Art Technology Group Inc. Q4 2008 Earnings Call Transcript

Art Technology Group Inc. (ARTG)

Q4 2008 Earnings Call

February 5, 2009 10:00 am ET

Executives

Kimberly Maxwell – Director, Investor Relations

Bob Burke – President and Chief Executive Officer

Julie Bradley – Chief Financial Officer

Analysts

Jeff Van Rhee – Craig-Hallum Capital

Nathan Schneiderman – Roth Capital Partners

Michael Huang – ThinkEquity

Shyam Patil – Raymond James

Brad Mook – MKM Partners

Michael Latimore – Northland Securities

Derrick Wood – Pacific Growth Equities

Presentation

Operator

I would like to welcome everyone to the Art Technology Group Q4 and Full Year 2008 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(Operator Instructions) Thank you, I will now turn the call over to Kim Maxwell, Director of Investor Relations. You may begin your conference.

Kimberly Maxwell

Thank you. Good morning everyone and thank you for joining ATG's Investor Conference Call to discuss our fourth quarter and full year 2008 financial results. Speaking today will be Bob Burke, ATG's President and CEO, and Julie Bradley, ATG's Chief Financial Officer.

This call will discuss information about ATG's future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements. As a result of various important factors, including those discussed in our annual and quarterly reports on file with the Securities and Exchange Commission.

Our SEC filings can be accessed free of charge from the investor's section of our website at www.atg.com. In addition, any forward-looking statements represent our projections only as of today, February 5, 2009. These statements should not be relied upon as representing our views as of any subsequent date.

While we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. During this call we will refer to non-GAAP financial measures.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure is available in our financial results press release, which was issued this morning. A copy of this release can be accessed in the investor's section of our website.

Now let me turn the call over to Bob.

Bob Burke

Thanks Kim. Good morning everyone and thanks for joining us. I'm going to start off today's call with a recap of our Q4 and full year 2008 results and business highlights from the quarter; then I'll hand the call over to Julie for the financial discussion and outlook.

ATG had a great fourth quarter, capping off the best year in company history. In 2008, revenue was $164.6 million, cash flow from operations was $34.1 million, GAAP net income was $3.9 million and non-GAAP net income was $17.6 million, all exceeding Wall Street consensus and our guidance range.

In addition, 2008 revenue cash flow from operations and non-GAAP net income are the highest since ATG's inception. We are especially pleased with our 2008 results, given the difficult macro economic environment. It's a testament to the underlying trends in our business.

E-commerce and optimization services have remained on our customers' IT priority lists and companies across many verticals increasingly view their website as the lowest cost channel to drive revenue.

I'll give you more color on what we're seeing in the market, but before handing the call over to Julie, I'd like to walk through some fourth quarter wins.

In Q4, eight new companies chose ATG's e-commerce platform solutions. Among the new and existing customers were B&Q, Corel, DirecTV, HEB Grocery, Lexmark, Shop Direct Group, and Sephora, and Sprint.

Shop Direct Group is a $2.7 billion company that manages several retail brands in the U.K., making it that country's largest clothing and home goods retailer. They want to move off their home grown site to significantly expand their presence online, and have a single view of the customer in order to improve the overall user experience, create targeted campaigns, and enhance contact center interactions.

To meet these goals, Shop Direct Group chose ATG for its multi-site and personalization capabilities. Interestingly, Shop Direct Group recently acquired the Woolworth's brand, after Woolworths closed its brick and mortar stores in 2008.

Last week, Shop Direct announced that the Woolworths brand will be revived and become an internet pure play, serving as another example of investment in the online channel at a time when the overall retailing industry is suffering.

Printer manufacturer Lexmark selected ATG to streamline and upgrade their existing platform and improve their customer service. This one time IBM subsidiary selected ATG as a core element of their drive to increase online revenue.

Corel, a leading developer of graphics and digital media software, purchased ATG commerce to power their global network of e-commerce sites, and after considering a variety of e-commerce solutions, Corel chose ATG for its personalization capabilities and merchandising tools, which will put more control of each site into the hands of the business users. Corel will also implement ATG commerce service center.

