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Demandware, Inc. (NYSE:DWRE)

Q4 2012 Earnings Conference Call

February 14, 2013 08:30 AM ET

Executives

Erica Smith - Director of Investor Relations

Thomas Ebling - President and Chief Executive Officer

Scott Dussault - Executive Vice President and Chief Financial Officer

Analysts

Greg Dunham - Goldman Sachs

Thomas Ernst - Deutsche Bank

Richard Davis - Canaccord Genuity

Laura Lederman - William Blair & Company

Shyam Patil - Raymond James & Associates

Shawn Milne - Janney Capital Markets

Brian Schwartz – Oppenheimer

Craig Nankervis - First Analysis Corp

Operator

Good day ladies and gentlemen and welcome to the Demandware Fourth Quarter and Year-End Conference Call. My name is Connie, and I am your operator for today. At this time, all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, the call is being recorded for replay purposes.

And now, I would like to turn the call over to Erica Smith, Director of Investor Relations. Please go ahead, Erica.

Erica Smith

Thank you very much. Good morning and thank you for joining today’s call to discuss our results for the fourth quarter and year-end. Here with me today are Tom Ebling, our CEO; and Scott Dussault, our CFO.

Tom will provide highlights for the fourth quarter and the year, and Scott will talk about the financials in more detail. Then we will open the call up to questions. Before we begin, let me remind you that during the call, we will discuss both GAAP and non-GAAP results to supplement investor understanding of the company’s financials. A GAAP to non-GAAP reconciliation schedule is provided in the press release this morning. Also, today’s discussion contains forward-looking statements such as statements regarding the market acceptance and SaaS solutions, the growth of e-commerce, our business strategy, demand for our solutions, growth of our customer’s e-commerce businesses, the seasonality of our business, our pipeline, and our projected financial results.

Forward-looking statements involve risks and uncertainties and our actual results could differ materially from those projected in our forward-looking statements. The company assumes no obligation to update the information provided during today's call. To revise any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in forward-looking statements. These risks and uncertainties are risks relating to our ability to attract new customers, the extent to which customers grow their revenue and renew their contracts for our solutions as well as other risk factors that could affect our results, are included in our 10-Q and other filings with the SEC.

With that, I will turn the call over to Tom.

Thomas Ebling

Thank you, Erica. Good morning. Thank you for joining us in today’s call. We are pleased to have strong finish to our first year as a public company, and we entered 2013 as the leading cloud-based digital commerce solution for enterprise class retailers and branded manufacturers. In the fourth quarter, our subscription revenue grew 40% to a record $22.9 million, which exceeded the updated guidance we provided in mid-December of between $20.5 million and $21.5 million.

Neckermann filed for insolvency on October 1st of 2012 and did not contribute meaningfully to our subscription revenue in the fourth quarter, which makes the 40% growth that much more rewarding. On top of it, excluding Neckermann in the fourth quarters of 2011 and 2012, our subscription revenue grew an impressive 56%.

For the year, we recorded record subscription revenue of $67.9 million or a 59% increase excluding Neckermann. Scott will talk more about the details of the quarter and the year later in the call. As most of you know, we have a unique shared success business model, a model that our customers love where customers pay us a percentage of gross merchandise value or GMV. Our model enables our customers to efficiently launch and experiment with new sites for new brands, geographies or channels to get to market quickly and grow their revenue.

So, our top line growth in the fourth quarter was driven by our customers’ strong performance during the holiday season. We would love to take all of the credit for our customers’ growth, but the fact of the matter is we have great customers, industry leaders who are forward thinkers and fully understand that the digital channel is extremely important to their growth. For them, digital commerce is strategic.

Before choosing Demandware, our customers weigh the pros and cons in investing in our state-of-the-art cloud technology platform, are investing in the old guard of traditional license software. They have evaluated the facts. We have unparalleled uptime. Platform achieved 99.98% SLA availability in the fourth quarter, which is when the greatest demands are placed on our infrastructure. And since the company is in inception, our SLA availability has been greater than 99.98%, which is well above industry average.

We enabled our customers to create highly customized brand experiences. We have customers like Adidas, Brooks Brothers, Versace, Lands’ End, Godiva, Pier 1, Paxton, New Balance, company’s brands are their most valuable assets.

We provide constant innovation, upgrading our software without disruption six times a year, so our customers stay ahead of the accelerating pace of technology change. We have customers today who are executing their army channel strategies on their platform, and probably most importantly, we empower our customers enabling them to grow their businesses and execute their complex digital strategies.

With Demandware, customers can free up their extremely valuable resources to do what they do best, sell it to their customers. The power the Demandware Commerce platform and our robust marketing and merchandising tools speaks of itself and is demonstrated in our customers’ results. The analytics company comScore measures U.S. retail e-commerce spending and growth, and for the year ended December 31s, 2012, estimated that growth at 15%.

In 2012, our comparable customers grew their GMV 34% over 2011. Simply put the fantastic growth through their digital channels. In fact, they grew more than two times faster than the comScore estimate. As a reminder, comparable customers are the set of customers who are on our platform for all of 2011 and all of 2012. No other vendor, cloud or on-premise software can demonstrate this type of growth across their customer base.

As I mentioned, our customers represent some of the largest and the most well-known brands and retailers in the world. During 2012, 14 customers generated more than $100 million in GMV over our platform, double the seven we had last year and also ahead of the expectations we talked about last quarter. They have 12 customers of that scale by the end of 2012. And these customers stand for the geographies we targeted in 2012: North America, the United Kingdom, Germany and Northern Europe. As a reminder, the 14 does not include customers like Brooks Brothers who launched on the platform in October.

Our existing customers are brands and retailers who are now growing in Demandware platform into digital commerce powerhouse. But throughout 2012, more and more larger companies embraced the cloud and are moving their mission-critical e-commerce operations to Demandware. Our success in signing larger customers in 2012 is demonstrated in the 47% increase in our contract backlog, which reached $208 million, up from $142 million at December 31st, 2011.

Also, the customers we signed had an average annual committed contract value that was 15% to 20% higher than the customers we acquired in 2011. Some of our recent wins include great companies with very strong brands like Fresh, World Kitchen, and (inaudible). We also signed Karstadt, one of Europe’s largest department stores. Karstadt has more than 100 department stores. They chose demand where because our innovative, multi-device e-commerce solution was essential for further executing their strategy to become a meaningful multi-channel retailer.

We also had other important new logo wins this quarter. Companies like Skull Candy, who chose Demandware because they need to execute a multi-brand strategy across diverse geographies while maintaining in-house control and merchandising and branding.

