a lot of those net new reps will come online in the first half of the year.

So around mid-year, we expect to have a good part of those hires probably in fold and hopefully working towards ramping those reps, and there is also other costs that are coming online in the first half of the year as well. So it's consistent pattern with last year, in terms of hiring, in terms of expense loading and resource allocation.

Robert Breza - RBC Capital Markets

Perfect. Thank you very much.

Operator

(Operator Instructions). We'll take a question from Richard Baldry with Canaccord Adams.

Richard Baldry - Canaccord Adams

Thanks. Can you look a little more specifically at the top-line sequentially? It looks like your net new subscriber number held up pretty solidly in the quarter, hence you are looking for a flat quarter, flat to maybe even slightly down to, really never seen from the company before. Can you talk about the assumptions on that specific quarter-to-quarter top-line? Thanks.

Steve Vintz

Sure. Rick, this is Steve. When analyzing sequential quarterly growth you have to first consider the flow of business from prior quarters. So, sales were essentially flat, Q3 over Q2 which is limiting growth in Q1.

And we've talked about this in some prior calls, but when we transact sales we invoice the full year up front, and then how that rolls off to the balance sheet and into the P&L it really takes a full two quarters.

So the strong sales effort that we showed in Q4 is really going to impact growth in revenue in Q2. So we'll get noticeably more sequential growth in Q2 than in Q1, and in Q1, growth is really a function of sales that have been transacted in prior periods.

And then also of note is the exchange rate. The average exchange rate last year was 1.57, we are assuming 1.4 on a go-forward basis and the fact that we're not going to generate any revenue from the Business Wire partnership in Q1 is all a factor in our growth expectations for Q1.

Richard Baldry - Canaccord Adams

Is there another way to look as on balance, I guess over the course of your sequential growth was driven by the 950 net new wins versus 750 the year before, so since you're still running at the higher end of your net wins number, it still seems somewhat surprising that your sequential growth will be as dramatically muted versus what you saw last year from December to March. Is there any other sort of year-over-year factors that we're missing in this?

Steve Vintz

Well, in Q1 of last year, it was a non-recurring partnership revenue, to the tune of about $300,000. It's a combination of lots of smaller pieces. We talked about the exchange rate. We talked about not recognizing or assuming any revenue from the Business Wire partnership in Q1. We talked about sales, essentially flat, Q3 over Q2 and then that combined with the fact that we had some non-recurring partnership revenue, and that all skews the flow of business.

And then as you look ahead in Q2, like we're expecting more significant sequential quarterly growth in part because of the strong sales in Q4.

Richard Baldry - Canaccord Adams

Thanks.

Operator

We will take our next question from Brad Whitt with Broadpoint AmTech.

Brad Whitt - Broadpoint AmTech

Hi, guys, thanks for taking my questions. So Rick, should we, are you expecting Business Wire to announce or have they already announced some type of online press release distribution service?

Rick Rudman

They did announce an online press release service. Or, I don't know if they announced it, but they launched something in December.

Brad Whitt - Broadpoint AmTech

So, you don't think any of those customers will come directly to you that had previously used Business Wire or you're just assuming they won't.

Rick Rudman

It's possible. We have in excess of 20,000 active users. We're not really tracking customers on an individual customer-by-customer basis. But, yes, I do believe that we have the better service to offer, and I do believe some of those customers will come to us.

And then, just more broadly from a competitive standpoint, we still are confident that we have the leading service in this industry and with 5 million to 10 million small business prospects, it really doesn't change the competitive dynamics at all.

Brad Whitt - Broadpoint AmTech

Okay. And, can you talk a little bit, absent the FX headwinds about international contributions this quarter. Curious as to whether you have any plans to expand into new international markets in '09 or whether you've pulled back on those type of plans?

Rick Rudman

Well, excluding the exchange rate, international mix was approximately 10%. In terms of our plans for 2009, I would characterize this as probably taking a slightly more modest approach to our expansion plans than we have in previous years due to number one, the economic environment which appears to potentially be worse in some of the countries in Europe than it is here, and second because of the exchange rates.

