RightNow Technologies Q4 2008 Earnings Call

Feb. 5.09 | About: RightNow Technologies, (RNOW)

RightNow Technologies (NASDAQ:RNOW)

Q4 2008 Earnings Call

February 04, 2009 at 4:30 pm ET

Executives

Stacie Bosinoff - Investor Relation

Greg Gianforte - Chief Executive Officer, Founder

Jeff Davison - Chief Financial Officer, Treasurer

Susan Carstensen - Chief Operating Officer

Analysts

Brent Hill - CitiGroup

Brendan Barnicle - Pacific Crest Securities

Keith Weiss - Morgan Stanley

Horacio Zambrano - Jefferies & Company

Patrick Walravens - JMP Securities

Michael Huang - Think Equity

Analyst by Tom - Thomas Weisel Partners

Nathan Schneiderman - Roth Capital Partners LLC.

[Bill Frerichs - Radnorwood Capital Group]

Derrick Wood - Pacific Growth Equities

Steven Ashley - Robert W. Baird & Co., Inc

David Hillal - Friedman, Billings, Ramsey & Co

Operator

Please standby. Good afternoon my name is Mark and I will be your conference coordinator. Today’s call is being recorded. At this time I would like to welcome everyone to RightNow Technologies, Incorporated fourth quarter 2008 earnings result conference call. All lines have been placed on mute. After the speakers’ remarks there will be a question-and-answer period. Stacie Bosinoff will begin the call. Please go ahead ma’am.

Stacie Bosinoff

Good afternoon everyone and thank you for joining us on RightNow’s fourth quarter 2008 conference call. Joining me on the call today is CEO and Founder, Greg Gianforte; Chief Financial Officer, Jeff Davidson; and Chief Operating Officer, Susan Carstensen.

Before turning the call over to Company, I will read our Safe Harbor statement. During the course of this call we may make projections or forward-looking statements regarding future conditions or events, which may drive our future business, current and new products and services and their performance, the size and strength of our market, our future financial performance and outlook for the Company.

These forward-looking statements may include, but are not limited to statements about revenue growth and profitability, our future strategic plans and perceived growth opportunities, market acceptance of our products and other statements relating to our operating results. These forward-looking statements speak only as of today and are based upon the information currently available to us. This information will likely change over time.

By discussing our current perception of our market and the future performance of the Company and our products with you today, we are not undertaking an obligation to provide updates in the future. We caution you such statements are just projections, and actual events and results may differ materially from what we discuss today.

Please refer to the documents we file with the SEC, specifically our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

As a reminder, we are providing a supplemental data sheet as well as an updated investor presentation on the Investor Relations section of our website that contains historical information for easy reference.

During the course of this call we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliations at GAAP which can be found in our Company’s earnings release which is posted on Investor Relations portion of our website.

With that I will turn the call over to Greg.

Greg Gianforte

Thanks Stacie. Good afternoon everyone. We closed 2008 on a very strong note. Our sales teams delivered our highest total bookings in any quarter over the last two years with total contract value of over $46 million. In the current environment we believe this is a tremendous achievement. This is also a testament to help strongly our teams execute in the fourth quarter and our core strategy of helping companies lower cost or retaining customers.

Jeff will provide all the details on the financial results, but in short, revenue was $36.1 million and non-GAAP net income was ahead of our guidance at $0.06 per share. Our strong bottom line result is directly related to our continued solid execution of our sales and professional services team even as we manage expenses tightly.

Cash for the quarter was at the high end our guidance range. For the year, revenue was $140 million or 25% growth over 2007 and recurring revenue was $102 million or 20% growth over 2007. I mentioned the great execution by our sales teams in the fourth quarter. I think that this momentum can be attributed to a few key factors that work in concert and drive our ever increasing customer adoption. I might spend a little bit of my time here talking about those factors on the call.