During the fourth quarter, we also signed a contract with VF Services [ph], and under that contract, Nautica and Kipling are moving to Demandware from an outsourced model. They liked the cost and innovation we provide and our ability to stay with them as they grow their business.

Looking ahead into 2013, we have a very strong pipeline in both Europe and United States that reflects our margin to larger customers and different verticals. Given our success in 2012, we are confident in our ability to continue to execute our strategy to penetrate large accounts in 2013. So, with no change in the competitive landscape since our last call or since we went public, our competition continues to be the traditional on-premise software vendors versus us as the only viable cloud alternative. Despite some recent (inaudible) for Wall Street community, we have yet to compete with another SaaS than any of our strategic prospects.

The main concern for our customers and prospects certainly isn’t the integration that ERP, point-of-sale, inventory or other back-end systems. Those are demonstrated table stakes. We are truly SaaS, we have a single code base, an open platform and standard of integration in the backend systems. Our customers do that challenges, real concerns. They are large, rapidly growing retailers in brands that face real pain points, including how do I grow my business and will my platform scale to that growth, how do I deliver a true omni-channel commerce experience, how do I ensure that I have the latest innovation and functionality in a world of accelerating technological change, and how do I do all of this fast enough to stay ahead of the competition? Not only do we help solve these challenges, we do sooner or later put skin in the game. Our success is predicated on our customers’ success and we truly value that alignment.

We need to ensure that we are delivering the value our customers need and when we do that, both our customers and we are rewarded. And as a result of our success, we continue to generate high, average subscription revenue per customers, the highest ARPU of any of our SaaS peers. Our trailing 12-month ARPU reached $479,000 at year-end and reflects the tremendous value we provide our customers.

Demandware Commerce enables our customers to quickly launch sites across multiple geographies, brands and in various languages and currency, and that is one of our core value propositions. This is very important to our prospects and customers, but is also an important component of our land and expanse strategy.

At the end of the year, we have 579 live sites in Demandware Commerce, which is an increase of 60% over 361 last year, and up from 517 sequentially from the prior quarter. Some of the existing customers that rolled out new sites during the quarter, with companies like Versace, which launched its United States site; Quiksilver who rolled out its DC shoes brand across eight countries in Europe; Guthy-Renker which launched its eight brand in Demandware Commerce; and L’Oreal who continues to expand in North America, with sites in the United States and Canada, and this quarter, L’Oreal launched their Biotherm brand.

One of our value propositions is the customization and brand experiences our customers can build on Demandware Commerce and extend the platform in many innovative ways. We have a customer today who is using our open commerce APIs on a digital wall in the window of a retail store. Consumers can approach the flat screen, interact with the brand and shop. With a simple touch, the consumer can add products to their shopping cart. Then using our APIs and their mobile device, they add items to the cart and check out, that simple. This is an incredible innovation that at one time retailers believed could only be achieved in a highly-customized legacy building e-commerce environment.

It provides that with Demandware, the customizations are virtually endless, limited only by the retailer’s creativity. We have other customers like Marks & Spencer and Pier 1 using Demandware Commerce to extend their catalogs and offer more merchandise in the store through endless aisle applications or with iPad.

Moving forward, we will continue to invest in our technology platform, extending the Demandware Commerce and other solutions into the retail channel. Another component of our same strategy is customers launching initial sites and then growing those sites. We ended the year with 151 live customers, a 50% increase over 101 live customers at the end of 2011, and up from 137 customers at the end of Q3. New customers launched site from the Demandware Commerce platform during the fourth quarter. It included companies such as Ethan Allen, who rolled out their Canadian site, which allowed their customers to customize a run right on the website; and last quarter we talked about Brooks Brothers, who launched their redesigned and innovative new site in the United States in October.

Once on the platform, we take great pride in the fact that our customers are delighted, which is why we continue to have such high renewal rates. Our subscription dollar retention rate exceeded 100% again in 2012 and that renewal rate takes into account the loss in Neckermann. Also, our total customer churn count remained under 5% again in 2012. This is further evidence that our customers are satisfied and are realizing real value in our solutions.

In the second half of 2012, we significantly increased our investments in brand awareness in Europe and in the fourth quarter, we conducted our first European customer conference. About 65% of our European customer base attended the conference, which was fantastic. The feedback was resoundingly positive. We believe these investments will strengthen in our position in our core markets of Germany, the United Kingdom, France and Northern Europe, and our pipeline in these regions continues to strengthen. In fact, almost half of our new customer contracts signed in the fourth quarter came from outside of North America.

At the beginning of 2013, we announced a number of other organizational changes that will help scale the companies we continue our rapid growth. We promoted Jeff Barnett to Chief Operating Officer. Jeff has been a key contributor to Demandware since joining the company. He is now responsible for sales, retail practice, marketing and services. Jeff and his leadership in sales have already built a very strong foundation and pipeline that Steven Chung can leverage in his new role. Steven is a great leader and a welcome addition to the team. He has a proven track record for scaling enterprise class sales organizations.

On the technology side, though the unavailability, Demandware Commerce is critically important to our ongoing success as we expand our customer base. For this reason, Wayne Whitcomb, our founder and our CTO, will be totally focused in ensuring that our platform availability remains unparalleled in the industry. Rohit Goyal will focus on the application layer and the e-commerce functionality that our customers acquire to stay competitive.

Our significant investments in 2012 certainly paid off. With a more confidence never before, and our position as the leader in cloud-based digital commerce solutions for enterprise scale customers, we serve a large and fast-growing market. We deliver mission-critical consumer-facing enterprise class SaaS application, a unique and scalable platform coupled with our shared success value proposition that disrupted the legacy solutions in the digital retail markets.

We are in the middle of a market share capture and we are winning. In 2013, we plan to continue to investing aggressively in sales and marketing to extend our leadership position and expand our list of referenceable customer. We are going to invest in bolstering our geographic coverage in our existing markets in the United States, Germany, the United Kingdom, France, and Northern Europe. We are also investing in Asia-Pacific. We also continue to develop our technology platform, including open commerce APIs and our in-store initiative that will enable our customers to continue to expand Demandware Commerce to achieve their omni-channel objectives. We believe these strategic investments will position us for a significant growth in 2013 and beyond.

We are excited about our opportunity. The debate is over and the evidence is clear, enterprise organizations are moving mission-critical applications into the cloud. Offline and Online retail are converging and we sit at the center. We are the keen focus and established track record, state-of-the-platform and referenceable customers. We enter 2013 in a great position and I am looking forward to another successful year. With that I am going to turn the call over to Scott.