We once again expanded our presence in the Telco space. Sprint Nextel purchased ATG to drive the merged company's website and online store, including the e-care and self service sites. We are replacing Sprint Nextel's platform with dynamic content targeting and personalization. Key drivers in their decision to invest with ATG were our ability to help reduce channel selling cost, as well as improve customer service and loyalty.

This past quarter we signed on Collective Brands, the holding company for Payless Shoes and Stride Rite. Collective brands selected ATG commerce and our hosting services to provide flexibility, improve site management, and our personalization capabilities.

Now taking a look at our e-commerce optimization services business, we signed seven net new eStara accounts in Q4; showtimerent.com, 1-800-DENTIST, and Wilmington Trust were just a few wins in the U.S. Internationally, three of the top retailers in Germany became eStara customers.

In 2008, we implemented a strategy to transition out of some of the smaller eStara accounts, as we continued our focus on medium to large enterprise accounts. While the net new customer metrics have been lower in 2008, our new customer wins and targeted segments remain strong.

Our strategy for 2009 is to continue ramping new business growth within larger accounts, which should yield higher recurring revenue. To achieve these goals, we have increased the number of quota carrying sales reps in January. So far we've already seen good traction eStara bookings during the month of January, and we view 2009 as a solid opportunity to grow this business.

Now before I close with some remarks about the overall market, I'm very pleased to share with you the results of the latest Forrester Wave rankings of B to C commerce platforms, both licensed and hosted that was just published this last week.

ATG once again emerged as a leader and received the highest grow overall for our product offerings. In its summary, it said that ATG combines a strong and well-rounded e-commerce feature, set with an array of targeting personalization and customer interaction tools. ATG has a rich ability to integrate into the enterprise and provide strong multi-channel capabilities, including call center user interfaces in the eStara quick to call products.

Now I'd like to give you and updated view of what we're seeing in the market. We are mindful of the difficult economic climate and we are not immune to the effects it can have on capital expenditures. So while investment persists across a wide variety of industries, there are pockets within those industries that may take pause in their spending.

For example and not surprising, luxury retailers are facing an especially tough time right now. Our fourth quarter results and pipeline going into 2009, demonstrate that we remain on the short list of IT priorities. Companies are continuing to invest in e-commerce, not only for the potential revenue benefits, but also and probably as important, for the associated cost savings.

Now given the bricks and mortar channel is under an increasing amount of pressure, the online channel is becoming a higher priority, so in a sense it is viewed as both a source of faster growth and much lower costs.

The obvious source of savings comes from the expenses associated with physical storefronts, such as real estate and personnel, and companies are also able to have much more efficient inventory control, as they are able to test new brands online and sell specialty items without stocking their stores.

A recent Gardener report advised multi-channel retailers to pay specific attention to their online channel, because it stands the best chance for revenue growth in 2009. So we are optimistic about our long-term prospects and are well positioned to emerge stronger than ever as the economy improves.

I have one final update regarding our management team; I'm very pleased to announce that Nina McIntyre has joined ATG as Senior Vice President and Chief Marketing Officer. Nina comes to us with an impressive software industry leadership experience and was most recently Senior Vice President of Marketing at Authoria, where she established the company as the software as a service leader. She also has held a number of executive positions, including Ascentive and Lotus IBM.

And now I'll turn the call over to Julie.

Julie Bradley

Thanks Bob. As Bob highlighted, ATG had a very strong finish to a record year. Fourth quarter revenue grew 16% year-over-year $45.4 million. For the full year 2008, revenue increased 20% to $164.6 million. Geographically, Q4 international revenue accounted for approximately 32% of total revenue, consistent with a year ago quarter.

Product license booking, defined as product license revenue recognized plus net change in deferred license revenue, grew 25% to $16.2 million. For the full year, product license bookings were $52.8 million, a 22% increase over 2007 and above our guidance range of 10% to 20%.

This past quarter, 38% or $6.1 million of product license bookings were deferred and will be recognized ratably. For full year 2008, we deferred 48% or $25.5 million of product license bookings. For the fourth quarter, licensed Average Sales Price or ASP was $769,000 and $484,000 for full year 2008.