First, our land and expand strategy has been allowing customers to experience the benefits of RightNow solutions in a low-risk/ high-reward approach before they spend millions of dollars from those. Second, while discretionary spending in IT department was very tight these days many of our clients view right now as essential not discretionary. Talk to any high level executive and they are all say in the same thing. Find a way to cut cost but be sure to keep our existing customers. New customers are hard to find, so if companies do not protect their existing customers they are in trouble. Looking forward executives realized that they have to focus on improving the customers’ experience even in tough times and this was reflected in our Q4 results. Thirdly, the fact that we are growing our product footprint by releasing meaningful quarterly updates across our entire product line.

One important fact about our development effort is that we continue to mask the pedal down on innovation, in E-Service to further our leadership position. The most recent Gartner E-Service chart has right now in the clear and undisputed leadership position or [6.25] you have down on a lower-left laggard box and no other relative SaaS provider is even on the chart. We believe this E-Service leadership is the pointy edge of our spear that is driving our penetration into the agent desktop in our accounts or ASPs are higher and the market is six times larger.

Let me give you a couple of examples that illustrate these points. We signed a large deal this quarter with Sam’s Club, who is a new customer. Our solutions have particular appeal to companies who deal with millions of customers in highly competitive markets. Sam’s Club fits this description very well, even more critically they operate in the market where margins are extremely tight. So, any advantage that can be gained in terms of cost containment and customer satisfaction is paramount.

We started with a three-week pilot at the end of September and we are able to immediately demonstrate tangible value with an 18% reduction in telephone call volume and a 50% reduction in customer emails. This measurable ROI helped our internal sponsor elevate right now high on their IT priorities and get the deal done in Q4. It is not unusual for us to convert pilots to full engagement this quickly. They started with rep sales service the corner of our land and expand strategy. Another key element of our land and expand strategy is our ability to show value in one division or geography of a global organization and that expands other divisions and territories. Symantec has been a RightNow customer for years in fact we have fought off internal challenges from Siebel many times.

We have four deployments in three divisions with Symantec covers approximately 1800 desktops which is terrific penetration but do not really even begin to scratch the surface of the whole opportunity. This past quarter we engaged with yet another division of Symantec that was undergoing a cost reduction effort including a complete overhaul of the customer’s poor infrastructure. The existing good points within other divisions of Symantec give us a leg off in the evaluation and they chose our entire service product for hundreds of additional call industries, with global support and multiple languages to replace a legacy system based on clarity.

As you know, I have been spending time in the field with top executives of our client and prospect organizations, but over the last year I visited in person more than 200 individual clients around the world and I have been hearing some consistent themes.

Number one, times are tough. The projects are still getting done and forcing some tough decision. Often our discussion start with the economy but just as quickly turned to key initiatives related the keeping existing customers or driving costs out of the business. There is a consensus that now is not the time to be complacent or satisfied with the status quo. Tough times are forcing companies to make some tough decisions they know need to make and better align resources with the priorities. This is good. The best companies are making these moves aggressively and this is creating projects for RightNow.

Number two, customer experience is a mainstream key competitive strategy. Most organizations I have met with had identified customer experience is the key strategy more working to implement a program of incremental improvement as opposed of bloated monolithic projects, this aligns very well with our land and expand strategy. Some customers are more focus on cost reduction, other on revenue enhancement but there is a universal agreement that improving the customer experience is the best way to keep and expand the customer base.

And number three, our clients look to us as ‘the experts’ and they want us to lead them. They hire us because of our expertise in the areas of service, customer experience and call center transformation. We have completed a thousand of projects and 1,000 of lessons and they expect the benefit from those lessons.

Let me give you another example how this played out for new customer this last quarter, TiVo. TiVo attended our Summit in Colorado Springs last fall as a prospect and which was a factor in the decision because they were able officially to complete dozens of face to face customer references in real time.

This was a high profile corporate decision where we had to compete directly with Oracle Siebel and involved decision makers ranging from IT specialist all the way up to the CEO. TiVo’s need was straightforward. They are operating in a market that is competitive both from a market players’ view as well as from the pace of technology advancements. They need to improve efficiencies in the call center, from a cost perspective as well as reduce customer churn by improving the customer experience.