Scott Dussault

Thanks Tom and thank you to everyone for joining today’s call. We had a fantastic quarter and year end and performed well against all of our key metrics. Subscription revenue growth, new life customers, new life sites, average subscription revenue per customer or ARPU, total contract backlog, subscription dollar renewal rate and client retention rate. As Tom mentioned, we achieved record results in the fourth quarter with total revenue increasing 41% to $26.3 million. Our total revenue increased an impressive 53% when [ph]causing out revenue recognized from Neckermann in 2012 and 2011. Services revenue in the fourth quarter was $3.5 million an increase from $2.3 million last year. The increase in services was entirely due to approximately $1.2 million in deferred services revenue from the balance sheet related to Neckermann and we accelerated in recognizing that in the fourth quarter.

Our subscription revenue which is our core value driver of our business grew by 40% to reach a record $22.9 million in the fourth quarter again covering out subscription revenue from Neckermann in about 2012 and the 2011 quarters. Our subscription revenue grew by 56%. In the fourth quarter, overage fees were $10.1 million or 44% of subscription revenue compared to $7.2 million which also represented 44% of subscription revenue in the fourth quarter of 2011.

In the fourth quarter our revenue significantly exceeded our initial guidance and outperformed our updated guidance because as Tom mentioned our customers had a great growth on the Demandware Commerce platform during the 2012 holiday season. For the full year 2012, total revenue grew by 41% to $79.5 million and our subscription revenue grew by 44% to reach $67.9 million and once again covering out Neckermann our total revenue and subscription revenue grew 53% and 59% respectively, 55% of our revenue 2012 was generated in the United States and 45% was international.

For the year overage fees represented $22.2 million or 33% of subscription revenue compared with $16 million and 34% in 2011. We believe the right mix of overage versus base is in the low 30% range because this level indicates that our customers are continuing to grow their GMV and expand on our platform. If our customers are grown and take advantage of our robust marketing and merchandizing tools as well as the latest innovations on the platform they are likely to be happy customers. And so as a reminder, overage fees are not cumulative. They are invoiced at the same rate as the minimum subscription. In the simplest of terms, our business is a shared success revenue model with a floor. The floor or the base subscription is typically built mostly in advance. And overage fees are typically built monthly and over years and merely reflect where our customers and their contract cycle. Customers in their first contract year tend to generate their majority of their revenue in the base subscription while more mature customers have a higher percentage of subscription revenue in overage fees.

We have a number of renewals coming up in 2013 and we anticipate that these customers will renew their contracts for higher base subscriptions to align their renewal with the GMV their economic generating on the platform. So, as a result they want to stress that the year-over-year growth and overdue is not relevant and does not reflect the health of our business or the growth of our customers are experiencing under the Demandware Commerce platform. Also, as a reminder because we typically bill monthly, the majority of our deferred revenue is related to services. So, calculated billing is not a relevant metrics for us. Tom talked about the success we had with renewals in 2012 and our subscription dollar retention rate exceeded 100% again last year, insurance based on customer count was less than 5%. We expect their subscription dollar renewal rate to exceed 100% again in 2013 and our insurance based on customer accounts to remain under 5%. Also, customers both new and renewals are committing to longer terms.

The average length of new contracts signed in 2012 was 3.5 years. Tom already mentioned that our comparable customers grew their GMV by 34% in 2012 and we are often asked how GMV growth translates into our revenue growth. If you look at the same set of customers, those on the platform for all of 2012 and all of 2011, our revenue contribution from those customers increased by 24% in 2012 over 2011. This dynamic is a product of our land and expand strategy with our customers and demonstrates how our revenue growth is a result of not only new customer additions, but also our existing customer expansion.

Our comparable customer GMV growth is one component of this land and expand strategy and another component is signing and launching new customers and new sites. We ended last year with a 151 live customers on the Demandware Commerce platform and this is up from 101 at the end of 2011 and 137 at the end of the third quarter. We also had 26 customers in implementation at the end of the year. This brings the total number of customers under contract to 177 an increase of 40% over the 126 customers excluding Neckermann that we had in the contract at the end of 2011. Also, we ended the year with 579 live revenue generating sites in the platform, an increase of 60% from 361 a year ago and up with strong 12% sequentially from 517 sites at the end of the third quarter as our customer continue their third quarter (inaudible) of launching sites before holiday of 2012.

As of December 31, our customers were operating 3.8 sites on an average which is an increase from 3.6 sites a year ago. Our customers find tremendous value and their ability to get a launch sites without friction, get to market fast and minimize their operational risk and financial investment. This is one of the many differentiators between us and the legacy license model.

During the fourth quarter, 52% of the new sites were launched from existing customers who expanded their digital businesses on-demand, as were the case for retailers like Callaway Gold and Marks & Spencer. About 38% of the site launches during the fourth quarter from new customers like Buckle O’ Boot, Reebok and [ph] Pier Fishing. Each of them wants their initial site, but also incremental sites and expanded on demand where commerce led out of the gate. The execution of this land and expand strategy with customers growing on the platform drives our ARPU expansion. And ARPU for the trailing four quarters increased to 479,000 up from approximately 450,000 in the first quarter of 2011 and 468,000 in the third quarter.

We were particularly pleased to see the ARPU expansion as much as it did in 2012. We onboarded a number of new customers on the platform, and 83% of our 2012 subscription revenue growth was driven by new customers as opposed to comparable customers. As we talk about it in the past, first year customers have a lower ARPU than most mature customers that are fully ramped on the platform. Generally, between $300,000 and $400,000. So, there is so much of our revenue growth in 2012 driven by new customers. We were thrilled to see this metric continue to expand which illustrated how our mature customers grow their business on our platform.

Now, switching gears to margins. We again demonstrated the incredible leverage of our model during the fourth quarter. Subscription gross margin was 84% consistent with 84% a year ago and up 6 basis points sequentially from Q3. Our subscription gross margin expanded in the fourth quarter because of our customer’s strong revenue growth. Going into any quarter our expenses are relatively thick which means when our customers are outperformed we see tremendous leverage and margin expansion which is most common in the fourth quarter of any given year.

For the full year of 2012, our subscription margin expanded to 81% from 80% in 2011 primarily because of the overall scalability of our cloud based infrastructure. Also for the year 2012, total gross margin expanded 69% up from 65% in 2011. The total margin expansion we realize in 2012 resulted primarily from the continued shift in our revenue mix towards subscription revenue and away from low margin service revenue.