The primary reason for this past quarter’s higher ASP was due to the fact that we had six seven-figure license yields booked in the quarter. However, no customers were in excess of 10% of quarterly revenue.

Recurring services revenue, which includes support and maintenance and On-Demand recurring services, grew 11% to year-over-year to $23.7 million this past quarter. For the full year, recurring service revenue grew 19% to $91 million over 2007, in line with our previously stated guidance.

In Q4, our support and maintenance business increased approximately 8% year-over-year to $11.6 million. For the full year, support and maintenance grew 9% to $45.8 million. Renewal rates in our support and maintenance business remained in excess of 90%.

This past quarter our on-demand recurring services revenue, which includes ATG Commerce On-Demand and our e-commerce optimization services, grew 14% year-over-year to $12.1 million. For the full year, on-demand recurring services grew 30% to $45.3 million.

Recurring service gross margins increased to 64% in the fourth quarter, compared to 63% on the third quarter. This sequential improvement is attributable to continued leverage from the investments we have been making in people in infrastructure to manage this line of business.

Professional and educational services revenue for the quarter was $6.6 million, a decrease of 22% compared to the year ago quarter. For the full year, professional and educational services revenue was $26.2 million, a decrease of 12% over 2007. The decrease in professional and educational service revenue was expected and was a result of successfully shifting professional services to our primary ecosystem.

Also as a result of this program, we are achieving higher margins in this line of business as we shift implementation work to our partners. The professional and educational services gross margin was 12% for the fourth quarter, a significant increase from 3% in the third quarter. For the full year, professional and educational services gross margin was 2% and within our previously stated guidance.

GAAP gross margin was 67% for the quarter, up sequentially from 62% and up from 57% year-over-year. GAAP gross margin for the full year was 62%, in line with our guidance, and a significant improvement over 59% in 2007.

In the fourth quarter, income tax expense was $1.4 million. This non-cash tax expense is primarily related to increased book income, which requires the utilization of NOLs from an acquisition from our acquisition of Primus Knowledge Solutions. Under current accounting rules, we were required to reduce goodwills and record a tax expense. However, effective January 1, 2009, a new accounting rule FAS-141R changes the way acquired tax acts should be accounted for. Therefore, we expect to return to a nominal tax provision in 2009.

Non-GAAP net income grew 102% to $8.3 million or $0.06 per diluted share in the fourth quarter, compared to non-GAAP net income of $4.1 million or $0.03 per diluted share for the fourth quarter of 2007. For the full year, non-GAAP net income grew 123% to $17.6 million or $0.13 per diluted share, compared with $7.9 million or $0.06 per diluted share in 2007.

Operating expenses for the fourth quarter of 2008 were $25.2 million, up from $24.8 million in the previous quarter, and an increase of 14% compared to the fourth quarter of 2007. This past quarter of variable compensation increased sequentially, due to strong bookings and was partially offset by lower marketing programs, lower contractor expense, and recruiting costs.

Our headcount decreased slightly this past quarter to 502 employees, from 506 employees of September 30th. Although we expected an ending headcount to increase from the third quarter, several positions were filled with Q1 start dates. Capital expenditures or CapEx for the fourth quarter was $1.4 million or 3% of revenue. CapEx for the full year was $7 million or 4% of revenue.

Now looking at the balance sheet, our balance is cash, cash equivalents and short and long-term marketable securities at December 31st increased 5% to $61.4 million, from $58.7 million of September 30th. For the full year of 2008, cash increased 18% from $51.9 million at December 31, 2007.

Pursuant to our stock buy back program, we used $7.4 million to buy back 4.2 million shares of common stock during the fourth quarter. To date, we have used approximately $11.8 million of the $20 million authorized by our Board.

The percentage of our accounts receivable that are left more than 60 days old at December 31, 2008 was 92%, exceeding our target range of 85 to 90%. Day sales outstanding or DSOs were 70 days, down from 79 days from the third quarter.

Including net change in deferred revenue, modified DSOs were 68 days, down from 82 days in the third quarter. The improvement in DSOs is attributable to both strong cash collections as well as the varied linearity of deals during the quarter.