In an interesting twist on the land and expand strategy, they are starting in the call center with hundreds of feeds and then will expand the E-Service. We are seeing this happen more frequent these days. Customers need to tackle their greatest pinpoint first which is ultimate in efficient call center. One of our advantage is that we can land on either side, solve the pain and then expand from their. Also in the quarter we added 59 new customers and we did new and expansion business with organizations including [EV-Jet, FEMA] Intuit, Napster, Obama for America, Prudential Financial, RealNetworks, State Department, Under Armour, US Forest Service, and TomTom.

Many of our repeat and expansion transactions happened because we are rolling out new modules and enhancements every single quarter. For those of you that are new to this story we shifted our development process a couple of years ago away from a big bang major release every two years to a quarterly released methodology which has really accelerated our ability to bring new capabilities to market. This release schedule gives our sales and services teams the benefit of carrying an expanded sales kit into every meeting and fosters ongoing communications with customers.

Over the past 12 months alone we had rolled out critical functionalities such as customer portal, contextual workspaces, proactive chat, topic monitoring for feedback and a fully integrated multichannel customer feedback capability. This middle objective is consistently providing our customers with the most current and advance customer experience solutions as well as provides constant innovation for expanding throughout large enterprises.

In the most recent, November ’08 release, we improved contact center agent efficiencies through new modules for agent scripting, guided assistance, and a new agent desktop integration framework. These capabilities push relevant customer information from existing legacy systems out at the contact center agent desktops in real time to facilitate a more valuable customer interaction all while improving agent productivity and reducing cost.

So all things considered we are very happy with the current state of the business. We continue to manage expenses tightly to drive margin expansion but we will prepare to capture market opportunities as they arise.

Let me share with you something that I told the sales team in our kick-off last month. In 2009, we have two primary objectives. Number one - to take care of our customers and number two - to grow profitability and everything we do is going to support one of these two objectives.

I am confident about the prospects of our business in our industry, although we will operate in a manner which is mindful of global economic environment. Land and expand has been a success from a growth perspective but it is also becoming clear to us that having a beachhead at a customer with proven ROI also provide some measure of protection against an IT slowdown.

As we have seen with customers like Symantec and Sam’s Club, that foothold changes the nature of our sales cycle and elevates RightNow above the level of discretionary spending. We believe we will continue to grow through this year and we will deliver solid positive operating margin expansion in 2009.

With that I will turn over to Jeff.

Jeff Davison

Thanks Greg. We are pleased with another quarter of non-GAAP profitability ahead of our guidance and our first quarter of GAAP profitability since moving to an all subscription model. As Greg mentioned our bottom line success was driven by managing our cost tightly while our sales team turned in a great quarter.

Revenue in the fourth quarter was $36.1 million slightly below guidance. It is worth noting that revenue would had been above guidance had it not been impacted by foreign exchange rates which reduced revenue by $1.6 million in the quarter. This revenue impact was offset by an approximate $1.2 million foreign exchange benefit to total expenses. Recurring revenue for the quarter was $26.5 million compared to $25.9 million last quarter and $23.5 million in the fourth quarter last year. Foreign currency exchange rate negatively impacted recurring revenue by approximately $1 million. Professional service revenue was $9.6 million for the quarter, a decline of approximately $700,000 from the previous quarter of which $600,000 is foreign exchange related.

I will just make a quick note that perpetual revenue was $15,000 in the quarter, so in case you have not yet removed perpetual revenue from your model now would be a good time to do so.

The mix of revenue across geographies for the quarter was 74% Americas, 19% EMEA, and 7% Asia-Pacific.

Turning to ASPs for Q4, the average first year contract value was $96,000 which is consistent with last quarter. This is an increase of 14% over the fourth quarter last year. We had 7 deals over a million dollars, 91 deals between $100,000 and $1 million and 527 deals less than a $100,000. Again, representing the broad spectrum of deal sizes and the impact of the expand strategy.

We signed 59 new customers this quarter. Our solutions enabled 583 million customer interactions this quarter compared to 576 million last quarter and 436 million a year ago. In 2008, total interactions were 2.1 billion compared to 1.5 billion in 2007. You might take that to mean we are on our way to enabling one interaction for every person on earth.