In the fourth quarter, our total operation expenses increased 61% to $16.7 million from $10.4 million a year ago. Stock based compensation within our operating expenses was $2 million in the fourth quarter of 2012, an increase from $320,000 a year ago. Therefore, excluding stock based compensation our operating expenses increased 46% year-over-year. Yet despite that increase in OpEx actually generated $3.3 million of operating income in the fourth quarter of 2012 and our non-GAAP operating income which excludes only stock based compensation with $5.6 million or 21% of fourth quarter revenue, that is an improvement from non-GAAP operating income of $3.4 million an 18% of revenue in the fourth quarter of 2011. So, as our business grew year-over-year both in revenue scale, but also in significant OpEx expansion we were able to demonstrate meaningful operating margin expansion. This was again demonstrated in the fourth quarter through rolling fourth quarter revenue per head count which exceeded $250,000 for the 11th consecutive quarter.

Our strong revenue visibility coupled with our shared success business model allows us to invest in our future in a responsible way. For the full year 2012, our total operating expenses increased 66% to $62.3 million from $37.6 million a year ago. Stock based compensation with an operating expenses with $6.1 million in 2012 an increase from $1.4 million in 2011. Therefore, excluding stock based compensation our operating expenses increased 55% year-over-year. The increase in fourth quarter in year-over-year total operating expenses was primarily related to headcounts to grow the business and to a lesser extent expenses related to being a public company.

At December 31, 2012, we had 298 employees, a 39% increase from 215 a year ago. We increased sales and marketing headcount 58% year-over-year from 76 employees at the end of 2011 to 120 at December 31, 2012. We aggressively increased our expenses in 2011 and again in 2012 because we were confident that it was the right thing to do for the business and for our shareholders. Our investment in 2012 certainly paid off, we increased our total contract backlog to $208.2 million from $141.8 million, a 47% increase and remember the contract backlog consists only of base subscription fees and deferred revenue, it does not take into account anticipated overage fees. And over the last four years overage fees have consistently and more importantly because we are fast predictably when it is about 30% of total subscription revenue. We are extremely pleased with the growth in our backlog. We provided detail information regarding GAAP and non-GAAP net income and EPS for the fourth quarter as well as GAAP and non-GAAP net loss per share for the full year of 2012 in a press release we issued this morning. And that’s posted on our website. So, rather than walk through those results in more detail during this call.

I would like to turn to forward looking guidance. If there are any additional questions regarding our profitability in the fourth quarter or a net loss for the year, we can certainly cover those in the Q&A section of the call. So, now I would like turn to forward-looking guidance, which as Erica outlined fall under the Safe Harbor provisions. Our guidance for 2013 assumes an exchange rate for the Euro and Pound Sterling of a $1.30 and $1.60 respectively.

For the first quarter 2013, we expect total revenue to be in a range of $19.5 million to $20 million and subscription revenues to be in the range of $17.5 million to $18 million. If you exclude the $1.9 million of total revenue and $1.4 million of subscription revenue contribution from Neckermann in the first quarter of 2012, our 2013 first quarter guidance represents approximately 39% total revenue growth and 46% subscription revenue growth at the midpoint of the range.

We expect our GAAP net loss for the first quarter to be approximately $6.9 million to $7.4 million, or $0.23 to $0.25 per share. And our non-GAAP net loss to be in a range of $3.5 million to $4 million, or $0.12 to $0.14 per share. We anticipate our weighted average basic and fully diluted shares outstanding will be approximately $29.9 million shares in the first quarter.

We are establishing our full year guidance for 2013 and expect total revenue to be in the range of 96.5 to 97.5 million and subscription revenue of $89.5 million to $90.5 million, if you exclude the $6.8 million of total revenue in the $4.3 million of subscription revenue contribution from Neckermann in 2012. Our 2013 full year guidance represents approximately 34% total revenue growth and 41% subscription revenue growth at the midpoint of the range.

We expect our GAAP net loss for 2013 to be approximately 25 to 26 million, or $.83 to $0.86 per share. And our non-GAAP net loss to be in the range of $10.8 million to $11.8 million, or $0.36 to $0.39 per share. We anticipate our weighted average basic and fully diluted shares outstanding be approximately $30.2 million shares in 2013.

The anticipated net loss in the first quarter and in 2013 is driven predominantly by increase in investments in sales and marketing in Europe, Asia Pacific, as well as in North America. As we continue to expand our sales force and to make strategic investments in enhancing our brand. In addition it is imperative that we continue to invest in our core platform to ensure our customer stay ahead of the latest innovation in e-commerce, so they can achieve their merchandising objectives and we will absolutely continue to be on the cutting edge in 2013.

Also in the technology front, we understand that our customers (inaudible) all channel distribution. As critical finance to succeed and as a platform provider, we are well positioned to beat our digital back loan. As a result we plan to enhance our in store and content capabilities in 2013. We are also continuing to invest in our big product initiatives including order management, our open commerce API’s and commerce center user interface.

We are pleased with our financial performance in 2012. Excluding Neckermann we achieve greater than 50% comparable growth in our core subscription business, placing us as in a lead class among fastest grown, fastest grown, publically traded SAS companies. We generated best in class SAS gross margins and we demonstrated powerful leverage in our business. Our strong retention rates are further evidence of the value we provide to our customers. We have a great opportunity ahead of us, so in 2013 we are again investing in sales and marketing in R&D, which we believe will generate the greatest return for our shareholders.

And with that, I’ll turn the call back over to Tom.

Thomas Ebling

Given our success in 2012, I more confident than ever that we are the market leader for cloud base digital commerce. Rapidly growing retailers and brands will need to turn to the cloud, keep pace with accelerating changes in retail. We have proven that we scale to meet their needs and that we provide them the platform to quickly grow their businesses.

With that, I would like to open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you Tom. (Operator instructions). And it comes from the line of Greg Dunham with Goldman Sachs, please go ahead.

Greg Dunham – Goldman Sachs

On the new bookings environment, you have a back log number that was very healthy but when you talked about new bookings in Q4,what your seeing out there, and then the follow up question would be that you have invested a lot in sales and marketing over the past year, where are we in terms of productivity at some of those new reps?

Thomas Ebling

So, we don’t disclose bookings specifically by quarter but I think we are certainly happy with the number of new customers we have added, the overall level of pipeline activity. We gave a little color on the geographic distribution, so we saw a lot to new customers in Europe in Q4, customer signs which we are happy about. In terms of the investment in our sales force, there is different ways of looking at productivity. Our overall productivity of the sales reps who have been with us a while and are experienced we are very happy with in 2012. I think we are making some additional investments now to increase our ability to bring on new people and make them productive as quickly as possible. I think that was one of the things that we learned we could do faster and do better and that’s what we will do in the future. But in terms of the productivity of the people who have been selling a while, we are very happy with that and so it was at a very good level in ’12.