Fourth quarter cash flow from operations remains very strong; cash flow from operations was $11.4 million or 25% of quarterly revenue. For the full year, cash flow from operations was $34.1 million, a 30% increase over 2007 and above our previously stated guidance range of $28 to $32 million.

Now for the section I am sure you've all been waiting for; I'd like to spend a few minutes talking about our outlook and financial guidance.

Earlier this quarter, we tasked our sales team for the reaching out to their 2009 prospects to gain insight into specific budgeting prophecies and priorities. The feedback was a cautiously optimistic view of e-commerce spend and IT prioritizations. However, these are uncertain times to say the least.

Although it is our preference to provide full year guidance, we plan to issue quarterly guidance until the macro economic environment supports a longer-term view. The following is our guidance for the first quarter of 2009.

We expect total revenue to be in the range of $39 to $42 million or 8% to 15% year-over-year growth. We believe product license bookings should be in the range of equal to or up to 8% compared to 2/1/2008.

We expect that approximately 30 to 40% of our product license bookings will be deferred and recognized ratably and approximately $3 t $4 million will be recognized from previously deferred license revenue.

Referring services should be in the range of $22 to $24 million. Professional and educational services revenue is expected to be in the range of $6 to $7 million. Operating expenses will be approximately $24 to $26 million. GAAP net income is expected to be between break-even and $1 million. Stocks based compensation in the quarters with FAS-123R, will be approximately $2.2 million and amortization of acquired intangibles will be approximately $925,000. Allocation of these items will be consistent with historical trends.

Non-GAAP net income is expected to be in the range of $3 to $4 million or $0.02 to $0.03 per diluted share. Cash flow from operations is expected to be in the range of $5 to $7 million.

ATG is committed to profitability in 2009, and to helping our customers fill online in new and innovative ways. We will continue to invest in the future and to strengthen our e-commerce leadership position.

I would like to remind everyone that this guidance is based on our projections as of today, February 5, 2009. We do not undertake any obligations to update these estimates after today’s call.

With that, Bob and I would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first questions comes from the line of Jeff Van Rhee – Craig-Hallum.

Jeff Van Rhee – Craig-Hallum Capital

Thanks. Congrats everybody. These numbers look great. First, just maybe, Bob, in terms of understanding your now down to one quarter’s of guidance, can you give us maybe, a little more color about what the pipeline looks like?

Particularly, as things are coming into the funnel and what you've assumed in terms of closure rates in a pretty uncertain world?

Bob Burke

So basically what we see out there right now is we do have the strongest pipeline ever and lots of activity going on. I think that in terms of close rates we don’t expect that we have to improve those dramatically, to have a good year.

Certainly, in terms of the overall economic conditions that we’re seeing out there, as we’ve indicated there’s some impact to some customers. On the other hand we’ve had other customers that have been motivated to move faster into the online channel, so I think in terms of the pipeline, we’re very pleased with what we’ve seen so far.

We’re pleased with the traction that we’ve seen already in the quarter and I think given the leadership and our products, our close rate is assumed to be at or better than what we’ve enjoyed in the past.

Jeff Van Rhee – Craig-Hallum Capital

Just to be clear, so you’re saying in the Q1 numbers, you’re assuming flat or modestly improved closure rates based on what’s in the pipe?

Bob Burke

In terms of the assumptions we’ve had, in terms of the forecast, we’re assuming the same.

Jeff Van Rhee – Craig-Hallum Capital

The eStara side, certainly you’ve closed considerably more customers over time, new customers, but you had re-tasked sales comp to really get these guys focused on targeting the install base. Can you give us a sense of how that up-sell has gone as well as the initial reactions to CleverSet?

Bob Burke

Yes, so really the number that we’ve given out Jeff is the net new number, so actually the new customer count has remained strong, but we have churned out a number of the very small accounts that quite

Frankly, in some cases were probably not worth the cost of invoicing and certainly supporting. So that continues to be strong there.