Strong verticals in the quarter included high-tech, public sector, telecommunications, travel and hospitality, retail CPG and financial services. On expenses, note that my comments are before stock-based compensation. Gross margin was 67%, a 300 basis point improvement over Q3. We delivered a 26% professional services gross margin compared to 22% last quarter. This margin improvement and professional services gross margin reflected our focus on expense management in the quarter and also the result of completing some high margin projects.

Total operating expenses were $22.8 million this quarter, a decline of about 3% from Q3, and represented 63% of revenue, compared to 65% of revenue last quarter. Approximately $1.2 million of the reduction in total cost and expenses from Q3 was related to foreign exchange.

We were very pleased to report an operating profit of $1.3 million or 4% of revenue. This is an important achievement on several fronts. For one, it represents our eight consecutive quarter of operating margin improvement. More importantly, it fulfills an objective we set out two years ago when we switched to our entirely subscription based model. That was to improve operating margins every quarter and return to an operating profit by the end of 2008.

At the bottom line we recorded the profit of $692,000 or $0.02 per share. Excluding stock-based compensation our non-GAAP net income was $2 million or $0.06 per share while ahead of our guidance.

During the quarter we repurchased approximately $1.9 million shares of common stock. We still have approximately $2 million remaining in the $15 million buyback authorization. Weighted average diluted shares at the end of the quarter were $33.2 million.

Headcount at the end of the quarter was 737, down 5% from 777 at the end of Q3 and up 7% from the end of 2007.

As we said on the earnings call last quarter we paused hiring during the quarter which contributed to the lower headcount. We also eliminated some positions at the end of the year to align resources to our 2009 plan. We are hiring in 2009 to fill positions that support projects and initiatives that help our two key objectives that is - take care of customers and grow profitability.

Next, on the balance sheet and cash flow statement. Cash generated from operations was $3.8 million for the quarter, for a total cash from operations of $14.7 million for the year. DSOs were 79 days for the quarter compared to 77 days in Q3. Similar to last quarter approximately 25% of our business included extended or periodic payment terms.

We ended the quarter with total cash and investments of approximately $90.8 million. We used approximately $13 million in the quarter to repurchase shares of our common stock. Our balance sheet accounts were impacted in the quarter, once again, by the sharp decline in foreign currency exchange rate. On the balance sheet you can see the net deferred revenue increased 6% to $103.9 million at the end of the quarter compared to $97.9 million at the end of Q3. Excluding a $4.1 million impact related to foreign exchanges net deferred revenue increased 10% sequentially.

Now turning to guidance. For the first quarter we expect revenue to be in the range of $36 million to $37 million comprised of a modest increase in recurring revenue from Q4 and flat professional services revenue. Professional services margin should return to historical percentages in the low 20.

We expect non-GAAP EPS to be in the range of $0.02 to $0.04 and GAAP lock per share to be in the range of $0.03 to $0.01. We expect full year revenue of approximately $150 million to $155 million. Non-GAAP earnings per share for the year of approximately $0.15 to $0.23 and GAAP earnings per share of negative $0.07 to positive $0.02 for the year.

One change in our guidance is that we are no longer providing cash flow guidance. There are two primary reasons for this change. First, given the changing dynamic in customer payment term we will need to provide such a large guidance range that it would not be meaningful. Second and more importantly now that our model is completely based in subscription revenue and we are once going profitable, the metrics that we focus on are revenue, recurring revenue and earnings. That being said for there no one reason correctly into this decision we certainly planned to generate positive cash flow from operations in 2009.

We expect stock-based compensation to be approximately $1.4 million for Q1 and $7.3 million for the year, with similar quarterly trend of 2008. For tax expense we expect approximately $1 million for the year. We expect capital expenditures to be approximately $8 million in 2009 and we are forecasting $32 million basic and $33 million fully diluted shares outstanding for the first quarter, with similar historical quarterly trends throughout the year.

With that I would like to turn the call over to question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Brent Hill - CitiGroup.

Brent Hill - CitiGroup

Thanks. Good afternoon. I was wondering if you can just comment on the guidance. I think it implies roughly 7% to 10% year-over-year of revenue growth for ’09. Your visibility on that revenue stream uncertainty around that revenue at this point early in the year.