Scott Dussault

Greg, in terms of dollars, Q4 was one of our – we look at bookings internally on only the committed contract value, which obviously is no, it’s not a component of our business. But even in the fourth quarter, it was one of the highest quarters we have in terms of just committed contracts, so we are happy with that. Also on productivity, as Tom pointed out, we ramped significantly in 2012 and on boarded many new reps, and I think we have talked about this in the past but we measure productivity by looking at the new ACV, so that’s just the committed base subscription as a percentage of sales expanse. In 2012 overall we achieved 98% of our plan productivity. So, we feel like the hiring reps we executed against in 2012 was really appropriate the level of production that we wanted to see in return.

Greg Dunham - Goldman Sachs

Okay. And one follow-up if you permit. You mentioned the 15% to 20% growth in average committed contract value, can you clarify what specifically that is, have you given that metric before?

Scott Dussault

No, we haven’t. The reason why we wanted to talk about that on this call is to give some color on the size of the – we talked I think qualitatively in the past few quarters about the size of the customers that we are onboard, the size of customers signing and in 2012, the base subscription, the average base subscription is what we are looking at, and that was about 15% to 20% higher than the average base subscription that saw with new customers signed in 2011.

Greg Dunham - Goldman Sachs

Okay. And then one, I guess, within your guidance what kind of growth in GMV are you projecting for your customer base?

Scott Dussault

Yes. So for guidance, Greg, nothing really new there. We apply the exact same methodology in planning our guidance in 2013 as we had planned or we had discussed about in the past. So, the same exact scenario for guidance, the same exact methodology and projecting overages and projecting GMV, particularly during the seasonally heavy holiday season.

Greg Dunham - Goldman Sachs

Okay. Thanks guys.

Operator

Thank you for that question. The next question we have comes from the line of Tom Ernst from Deutsche Bank.

Thomas Ernst - Deutsche Bank

Good morning, thanks for taking my question.

Thomas Ebling

Hi, Tom.

Thomas Ernst - Deutsche Bank

Hi. Good to hear we got the same conservatism on the end of your -- in terms overages and outlook to the mix of the business. The concern that I think – I think worried about and the question we have, with the picked up rate of investment in 2013 is -- how does the business look for a lot of the new customers as Neckermann rolls off. The question is, was Neckermann far more profitable? Because it looks like we are getting more dollars on average per customer and that’s been consistently rising, but what about the overall profitability level of new business you are winning, et cetera? As you gave us the plan here for more spend in 2013, what portion of that is about going out and trying to maintain or accelerate growth versus perhaps a headwind of less profitable customers?

Thomas Ebling

Well, let me take, this is Tom. Let me take or crack it at a high level and maybe Scott can add details if necessary. So, I think, we are not experiencing headwind of less profitability in anyway. I mean, broad-brush Neckermann was in the same profitability category as our other customers. I mean, they weren’t dramatically more profitable, or dramatically less profitable. The subscription revenue gross margins, which Scott about those numbers, were great. Again for Q4, even though we had infrastructure planned for Neckermann and we didn’t have Neckermann revenues, so our overall profitability levels are still very consistent, very strong. We are still achieving similar levels of revenue share and new contracts that we have achieved historically. So, most of our investments really had to do with growing market share, which we view as being the strategic comparative for the company at this point in its life cycle and at this point in the market.

Scott Dussault

Yes, quantitatively, Tom, I mean, the investments that we are going to make in 2013, you can put them in two buckets, one is above gross margin, which is to manage the customers who are onboarding and the other is an operating expense, which is really the growth in the business and investing in customer acquisition and R&D. The gross margin line is not looking much different. We expect subscription gross margins to be comparable to 2012 and 2011, maybe closer to ‘10 levels since we are not planning on holiday 2013 to be as super strong as it was in the fourth quarter of 2012, but overall the subscription margins aren’t being impacted by the loss of Neckermann.

Thomas Ernst - Deutsche Bank

Okay, perfect. Thank you. If I can follow-up on that, I might have missed it on the call, did you give the number of customers in implementation at the end of the year?

Scott Dussault

26.

Thomas Ernst - Deutsche Bank

26, okay. If we look at the overall number of customers, the rate of investment, the company et cetera, it looks like the business continues to grow strongly. I guess the question is, are you seeing the pipeline continue to develop at the same sort of (inaudible). How much room do you have to take 177 and double and triple it? What do you think the target market allows you in terms of the number of years of growth to apply yourself in terms expansion of just overall customer account?

Thomas Ebling

Yes, we certainly feel. Our view on the market opportunity has not diminished in anyway. With the number of customers, the important strategic channel, the growth of ecommerce spending, the expansion of the digital experience into the store, all of those things are drivers for our marketing. We see, I don’t know how many years, as far as years as we can see we feel we have the ability to keep adding customers and keep growing the business that we execute successfully.

Thomas Ernst - Deutsche Bank

Alright, thanks again.

Operator

Thank you for that question. The next question we have comes from the line of Richard Davis from Canaccord, please go ahead.

Richard Davis - Canaccord Genuity

Hi, thanks very much. Just a quick follow-up on a little bit what Tom said and then I just have a second follow-up. So, first, I talked to like small business ecommerce firm down in Austin yesterday and we called several retailers and brands, and all of them have said, their commodity backend financials and APIs to augment it, which are certainly important, but the way you differentiate yourself and that demand is through the front end multi-channel and things like that. So, you touched on this in your prepared remarks, but I just want to make sure, have you seen any indications that your business is either commoditizing, or that the percentage of gross merchandized value pricing has become to phase push back and those kind of things, that’s something that’s kind of rattling around in the marketplace these days?

Thomas Ebling

Yes, Richard, we have seen no indication of that. I mean, there have been some comments in the market which may be are causing that about the importance of backend systems and what you do in the front end is just the display and that type of thing. Anybody familiar with ecommerce or practitioner in the field, just finds that unbelievable, that someone would believe that. I mean, I try to think of store analogy, it’s almost like the logistics. People doing the inventory and the warehousing, think what they do in the stores is very important, and yet you go in the store, how you setup the displays, and how you run the promotions, and having the right personnel watch what the consumers do and then helping them find the right material, that stuff is all what drive success in retail and that’s what our software does. We are certainly seeing more and more strategic emphasis on that and the customer is not less.

Richard Davis - Canaccord Genuity

Got it. This is one other question but whether it’s fair or not, public investors are frustrated or worried about the methodology by what some, one of the venture investors distribute stock, is there any way that you can negotiate or set it up, so there is less disruptive, the answer maybe no, we’ll just have to deal with it if you get distributions. I get pushed back from investors, like look, if I have a stock and it gets smashed two days later, is there anything that we can pass on to investors on that regard?

Thomas Ebling

Well, I think – we probably can’t go very far in that direction, I guess. People who own our stock are largely free to do what they want with it and certainly we are sensitive of that and fund or manage as well as we can.