There have been some great examples, in fact we mentioned one, Wilmington Trust, it was an ATG customer – examples where we’ve had cross-sale and up-sell opportunity. But I think in terms of overall business traction, that business, I think, continues to enjoy strength and to that end that’s why we mention that we’re actually increasing our sales force to go after that this year, because I think we see some definitely upside, particularly as we get into bigger accounts and can sell more of a full range.

So one of the things that we are doing is combining more of our capabilities between the CleverSet capabilities that we bought this last year, as well as some of the dynamic capabilities that eStara enjoyed to offer a more end-to-end solution. So we’ll be talking more about that at some point in the future, but I think right now I think the good news is that particularly for commerce customers; having that more of a kind of united capability is pretty intriguing to them.

Jeff Van Rhee – Craig-Hallum Capital

And could you put a number to that in terms of the expanded sales force? Where are we in direct reps right now?

Bob Burke

Yes, so at the end of the quarter we were about flat in terms of where we were in terms of quota carrying reps because we had a number of people, as we indicated in the call that actually ended up starting after the beginning of the year. We are actually up to north of 75. We had ended last quarter with 68, so we’ve already added a few – that’s in total – the eStara part of that is about four people already this quarter.

Jeff Van Rhee – Craig-Hallum Capital

Okay and then last question – I’ll let somebody else jump on – the professional services margin, certainly the past 12 to 18 months have been a transition period as you’ve really tried to equip the channels to go out and do some of the work.

The margins this quarter suggest you’re coming of the back end of that process, but can you just give us a sense of PS margins and what happened this quarter? And is that, in fact, a valid read of what’s happening there?

Julie Bradley

I’ll take that one. We were very pleased with the PS gross margins. We were expecting improvement throughout the year as our partner program took effect and we were being able to leverage more of our partners and ship the implementation work to them and decrease the amount of support that was necessary, and I think that is evidenced by these Q4 numbers.

As we’ve said in the past, we expect the support of our partner organization to be a continual activity and that – but over time we should see increased improvement. For the first quarter of 2009 we’re probably looking at gross margins in the 5% to 10% range.

Operator

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

Nathan Schneiderman – Roth Capital Partners

Nice job on the quarter in a tough environment, good to see. A handful of questions for you here – I was curious if you have any thoughts you could share with us on cash flow from operations thoughts for the year. Do you feel like ’09 will likely be up year-over-year or any thoughts on cash flow margin as well?

Julie Bradley

So right now we are just guiding to the first quarter and of $5 to $7 million for cash flow from ops. Typically we see inverse seasonality in the first quarter, where we're coming off a strong bookings quarter in Q4 you see more of a positive uptick in cash flow in the following quarter.

This past quarter we saw a benefit in cash flow from operations from some of the linearity in the bookings, so we were booking deals earlier that we’re actually collecting the cash during the quarter.

In addition to that, we had very strong cash collections that the overall credit market tightened. We also tightened our credit terms, which resulted in a much lower AR balance and about 92% of it is under 60 days old. So I would expect that would have some impact as we’ve reflected in our guidance, for the first quarter.

Nathan Schneiderman – Roth Capital Partners

Do you maybe following up on that – do you feel like Q1 will be a low point for cash flow from operations during the year? And how do you feel about some of the cash flow margin targets that you had laid out last February?

Julie Bradley

It’s a good question, and related to the overall long-term model. I think that right now we’re focused on just quarterly guidance. It’s definitely our intention to continue traction towards our long-term model and that over the long term, that we should achieve those gross margins, net income margins and cash flow margins that we’ve laid out and some of our long-term model we’ve previously published, but just given the uncertainty in the macro economic environment we no longer have the visibility to predict the precise timing of when that’s going to occur.

Nathan Schneiderman – Roth Capital Partners

Can you speak to the recurring revenue of $23.7 million, and so that was just up a tad sequentially? I would have thought it might have been up more than that on a sequential basis and can you talk about the dynamics?

Are there portions of your various recurring revenue streams that actually declined sequentially? Or just maybe if you could talk about why you don’t think that was up stronger on a sequential basis.