We are still adding some reps to our UK team and actually in Germany, where we opened an office last year and have started to have some early success. But, we probably won't do much more beyond that.

Brad Whitt - Broadpoint AmTech

Okay. And any other information you can give us around the closure rate expectations or sales productivity. It sounds like with all the additional sales headcount, you're actually probably expecting less sales productivity in '09 versus '08.

Rick Rudman

Yeah, I think that's consistent with our assumptions.

Brad Whitt - Broadpoint AmTech

Yeah. Okay, thanks for taking my question.

Operator

We will take our next question from Mark Murphy with Piper Jaffray.

Mark Murphy - Piper Jaffray

Thank you. Steve, any insight into the ASP trend for PRWeb and just perhaps where does that stand versus where it was a year ago?

Steve Vintz

We had no significant changes to report in the ASP trends for PRWeb. And that's our expectation in 2009 as well, that those assumption will hold true.

Mark Murphy - Piper Jaffray

Okay. So the growth that you saw on the PRWeb site of about 30% to 35%, was that purely on the basis of volume increase or are you saying that the ASPs were consistent year-over-year or that there was no sequential change from Q3?

Steve Vintz

Okay, I'm sorry. For the quarter, there was no significant change in the ASP for PRWeb. For the year, we did see some increases in ASP combined with just more volume pushing through that platform. So that's what's driving. It's a combination of growth in ASP as well as more volume that's driving the growth overall for PRWeb to 30% plus.

Mark Murphy - Piper Jaffray

Okay. That makes sense.

Steve Vintz

Right.

Mark Murphy - Piper Jaffray

And a question for Rick. In terms of some of the economic impact that I think all businesses are seeing from a very material way, how frequently were customers indicating to you that their budgets were temporarily frozen at the end of 2008, but that, perhaps, they might open up at some point in 2009?

Rick Rudman

I don't really have that level of detail on an answer to that specific question. I do know that, once again, in terms of our existing customers, we saw renewals that were consistent with what we saw in a good economy. So, we are really pleased with that in Q4.

And even on the upgrade upsell side, we still see customers continuing to upgrade and buy additional modules. But in that area, it's probably a little bit more muted due to the economy.

Mark Murphy - Piper Jaffray

Okay. And then, also in terms of the business plan or what you have embedded into the plan for 2009, what do you think will be a reasonable expectation for customer adds in the coming year versus the 952 that you added in 2008?

Steve Vintz

Well, we talked about revenue growth of roughly 15%. Our customer adds will grow at a rate higher than that, north of 20% growth.

Mark Murphy - Piper Jaffray

North of 20% growth, okay. And then one final one, Rick, it would appear that you have set the bar fairly conservatively here, what gets you most excited product-wise going into 2009 just in terms of what could go right here or open up some new opportunities or something that could maybe provide upside later in the year?

Rick Rudman

Well, I think there's a lot of things we're excited about in our business. And I think it's important to keep in mind that if you look at the kind of the core aspects of our business, PRWeb, Vocus PR subscriptions in the U.S. and even our international business on a pounds-over-pounds basis, all of those segments are growing in line with our long-term growth target of 25%.

So, we're really excited about all aspects of our business: PRWeb, which is a growing and profitable e-commerce platform. We're excited about putting additional products through that channel. We're excited about our core PR subscription growth in the mid-market. And once again, while the exchange rates are hurting us overseas on a pound-over-pound basis, we're happy to have an international business that's still growing in excess of 25%.

Mark Murphy - Piper Jaffray

Okay. Thank you.

Operator

[Operator Instructions]. We will go to Steve Ashley with Robert W. Baird.

Steve Ashley - Robert W. Baird

Thank you. I would actually just like to drill into the headcount. I guess first of all with respect to non-sales personnel, did you grow that in the fourth quarter and do you plan to growth those people in 2009?

Steve Vintz

Steve in your question is that sequentially to grow headcount or quarter-over-quarter or year-over-year?