Richard Davis - Canaccord Genuity

Yes, so I figured, it’s a hard question but I had to ask anyway. Thanks a lot.

Operator

Thank you. The next question we have comes from the line of Laura Lederman from William Blair, please go ahead.

Laura Lederman - William Blair & Company

Yes, thank you for taking my question. A follow-up on the line of question of the increased spend that everyone else was asking about, which is obviously the question we are going to get all day today. If you are spending more and yet the revenue guidance is roughly for 2013 what the Street was looking for, it means, obviously something is different. Help us understand the sales people you are adding today, when will they start contributing to revenue? So, with revenue guidance (inaudible) is it simply that the customers that you signed wouldn’t get up and running until 2014, so the higher investments you are making today won’t pay off for another year? And so, what you are doing is, you are investing in faster long term growth? Help us understand the dynamics of the investments you are making today when they pay off?

Thomas Ebling

Sure, Laura. It is sort of the hypothesis your question indicates, it really is investment in long term growth. If we decide to spend an extra dollar in sales today and hire additional sales person today and if they – there is some initial ramp up period, but let’s say that’s relatively short, within a couple of months they are very actively engaged with some customer sales cycles, and those sales cycles as we have discussed before runs six to nine months. So, they might close their first customer near the end of the year from the time we make the decision to spend more money on sales and then customer has a six-month implementation period. So, our subscription revenue would generally start 18 months after we made the decision to spend that extra dollar on sales. And then as Scott has talked about, in their first year, they generally have lower ARPU and then they grow their ARPU significantly over time, so when we decide to spend additional sales and marketing dollars now, it’s really primarily about impacting growth 18 months to 3 to 4 years out, and that’s really what the investments are about. If we were focused strictly on 2013 growth or first half of 2014 growth, frankly, we wouldn’t need incremental sales investments.

Laura Lederman - William Blair & Company

Maybe a way to get investors comfortable because people are going to worry along the lines of the earlier questions that were asked, is there something in the underlying profitability or pressure on the percentage of GMV. So, maybe one way you could help us if you are comfortable with it is maybe give us a sense of the growth in the sales force? In other words, you were going to increase to 30% and now you are going to increase at 100%, is there any numbers you can give us that will sort calm people’s concerns in terms of helping us understand where the money is going to go specifically?

Scott Dussault

Laura, are you referring to how we are going to increase sales and marketing expense specifically in 2013 and by how much?

Laura Lederman - William Blair & Company

Well, more or like, okay. We are going to increase the sales headcount to 100%. In other words, help us understand that increased spent, maybe in the contracts of the growth in the sales headcount?

Scott Dussault

Yes, it’s not going to be 100%. I think in 2011 and 2012 the increase was started to get real significant in 2011 and in 2012 we had quite a few, and in 2013 most of the additions we are adding are happening now. I mean, they happen either at the end of last year or the beginning of this year. So, a lot of the headcount that we had, I think even the guided loss number in Q4 was actually higher than we ended up and that’s because I think a lot of the hires for 2013 came onboard a little late. So, most of the hiring that we are doing for sales and marketing is happening now as opposed to any investments that happened throughout the year. One of the ways to look at it, just to give some more color or visibility on where the expense line should come in next year, and I alluded to this when Tom asked his question, subscription margins will be comparable. They are going to be comparable to the ’12 or ’11, ’10 levels and maybe a little bit lower because we are not planning from a guidance perspective on holiday 2013 to be as strong as we have always done. And then, when you think about operating expenses, or even services margin, the services margin be compressed by -- overall margin be compressed maybe by a point or two, as services, that team transitions from a core billable organization to a QA and partner enablement organization with less revenue. We don’t plan to significantly grow that organization but we also don’t want to become a body shop and grow that revenue line. So, even in the guidance that we gave, the guidance I think, in total revenue was in line, but I think we were higher on the subscription line and maybe lower on the services line.

Finally, with OpEx, non-GAAP OpEx taking away the stock component, which is a non-cash component, obviously, with the investments results in higher expenses as a percentage of revenue in 2012, we will probably see, if you look at the percentage of revenue of the OpEx lines, again, non-GAAP, we will probably see a one or two point increase in engineering, maybe a one or two point increase in G&A, and probably a four to five point increase in sales and marketing. So, that’s a way to look at how the investments are allocated for 2013.

Laura Lederman - William Blair & Company

Okay. A follow-up question. If you look at your business today versus when we all went through the IPO due diligence process and what you were looking at spending down versus what you are spending now, what’s the big difference?

Scott Dussault

I think the big difference, Laura is that, we continually talked about this is that we are having success. When we started the process, we certainly didn’t think we are only going to have success for a year but because we had the success that we had in 2012. Like I said, we finished the fourth quarter, we had one of our highest quarters ever in terms of base subscription, committed average base subscription in the fourth quarter. So, the pipeline there we are the only alternative when it comes to SaaS based ecommerce platform because there is nobody else out there that’s competing for strategic accounts like we are and the market is coming our way. So, we couldn’t be profitable now if we decided to stop investing and acquiring customers, but we don’t think that’s the right thing to do in terms of being the leader in this space.

Laura Lederman - William Blair & Company

Yes, one last question. Any update on Finish Line?

Thomas Ebling

Well, no substantive update. There are no contract with us, we have a valid contract and we are willing to work with them on go forward but there is nothing to announce at this point.

Scott Dussault

And typical, Laura, we actually in our guidance don’t have any planned revenue contribution from Finish Line in 2013. We plan that conservatively.

Laura Lederman - William Blair & Company

Thank you.

Operator

Thank you. The next question we have comes from the line of Shyam Patil from Raymond James & Associates, please go ahead.

Shyam Patil - Raymond James & Associates

Hi, thank you. Great quarter, guys. Maybe on the sales and marketing productivity, maybe other way to look at that. I know you don’t guide to the net adds specifically but what’s the right way to think about the net adds in 2013? And then also the customers implementation that you might have exiting ’13?

Thomas Ebling

Yes, Shyam, you are right, we don’t guide exactly to that. But certainly we are expecting – so Scott talked about, there is a couple of different ways of measuring productivity, which we touched about. Scott talked about sort of the ratio of ACV to sales expense and we have similar goals for that going forward and then the other one is the productivity of sales people and our assumptions remain very strong for that, especially for sales people who have been with us for a while and then we are investing to make new hires productive more quickly. So, as a result of all that the increased investments, we are expecting an increased number of new customer adds, and increased number of large contracts, pretty significant increases in ACV and all of that in 2013, which will be reflected as we discussed and answered to Laura’s question, which will be reflected in the long run growth of the business.