Jeff Davison

Sure. As you know, based on the model, we have got certain amount of visibility into revenue for next year based on the deferred revenue. The range we have given 150, 155 includes flat professional services, so we have looked at that staying as consistent and the growth is in the recurring revenue and the 15%, slightly below what we have seen in 2008 which was at 20% but given where we are in the year that is kind of how our outlook is given the economy.

Brent Hill - CitiGroup

An just on operating margin side, I mean, as we look at this how do you think about this now as you are turning positive. How do you think about the operating margin improvement as you look at it by year zero on midterm goal that you can set in terms of where you think you can have margins or set back to over time or is it just too early to tell?

Jeff Davidson

I am not completely following your question. The operating margin improvement we are going to continue to see over the year. The high end of the guidance is around a little over $7 million of non-GAAP earnings which is a significant improvement over where we ended in 2008.

Brent Hill - CitiGroup

Okay. I guess it is just in terms of a mid-term target in terms of where you think the operating margin could eventually end up. I know you mentioned $7 million on non-GAAP earnings but just in terms of where you think the overall operating margin can settle in over the long haul?

Jeff Davidson

Well, again our long-term target has not changed which was 18% to 22% and we have historically calculated that being on a 3 to 5 year goal, at this guidance here obviously sets out significant improvement and traction getting towards that by the end of this year.

Operator

Your next question comes from the line of Brendan Barnicle - Pacific Crest Securities. Please go ahead.

Brendan Barnicle - Pacific Crest Securities

Thanks Jeff. I just wanted to clarify on $4 million that you have lost to the FX and deferred revenue. If we add that back then that would imply about 20% booking trade is there kind of a way to get to that through organic bookings trade as that reflective of other things that we might be adding back to make that more reflective.

Jeff Davidson

No, I think if you add back that piece. That is right.

Brendan Barnicle - Pacific Crest Securities

Okay. That is only one to add back. Also in the Third Quarter with deal terms changed and you may have mentioned that earlier I just wanted to check back on that and see if that trend to change at all or anymore clarity on that piece?

Jeff Davidson

The deal for us in Q4 were pretty much consistent with what we saw on Q3 and that was about 25% of the business had the monthly or periodic payment terms and to the question the other one on the contract term link that was around 20 months again in Q4 so no real change there either.

Operator

(Operator Instruction). Your next question comes from the line of Keith Weiss -Morgan Stanley. Please go ahead.

Keith Weiss - Morgan Stanley

Thank your guys for taking my question. Last quarter, you talked about some slip deals in the quarter. Two parts of question on one question, do you guys have any success in closing those deals or in this quarter and with any significant changes and sale cycles that you saw in this quarter year things improving stabilize and getting worse?

Susan Carstensen

Yes. Thanks Keith. This is Susan. I do not think we talk about significant slippage in Q3 the deals that detect a little bit longer. We did get close here in Q4 but Q4 really stands out in selling it is a terrific quarter and we will mind with our plan in a record quarter. It is very true that buyers are very delivered about their purchases. They are taking more signatures to get done, higher approval level can see that our plan that really deliberately in your sale cycle. I guess the good news for us if you look at, like our 7 deals over a million dollar, we get close to a thousand deals but if you look at those 7 they were across a wide variety of industries, CPG, High-Tec, Telco. They are both international, North America. For us it proves the point that if CPG companies were buying significant solutions in Q4. I mean they are just not considering that discretionary spending.

Operator

Your next question comes from the line of Horacio Zambrano - Jefferies & Co. Please go ahead.

Horacio Zambrano - Jefferies & Company

Hi guys thanks for taking my question. I guess I had a question around a little bit more color on what you are seeing from a customer standpoint and I know you talked about the terms but in terms of existing customer sales versus new business or new customer’s logo that you are acquiring. Any change there and then maybe you can comment on your pipeline for Q1 given that you had just a strong performance on large deals in Q4?