Steve Ashley - Robert W. Baird

Well, it's sequentially in the quarter, did you grow headcount in the fourth quarter?

Steve Vintz

Modestly so, it was 433 was our total employees, which is up from 431 in the preceding quarter.

Steve Ashley - Robert W. Baird

Great. And then the question is, other than sales reps, what is the growth in headcount, kind of the outlook there in 2009?

Steve Vintz

Well, a lot of our growth is coming from sales and marketing specifically. We're expecting to end the year 2009 with close to 500 employees. Of course a 160 to 165 of that is quota-carrying sales reps.

Steve Ashley - Robert W. Baird

Right, Okay and I just want to confirm something and it was an earlier question about the renewal rates. And the point is, is that throughout the quarter in terms of linearity, you did not see any deterioration in renewal rates late in the period, you are simply assuming that, given the economic environment going forward?

Steve Vintz

That's correct.

Steve Ashley - Robert W. Baird

Perfect. Thank you.

Operator

We will take our next question from Terry Tillman with Raymond James.

Terry Tillman - Raymond James

Yes. Thanks for taking my questions. First question just relates to the bookings in the quarter beat my number and I think even the Street's, so that looks strong. But the new customer adds - actually I think it looks weak compared to trends in the past and a big deceleration. I mean, should we get away from looking at net add each quarter in isolation and it could be just a mix of business type thing there?

Steve Vintz

Yeah I think, that's a good commentary. 15% to 20% of our business is transaction based, so as a result we don't include any customers from our PRWeb or e-commerce platform in our customer accounts.

But the trends you saw in Q4 are not entirely different than what you saw last year. And let me just review, so we can put things in perspective. If you look at last year, our net adds was 213, which is up from 210 from Q3. This year, our net adds was 235, up from 233 in Q3. So you are seeing a similar trend here. And to your point, mix of business has to be factored in when you're looking at growth.

Deal sizes now also are at a very wide range, which also has to be considered. Our ASPs range anywhere from 3,000 at the low end for the FPE up to over 300,000. So, there is a mix of business, average selling prices and also trend line should all be considered when evaluating that number.

Terry Tillman - Raymond James

Okay. And then in terms of the color on 25% sales force expansion. Earlier on the call in your script you talked about balancing growth with profitability and getting earnings leverage, but that's a pretty significant expansion of the sales force if I take into account your revenue growth assumption.

So, I mean, when you plan that sales force expansion is that based on still seeing solid trends and you are just being more arbitrary about just the conservative revenue guidance?

Rick Rudman

Answer Andrew.

Andrew Muir

Yeah, I want to make sure I understand your question.

Terry Tillman - Raymond James

Yeah. It's 25% sales force expansion, why do that much growth in your sales force headcount expansion if you are only looking for this kind of growth. So I guess what I was wondering, is there something, it's just that much more conservative in revenue growth guidance because I didn't think your sales cycles actually go that long and if you add 25% sales force expansion you could get a quick hit and benefit from that growth.

Andrew Muir

Well, first of all, just in terms of gauging the aggressiveness of the expansion. Keep in mind in the last two or three years, we've expanded the direct sales force by 40% to 50%. So our view is going into 2009, this is a more modest expansion of the direct sales force.

I'll let Steve maybe speak to a little bit of the revenue flow-through, but I think the short answer is it takes a while to get the reps ramped up and they produce bookings, they take a while to flow all the way through to revenue so you don't really see a lot of that flow through to revenue.

Steve Vintz

That's right and just to follow on. You have to look where we're adding reps and a good portion of those reps is in the small business market. Those reps carry inherent lower quotas. It takes six months on average to nine months to ramp these reps, so we're expecting very little revenue contribution from those sales reps.

That, and combined with some, a more conservative posture in 2009, in terms of sales rep productivity I think is probably what's the disconnect between the growth in the sales force and revenue.

Andrew Muir

And just one final thing there, Terry also is, I think our approach here in terms of pegging the investment for direct sales growth expansion was also tied to what really what our focus is on operating income. And our focus on operating income is really to look for an expansion as we move out to 2009 and beyond of about 100 basis points a year.