Shyam Patil - Raymond James & Associates

Great. I think last quarter you talked a little bit about seeing some lengthening in sales cycles for larger deals in Europe and North America. Can you maybe talk about what you saw in the fourth quarter and kind of how 2013 is looking compared to those previous comments?

Thomas Ebling

Yes, I think any individual deal larger or medium size is inherently in long sales cycle and then sometimes longer than we expect for an individual deal depending on the customer’s situation and their sense of urgency whether they have a compelling event like going live for the holiday season et cetera. I think some of the larger deals tend to get more voices in the customer side involved and more complex negotiations and those types of things. But we are sort of being very happy with our rate of closure of large deals. We are actually seeing a lot of success in large deals getting to have selected, getting to final negotiation stage and completing them. So, I don’t think there will be a dramatic change in the length of the sales cycle across all of our sales efforts but I think there will continue to be quite a bit of variability as always has been.

Shyam Patil - Raymond James & Associates

Great. Then just one last question. You guys have talked about the competitive landscape for a medium enterprise kind of deal activity and detail in the past. I am just curious, when you look at the competitive set in your emerging brands initiative, who do you see, and do you see that that specific SaaS you referenced earlier at all, even in kind of that lower end part of the space? Thank you.

Thomas Ebling

Well, yes, maybe the first thing to point out is that, I think we are really placing more and more emphasis on the larger accounts because that where we see the largest opportunity for ourselves. In those large accounts and medium accounts and sort of the traditional customer base for Demandware, the competition remains the same, which is primarily the major license software vendors, IBM, AGT, Oracle and Hybris. As you get into the smaller end of the customer base, and I think, here it depends on the characteristics of the sale, the sales were – most of our sales people spend their time, our customers who really review ecommerce as strategic and have strong means of brand differentiation and very strong growth plans. Even in those customers we tend to see those same kind of competitors, maybe not IBM so much, but ATG, Oracle, or Hybris trying to cut down. We were occasionally, particularly if the customer has relative amount of growth plans or maybe relatively low needs for product differentiation and that type of thing, then we will see a host of other smaller competitors. But no real dramatic change there either in terms of the competitive landscape.

Shyam Patil - Raymond James & Associates

Great, thank you.

Operator

Thank you. The next question we have comes from the line of Shawn Milne from Janney Capital Markets, please go ahead.

Shawn Milne - Janney Capital Markets

Thank you. There have been many questions on the expenses. Scott, I wonder if I could try to tackle it in another way. Let’s look at your revenue forecast for the year, subscription revenue forecast, you already talked about some conservatism around the holiday? Also, it sounds like there is nothing from Finish Line in there that you can expand upon that a little bit. If you see upside to the growth in ecommerce and some growth from larger accounts, would the company come back in and reinvest or is this the plan for the year, and if there is upside in GMV, would this flow through the bottom line? Thanks.

Scott Dussault

Yes, sorry, you broke up a little bit, but I think got the gist of your question. I mean, yes, you are correct, Finish Line is not in our assumptions for any revenue contribution in 2013 at all. And the guidance that we applied in establishing or the methodology we applied in establishing guidance for 2013 has been consistent with what we did in 2012. So, that’s that part of the question. And in terms of reinvestment, I think from our perspective, because when we hire sales reps, particularly our enterprise class sales reps, it’s a significant investment. We are not hiring thousands of people to work the phone to sell small e-commerce deal, some mom-and-pop shops, that’s not what we do. So, the investments that we are making in sales and marketing are particularly within the sales force. They are there for this year. That’s our investment for the year. I don’t expect that we are going to increase expenses, just because we can.

Similar to with our revenue guidance, we can’t do $200 million in revenue when we guide to $90 million. It takes time to sign customers on board and then get them launched and get them ramped. Same thing with sales force, the sales force that we hired, the strategic sales folks that we want to get enabled and then become productive. So, the expense that we are guiding to is where we think we are going to come out.

Shawn Milne - Janney Capital Markets

Thanks. Sorry for the audio problems, but in terms of the pipeline, could you maybe a little more color on retailers versus brands and do you have an expectation for the number of 100 million plus GMV clients for ’13? Thanks.

Thomas Ebling

With respect to the second question, we do have sort of our own internal expectations and goals. We are not publicizing those, but yes, we set targets for our sales, leadership in terms of larger accounts and that’s a really strategic element of our continued market share gains. So, yes, that’s really important to us. I didn’t write down the first question. Retail versus brands, yes, we don’t actually sort the pipeline that away, but apocryphally in terms of thinking about the prospects that I have been involved with. We have got a good dose of hope. It varies by territory. There is some geographic areas where there is higher concentration, retailers and others with higher concentrations of brands, but I think without adding numbers in front of me, I think broadly, it’s similar to the mix we have got in our customer base, in terms of the prospects I have seen over the last six months and the ones that I am planning to see in the near future.

Shawn Milne - Janney Capital Markets

Okay. Thank you.

Operator

The next question we have comes from the line of Brian Schwartz from Oppenheimer. Please go ahead.

Brian Schwartz - Oppenheimer

Yes, hi, good morning, thank you for taking my questions. Good quarter guys there. First just real quick follow-up here, you did say that, that most of the investments in sales and marketing you thought would be sales heads, is it possible to tell us, Scott, where you think the total headcount? I think you said it was 77 within the sales and marketing group that’s here. Where you think that number will end in 2013?

Scott Dussault

I think we said that in 2012, we ended the year with 120 in sales and marketing. We didn’t actually specifically talk about where we think that, that will go. I did talk about what the expense will be and what percentage of revenue you can kind of put at. So, we didn’t actually specifically talk about the number of heads in sales and marketing. And I want to emphasize, not just headcount, it is headcount, because we are adding more sales reps and also management and layers, but it’s also marketing. We are spending, we did the NRF Conference for the first time in 2013, back in January. That’s part of that investment. That’s a huge payout for us in terms of visibility within retail. We are going to continue to invest in our customer conference that we will do in April and may get us more significant for prospect as well. So, there is a number of programs in that spend that we are investing into to continue to enhance the brand.

Brian Schwartz - Oppenheimer

Yes, okay. Thank you for that. And then, just operational, I want to ask Tom a question here. I have noticed at least on the year-over-year numbers, you are showing very nice growth in terms of customers going live and the number of live sites here. And so, if I gave you maybe three potential scenarios what could be driving that, was curious to get your opinion and then was wondering if there was an opportunity here to take continue to potentially improve the go-live as we move forward? Are you seeing any improvements here on the utilization front, are you doing anything technologically to help you speed up your deployments at all, or is there something going on macro? You did allude to us in your introductory comments that you sensed that there is a shift going on here in the market where the market is increasingly looking to put mission-critical applications out in the cloud. Just kind of wondering what’s going on, on the go-live front and if there is opportunity for further improvement here moving forward. Thanks.