Susan Carstensen

Yes, 2 parts I would say no real significant difference. In addition to highest booking was the highest amount of new area of our business for over the last, any quarter in the last 2 years. We certainly our purpose of taking care of existing customers have significant opportunities with the new quarter that we are releasing some products coming out. Our pipeline perspective we would expect the seasonal decline from Q4 to Q1 somewhat like what we saw last year. With that being said in the pipeline is strong with the mix of pilot conversion continues to be very successful land and expand strategy, renewal to new business. I feel confident to pipeline support plans for Q1.

Jeff Davidson

Yes and we just add if you think about those 7 big deals just like a microcosm of the larger sort of near thousand transactions, two other more with new customers, five were all existing customer. It is always a blend of renewals expansion and new business but part of that proportion.

Operator

Your next question comes from the Patrick Walravens - JMP Securities. Please go ahead.

Patrick Walravens - JMP Securities

Great, thank you very much. I guess my first question would be why should Q1 EPS be lower than Q4 on higher revenue?

Jeff Davidson

Okay. You said there are probably 3 things that point you there. First, I do not expect to see the professional service margin performance in Q1 that we had in Q4 and that is probably $0.02. Secondly, we are hiring, as I mentioned, we are hiring in Q1 and customer facing areas that are supportive of our 2009 plan and then finally, we have got certain seasonality in Q1 that we have had that has additional expenses just to kick off the year in the quarter, sale kick offs and Q1 is typically a little slower on the sales side sequentially when compared to Q4, but if you put those together and that is the decline in EPS.

Operator

Your next question comes from the line Michael Huang - Think Equity. Please go ahead.

Michael Huang - Think Equity

Thanks very much. From a competitive standpoint I will be interested in hearing your perspective on sales force and your new service cloud offering which leverages also networking in Google. Do you expect, from a competitive standpoint that you will see more sales force in 2009?

Jeff Davidson

Okay good question Michael. When they made the announcement, we did not look at it closely and as we are accustomed to expect they did a great job on the press release in the packaging. I would say that when we got under the covers what they announced is honestly a small subset of what we have been doing for years and as we get back, we look at what from market telling us about our solutions. They are asking for full multichannel support capability that includes integrated chat, email management, the phone channel, web self service all together so we can get one deal with a customer, as well as the voice applications and integrated feedback management. So, in the end as we did the analysis, it really does not change the competitive environment in any way and I just point also back to this Gartner chart that I referenced in my prepared remarks. I mean we are clearly the undisputed leader in this E-Service space. What we see in mortgage here, I do not have a crystal ball, but we have not seen anything yet that gives us pause.

Operator

Your next question comes from the line of Tom Roderick - Thomas Weisel Partners. Please go ahead.

Analyst by Tom Roderick - Thomas Weisel Partners

Sure. Hey guys. This is [34:05] for Tom. So, your ‘09 guidance cost for recurring revenue goes about 10% to 15%, which is essentially flat with the Q4 number. What sort of factors are you making or predictions that you are making that give comfort that that gross is going to fly now because it has been slowing down for the past several quarter this year. Thank you.

Jeff Davidson

Sure. You know a big factor of the slow down has been the foreign currency that we talked about. The last 2 quarters I have talked about the impact on the deferred balance that flows into the revenue and definitely impacts the recurring revenue which was considered in our forecast. You know 10% to 15% given the environment and given what we see, we feel good about that for 2009. We are a whole year out on it and this economy is pretty uncertain of it. You can say we are being a little bit conservative improving in our guidance.

Operator

Your next question comes from the line of Nathan Schneiderman - Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners LLC.

I guess I have a high level question for you at the EPS guidance and the profitability is a fair bit higher than the consensus model out there and so I am just curious do you feel like you have a maybe a stepped up religion here on profitability or did you see anything, the rough environment cost due to change effectively, change or planning trajectory on your March toward your longer term profitability goal and then related to that, the headcount reduction of 40 sequentially? How do you tie that into that and also your headcount gross plans for next year just on the cost side?

Greg Gianforte

Okay. Nathan I will take the first half of that and I let Jeff address the second half and I would just say as we have been marching to profitability over the last two years ever since we went to 100% subscription with the commitment to get back to operating profit by the end of 2008 which we have now done. As we went through a whole 2009 business planning cycle in the second half of last year and looked at what specifically do we need to do this year, we came away saying as we looked at comparables and other business model and our long term target that there was absolutely no reason why we could not continue to expand our operating margin in 2009 and beyond to get to our target model so is there a new religion?