Julie Bradley

Yes, so we don’t break out all the pieces of our recurring revenue, however, they did all increase in the fourth quarter. As we had stated on our Q3 call, we expected minimal seasonality, positive holiday related seasonality in the eStara line of business, and we saw minimal seasonality in the eStara line of business.

And in addition to that we did have some foreign currency headwinds this past quarter, which I think in constant currency you would have seen more of an increase.

Nathan Schneiderman – Roth Capital Partners

Can you share with us what you feel the impact was from FX on a sequential basis?

Julie Bradley

On a year-over-year basis, so year-over-year it grew 11% and in constant currency it would have grown about 16%, so somewhere between those two numbers – the difference in those two numbers.

Nathan Schneiderman – Roth Capital Partners

Okay and then final question area for you, and this may also be FX related, but the current deferred revenue was down sequentially by a few million, so can you speak to that dynamic as well?

Julie Bradley

Actually deferred revenue was up sequentially. You need to add both the current and the long-term portion in order to get to total deferred revenue, which is …

Nathan Schneiderman – Roth Capital Partners

Yes, I was actually talking about the current deferred being down sequentially, though.

Julie Bradley

Well, there’s always a mix based on timing between when the recognition period is going to be.

Operator

(Operator Instructions) Your next question comes from the line of Michael Huang – ThinkEquity.

Michael Huang – ThinkEquity

A few questions for you, so first of all, so it seems that you’re making progress and ramping up the partner channel, well I was wondering from your perspective, are you through the aggressive ramp of third-party consultants, or given the strong bookings in Q4, I mean, are there still some remaining capacity constraints around services and implementation capabilities to deploy the booking?

Bob Burke

Yes, we – this is, as Julie mentioned, this is something that of course will never be complete in the full sense. Certainly the big ramp that we experienced back in late 2007 and last year, I think is – we’re probably not going to see quite that ramp in 2009.

However, as we expand into other markets I think we’re going to continue to require additional partners of some scale. So I think that we’re not through signing up new partners for implementation work or other activities to help ATG, but certainly I think we’re in a far different place where we’re not having to rush out our professional services people from a variety of job to jobs to try to fill the gaps.

For example like we did, certainly in 2007 and the first quarter of 2008.

Michael Huang – ThinkEquity

Are there things that you guys are doing now, you know, whether it be from a training program or infrastructure standpoint that’s allowing you to be able to help ramp consultants up faster than in the past?

Bob Burke

Well, there was just kind of a natural evolution where they not only needed to go through a lot of training, but we also had some partners that really needed to get some experience under their belts before they could start getting more efficient and more self sustaining.

We are going to, I think, over time need to do some things around more remote training because I think, to train the kinds of numbers of people that we need and also in the various geographies that they need to be, we’re going to probably have to do more things that don’t require people to be in classrooms necessarily, so that is something that we’ll need to work on as a company.

Michael Huang – ThinkEquity

Okay, and then switching gears a little bit, so now that you’ve had CleverSet for close to a year, what types of interest in spending are you seeing in CleverSet and if you were to characterize performance in 2008 relative to you expectations, how would you comment on that?

Bob Burke

I think the overall revenues were more or less inline for what we expected for this past year. I think one of the things that we had to focus on with CleverSet is to make sure that we had the kind of infrastructure capabilities in place.

Obviously this was a start-up that we had bought and early in the year in 2008, and like a lot of start-ups, it required to have more kind of industrialized, kind of like [ruggedization] to make sure that the service could scale to handle some of our bigger clients.

Going forward, I think that the real benefit is going to be the merging of what we’re doing in CleverSet with, as I mentioned earlier, with eStara and also with some of our product offerings over time. So, we’re very pleased with the progress there. We’ve had to do a lot of work to make sure that it’s, kind of gotten to this point, but I think that work will pay off as we go into 2009 and beyond.

Michael Huang – ThinkEquity

Okay, and then a math question from me, so I think you talked about some pretty strong large deal activity in the quarter. Was wondering if you could give some more color around those deals, which geography were they in, what products, and were they with existing or new customers?