Thomas Ebling

Yes, I think I captured your three options, but I think largely what’s going on is the macro trend. I don’t think there is any dramatic changes in the speed of implementation and lot of it is being done by our ecosystem, anyway more and more is being done by partners. So, in that sense, our own utilization of services people directly and implementation is not as important as it was two years ago to us. What’s important, the certification training, ramping up partners, the monitoring of their success with customers, those kinds of things. But the overall implementation timeframe is really having shifted. So, I think what’s going on is this macro trend in two very important ways or maybe three. Obviously e-commerce spending by consumers is growing. That’s happening across the industry, plus our customers are more than double the industry averages, but even the industry averages are strong. So, you have got, it’s increasing importance of e-commerce. Secondly, you have a much greater receptivity to the cloud.

So, going back a few years, only the smallest customers would entertain Demandware and then we sort of groove into customers into $50 million GMV range and obtaining Demandware, and now, we are going to folks well over $100 million and multiple hundreds of millions looking at Demandware. So, that trend is sort of happening industry-wide. It’s fast, but it’s also happening because of the success of our customers in the e-commerce, and we are doing things to help continue to accelerate that trend.

And then the final trend that I think is playing into it is not only is e-commerce becoming very strategic, but everything about the digital experience is affecting what the consumers do with the brand or retailer across every dimension of their business, including in the store and everything else. And that places a higher and higher imperative in doing it really well if you are brand. And Demandware helps in doing it really well. So, I think those are macro trends that are driving the business.

Brian Schwartz - Oppenheimer

Thank you, Tom for that color. One last one, I think it’s for you too, Tom. You did put out in the press release, can you talk about – you had a very large win here within the enterprise customer, Karstadt during the quarter, which was great to hear. And I guess the assumption, again with your commentary was that fast provider was not involved in this competitive engagement. I was wondering if you could just provide any color to us about that win in terms of how that sales process went, the length of that sales process, how many sites they are initially going to start with? And then, Scott, when you think that, that customer could go live and that could be potential positive hit to revenue when they do start (inaudible). Thanks.

Thomas Ebling

I think generally I am probably not going to get into commenting on specific customer plans of an individual customer because that is something between us and them and but I think broadly they are in the same kinds of implementation time frames as other customers, the large ones sometimes tend to go a little bit longer. It’s certainly the competitive environment for a large account like that, there is no other (inaudible) pretend to compete for an account like that, if not even close and so it is just license offer, it is the players we talked about and they were all in that cycle at some point and it was a long strategic sales cycle, but like many other dynamics we talk about in general for our business.

Brian Schwartz - Oppenheimer

Great work. Congratulations on that win and I thanks for taking my question here this morning.

Operator

Thank you, the next question we have comes from the line of Craig Nankervis with First Analysis Corp.

Craig Nankervis - First Analysis Corp

Good morning, nice job on the quarter. I think really just one main question remaining for me. Your customers and implementation were 26, which I believe is flat from the year ago level and I wonder how that compares to your own plan or expectations or how do you view that result given greater (inaudible)?

Scott Dussault

Craig, this is Scott. I think you really need to look at the total number of customers on the contract. I think we’ve talked about it in the past at the end of ’11 we had at Neckermann 126 customers and at the end of ‘13 we had 177, so that is a growth of 40% in our customers under contract and we are very pleased with that and then not to mention we signed larger customers for larger commitments in 2012. So, throughout with the customers we signed is a large high quality branded brands and retailers. So, I think you can look really just that implementation. At the end of the day if we had none in implementation those 26 customers actually would like being happier because they contribute to revenue sooner. Obviously that is not possible, but we really have to look at the total customers. Actually, it is interesting just to give you some color in our internal plans. We actually didn’t think we had significant customer launches and new customer launches in the fourth quarter. We generally don’t see that, we saw most of them happen before the middle of November before holiday 2012. But more launches than we thought, we thought some launching in December which was unusual for us and that is helpful to get those customers live and contributing to revenue sooner rather than later. So, we’ll leave it at that, thank you.

Operator

Thank you. The next question we have comes from Laura Lederman from William Blair.

Laura Lederman - William Blair

Yes, thank you. Just one final question from me, when can you talk a little bit about the long term operating margin target and has that changed it all and with these higher levels of assessments and I recognize you don’t want to give 2014, 2015 and 2016 guidance, but get us a sense of what you think of long term growth rate opportunity as for the company and is that higher than you would have thought in the past?

Scott Dussault

Yes. So, Laura it is Scott. I mean that is a long term model that we talked about in the IPO is still the long term model that we believe in today and the investments we are making next year one of the thought process we went through our planning for 2013 is what that we should invest in 2012. We did look at how well in 2012 we did in terms of the leverage that we showed and I think that is something that gives us confidence to invest. We look at for the year ended 2012 as an example from a pro forma perspective carving out stock compensations of non cash. We broke even from an operating income perspective, virtually. We had I think $115,000 non-GAAP operating loss for 2012 for the year. Obviously, that was helped out quite a bit by our fourth quarter which was extremely strong and more than $5 million, but that kind of leverage in the model despite the fact that we grow our non-GAAP operating expenses by almost 50% last year gives us a ton of confidence to achieve that long term model and it gives us a lot of confidence to save you know what even though the investments are going to be long term in return they are worth making and they wouldn’t be worth making if we didn’t think the customers in the prospects were there. So, the long term model hasn’t changed, we feel really good about the leverage that we’ve already shown in the model and that we think is going to continue to be there despite significant offering investments and so we don’t think that we are not looking at any changes to that long term operating model at all right now.

Laura Lederman - William Blair

That is a very helpful way to put it and any thoughts on kind of the long term growth rate without obviously giving specific guidance?

Scott Dussault

Yes, as we talk about I think long term growth rate in the past and we feel like even with just the existing customers and I talked about this in the prepared remarks just 83% of our revenue growth last year was coming from new customers as supposed to comparables, which was filled very much in land grab mode, new customers that are generating revenue on our platform, but if we just look at those existing comparable customers, the revenue growth from those customers in ’12 over ’11 was 24%. We think that is pretty healthy long term for a business that is not new, if you think about in that perspective that is not adding customers and that is because our customers are growing so strongly on our platform in achieving their objectives. So, we still feel long term growth of north of 20% is very very achievable with not just the existing customers, obviously we are going to be continuing to sign customers.

Laura Lederman - William Blair

That is very helpful. Thank you.

Scott Dussault

I think that is the end of the questions we have today. So, thank you everybody for your participation in today’s call. We look forward to talk to you next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may not disconnect. Have a good day.

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