I would say we have been marching to get back to profitability for two years. We ticked that one off and the question is what is next? Well, we need to get to our target model and we are going to do that and at the revenue scale we have, there is no reason why we are not there. We cannot do it overnight but we are going to make a good step in that direction over the course of 2009 and that is why it escalated to one of the two primary things we are focused on this year.

Jeff, do you want to discuss the headcount?

Jeff Davidson

Sure. Just to highlight a little more there on the operating margin, the guidance when you look at it, you will see that it works out approximately about a 5% operating margin for 2009 which we are ending 2008 with a minus 3% operating margin and that is just definite focus on profitability and expanding profitability. Like we said the two goals are focused on the customer and expand profitability.

Answering your question on the headcount, it is down 40. I would say half of that is related to just on a normal rigorous performance management that occurs. Some of is through attrition, the other half is the reduction. The reduction of employee is primarily in the sales organization and that was to align towards 2009 plan.

As for spending for 2009 and what we plan to do, there is headcount growth I talked about hiring in our prepared comments and I would say it is around 5% that we will see but as Gregg said, we are focused on profitability and every hire will be scrutinized and everything we spend will be scrutinized because I would not necessarily say we have got a new religion on profitability and expenses but it is important and we are focused on that.

Operator

Your next question comes from the line of [Bill Frerichs - Radnorwood Capital Group]

[Bill Frerichs - Radnorwood Capital Group]

One question I have is when you give folks extended terms from something that you would consider standard or if there is some offset in your pricing, do you charge the mark growth?

Greg Gianforte

Yes. I mean I understand when Jeff says, monthly or extended payment terms, just an example of an extended payment term might be a two-year contract paid annually. So, in that scenario, we are still getting a large chunk of cash upfront but the second pit maybe pushed out but specifically to address your question, customer does pay more for that flexibility.

Jeff Davidson

And that was part of our decision on that as well was as the set model matures and customers are requesting to extend payment or to buy on an annual payment basis, there comes a point were you stop backing the trend and trying to get the cash upfront and you charge a higher price and let them pay annually, so yes.

Operator

(Operator Instruction) Your next question comes from the line of Derrick Wood - Pacific Growth Equities.

Derrick Wood - Pacific Growth Equities

I know you guys are not giving cash flow guidance but based on what conversations you are having with the customers, what would you expect in 2009 around the trend and in contract ranks and payment terms, would you expect this to continue to be somewhat of a drag on deferred revenue growth and if so, for how long does that play out? I guess it is pretty tough at this point to tell and if you could give us any sense for, if you expect that deferred revenue to be growing higher or lower than the recurring revenue growth?

Greg Gianforte

Yes. I expect that 25% that was consistent in Q3 to Q4. I do expect that is going to increase. That is just what we think is going to happen with the FAS model and I think the economy is actually going to contribute a little bit help to speed that up probably. You are right, that will impact not only to cash but what gets at into deferred revenue because that business is book of the balance sheet or is it record on the balance sheet.

For me to project what that is for the year is a little more difficult to do. That is part of the reason I am not giving cash guidance. That trend is really hard to predict but in deferred revenue growth I think it is going to grow. I can not really ties at 10% to 15% to it’s specifically though. That will be in the recurring revenue and that will be obvious in our numbers.

I do not know if you ask about actual cash payment and collection but on that side of the business I have not really seen anything go on with the receivables or deterioration in our receivables. The collection of what we are booking is still strong and I have been really please with our collection so far this year. January has been a great month off cash coming in. So there is nothing bad going on those numbers but that trend I think will increase like you said.

Operator

Your next question comes from the line Ashley, Steven of Robert W. Baird & Co., Inc. Please go ahead.

Jack Miller for Steven Ashley - Robert W. Baird & Co., Inc

Hi guys. This is actually Jack Miller for Steve Ashley. Thanks for taking my question. Just one the new customer growth I mean I think that over the last couple of quarters you talk about maybe some of your smaller customer cycling off and I was just wondering what is your outlook for the growth of your install base over the next year? I am just wondering if maybe some of those that run off in the smaller customer maybe are about running out now?