So once we locked in on that, we wanted to turn around and take the remaining investment dollars and put them into sales and marketing.

Terry Tillman - Raymond James

Okay. Thanks for that color. And then just the last question Steve, it just relates to, as we're building our models for '09, you talked about G&A getting some leverage on a percent of revenue. R&D, you're about 4% of revenue. Should we look for that to be marginally down as a percent of revenue or could it be flat or up a little bit? Thanks.

Steve Vintz

Sure, I mean this probably is a good follow-up to Rick's comment about operating margins. So we're expecting operating margins to approximate at 18%, which is roughly one percentage point higher. Early on the call I commented that I expected gross margins to go up roughly 50 to 100 basis points.

G&A is going down as a percentage of revenue just due to economy to scale, as is R&D by roughly a percentage point. So really the opportunity to invest is in sales and marketing and that's going to go higher on a percentage of revenue basis.

So those are some of puts and takes. So, yes, to answer your question, G&A as a percentage of revenue is going down, but dollars on an absolute basis is going up.

Terry Tillman - Raymond James

Thank you.

Operator

We will take our final question from Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy - Dougherty & Company

Good afternoon and thanks for taking my questions. The last conference call, you guys talked about softness across the board. Now that you have one more quarter under the belt, can you give us some sense for the business strength across the three segments and what's your view as you look into this year?

Andrew Muir

I think, once again the best way to characterize our view of what we're planning for as we go into 2009, is just a general impact from the economy that we think would potentially fall across all segments of the business. So, they are all generally performing well, through Q4 equally. And I don't think we see any one area of the business in particular that seemed significantly more or less impacted.

Raghavan Sarathy - Dougherty & Company

All right. Just couple of follow-ups for Steve. In your share count guidance are you assuming stock repurchase for this year?

Steve Vintz

No.

Raghavan Sarathy - Dougherty & Company

All right. What are the assumptions for DSOs in your cash flow guidance and also change in deferred revenues?

Steve Vintz

We're assuming 65 days was our DSOs in Q4 and we're probably expecting slightly higher DSOs in Q4 of next year, but it will follow a typical trend line. So we are expecting roughly 50 days or so in Q1.

And then, we expect that pattern to hold true for Q2 and Q3 and then it skews higher in Q4, just because of the mechanics of the subscription model. We transact a lot of deals in Q4, add those sales to the balance sheet, but recognize very little revenue, so that spikes your DSOs higher in the quarter.

Raghavan Sarathy - Dougherty & Company

And what's the assumption for change in deferred revenues?

Steve Vintz

We haven't provided that, but one thing we will comment is that we expect bookings growth is going to be roughly in line with the growth in revenues for '09.

Raghavan Sarathy - Dougherty & Company

And then one final question. Can you update us on annual balance and how should we think about the tax rate for the RPS since probably we need to start modeling 20/10 estimates?

Steve Vintz

Sure. So the tax rate in 2009 should not be a significant surprise. In terms of beyond that, it really depends on a lot of factors, many of which are difficult to predict, option exercises, income that we apportion between certain jurisdictions. But, I would say just directionally here, we expect our tax rate probably to be flat. I think that's probably a fair assumption for now, which is 2010.

Raghavan Sarathy - Dougherty & Company

And what's the annual balance as of December '08?

Steve Vintz

The annual balance for December '08 for…

Raghavan Sarathy - Dougherty & Company

Annual balance at the end of December '08?

Steve Vintz

For the U.S., it's zero and for our foreign jurisdictions is a couple of million.

Raghavan Sarathy - Dougherty & Company

Okay. Thank you.

Operator

And there are no more questions in the queue at this time. Mr. Rudman, I'd like to turn the conference back over to you for any additional or closing remarks.

Rick Rudman

Great. We just want to thank everybody for joining us today. We look forward to speaking with you again soon. Thank you.

Operator

And that does conclude today's conference. We appreciate your participation. You may disconnect at this time.

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Source: Vocus, Inc. Q4 2008 Earnings Call Transcript
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