Greg Gianforte

I would say, you know just from our customer adds and I may do an additional comment or maybe Susan will add a little more color but you know we have really targeted our focus on the particular industries and clients in those industries and with the whole land and expand strategy, landing in the right accounts is really essential for the long term growth in the business. I think with the 59 new adds, 260 new clients, the thing is every single quarter the clients we are adding are more and more zeroing in on this bull’s eye were we know our current market is where we know we can create value so I have been really pleased about that one.

Susan is not going to add.

(Operator Instruction)

Your next question comes from the line [43:51] with Bank of America. Please go ahead.

Unidentified Analyst – Bank of America

Thanks. Thanks for taking my question. Specifically on sales and marketing expense it was down not only the percentage of revenue but over 6% year over year on an absolute basis. What can you just talk a little bit more about the leverage you are getting under the sales course and specifically how come plans are changing from year to year for most 2007 to 2008 and then 2009 and then any leverage that might affect this?

Susan Carstensen.

Thanks. In terms of call plans those no significant change in the call plans. There are always minor tweaks just like every other software company that in sense the right kind of business but no major change in the call plan. The dollar over dollar decrease is in part due to the FX impact as we have a large field organizations in Europe as well as Asia Pacific but we also have specifically looked at the highest. Where we are driving the most efficiency and productivity in the sales force and we will continue to drive that and stress the leverage.

Operator

And we have a follow-up question from Patrick Walravens of JMP Securities. Please go ahead.

Patrick Walravens – JMP Securities

Great! Thank you. Did I understand correctly that it was 46 million in total contract value in Q4?

Greg Gianforte

Yes. Over 46 million.

Patrick Walravens – JMP Securities

Can you tell us what the comparable number was a year ago or in Q3?

Greg Gianforte

Q3 was $39 million a year ago was $42 million

Operator

(Operator instruction) And we have a follow up question from Patrick Walravens – JMP Securities. Please go ahead.

Your line is open and hearing no response. We move on to Tom Roderick with Thomas Weisel Partners. Please go ahead.

Analyst for Tom Roderick - Thomas Weisel Partners

Sure. Hey this is [46:19].I am not sure if you can mention it but could you talk about your renewal rates and more specifically what is your modeling for your renewals on the go forward basis or what is implied in your guidance? Are you modeling anything down given me economic environment out there? Thank you.

Susan Carstensen

From a customer perspective, the trend is pretty consistent were we retained over 90% of our customer on an annual basis from our modeling perspective.

Greg Gianforte

On the modeling side we focused on our renewal and renewing 100% of the renewal dollars available. I do model a little bit down on that just to add conservatism. In this economic environment I think it is likely we will see some customers that either decrease their renewal or there maybe some other business.

So I model a little bit of that.

Operator

Your next question comes from the line of David Hillal with Friedman, Billings, Ramsey & Co. Please go ahead.

Analyst for David Hillal - Friedman, Billings, Ramsey & Co

Hi this is [47:25] for David. Could you just talk about what lead to the rather large sequential increase in receivables and how we should think about receivables in 2009?

Greg Gianforte

Sure the increase in receivables is really a matter of the strong bookings in Q4. The percentages that went on our balance sheet was consistent and the bookings were just up a notch to pump up the receivables so I guess the other piece would be sometimes we collect receivables in quarter when they are booked so it could have been an early December sale and we may have collected it. This would again is a matter of timing of when it was invoiced and collection coming in the next month.

Operator

And at this time there are no further questions. I would like to turn the call back over to you for any additional closing remarks.

Greg Gianforte

Thank you .I want to thank everybody for joining us today. Again in wrapping up we were very pleased with the strong sales result in Q4. The highest quarter in any of the last 2 years. Land and expand continues to work for us and we look forward as we go out on the circuit in Investment Conference and I am pleased to spend more time with you. So thank for your attendance today.

Operator

And that does conclude today’s Conference Call. At this time you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!