Bob Burke

Sure, what I mentioned, a lot if the customers, or a lot of the deals that I mentioned were mixed. First of all I’ll talk about verticals then give you a little color on some of the other things. So for example, in various verticals, Direct Shop, which was also a new verticals, of course in the retail sector, of course Sprint is in Telco, that was in North America. We did have strength, as we mentioned earlier, in international. It was about 32% of our revenues.

We also had strength in consumer products or manufacturers, so people like Lexmark, for example, was a new win for the company, and we’re also seeing that, even in retail some of the sectors that more traditionally had not adopted more of an online presence, are starting to move that way. So we saw yet another grocer this last quarter sign on with ATG, HEB grocery down in Texas.

So it was, I think, geographically diverse, I think it was vertically diverse and we also saw, obviously, a lot of business coming from our existing clients, as you would expect in enterprise software, so that range from people like DirecTV, for example and B&Q which is the Home Depot of the U.K. to people like Sephora.

Operator

Your next question comes from the line of Shyam Patil – Raymond James.

Shyam Patil – Raymond James

When you look at 2009, this is a higher level question Bob; I think we all know the outlook for IT spending in '09, or at least the forecast. How do you think e-commerce technology budgets will fare relative to the overall IT forecast? I mean do you think they’ll be relatively more defensive, about inline, how do you think about that?

Bob Burke

Well, definitely this has moved up to priority list. That is definitely a trend that we’re seeing, and this is definitely a much more defensible part of the budget than most other elements that people have, so that definitely is the case and that’s something that we have seen, I think, increasing over time but I think in the last couple of quarters it's even gotten stronger.

Shyam Patil – Raymond James

Okay and Julie, I was wondering if you would be able to provide a little bit of guidance around expenses in '09; that seems like something that you might have a little more control over than the booking. Also, what we might expect from working capital and CapEx as well.

Julie Bradley

Sure, so our guidance for operating expenses was $24 to $26 million. I think in there we do expect to add headcount in the first quarter, for example as we stated, we’ve already had an increase of headcount on just in the month of January for some Q1 start dates. And breaking down the departments, in an R&D perspective we do expect a slight increase in the first quarter over the fourth quarter as some of that headcount is earmarked for R&D and future development.

In sales marketing we do also expect a slight increase over the fourth quarter. We’ll see less variable compensation, but we also have our sales kickoff and some additional sales reps coming on board, that Bob had mentioned.

In the G&A line I would expect that number to go down slightly sequentially, as we had some year end accruals set for sales tax and bad debt facilities and so forth. So we would expect that number to decrease slightly.

Overall, we spoke about Project Prudence last quarter and how we had implemented that strategy throughout the company. We are keeping that in place and so we’re having constraints on hiring, on travel, discretionary spend, it’s been very well received by our employees, so we continue to manage expenses very closely and I expect that we will do that throughout 2009.

Shyam Patil – Raymond James

Just my last question, when you look at the product license bookings in the second half of the year versus the first half, it’s about flat, but it looks like in the second half you had fewer deals and higher ASP’s versus the first half of the year. I was just wondering, as you look at 2009 do you expect the year to be similar to the first half of '08, or more similar to the second half of '08?

Bob Burke

Well, I think if you look at, for example, the number of the new customers that we closed in e-commerce in Q4 for example, was actually one more than we closed in the fourth quarter of 2007 so it's not dramatically different. We did have a big quarter in the second quarter when we closed, I think 15 new customers.

I would expect we may not get that number in the first half, so it may be more back to our traditional realm of the 5 to 12 range, but we’ll see. There’s a lot of deals in the pipelines, so we’ll see. I would expect, by the way, the ASPs to be running higher than the range that we had in the 350 to 450 rage because we are seeing bigger deals out there.

Operator

Our next question comes from the line of Brad Mook – MKM Partners.

Brad Mook – MKM Partners

So Julie, you mentioned linearity being favorable in the quarter, you also had some deals slip out of Q3; I’m wondering if you normalize for the deals that slipped out of Q3 and closed early in the quarter, what would the quarter have looked like?

Julie Bradley

So we did have some deals that slipped out of Q3 and as we indicated on our third quarter call a few of those had already closed by the end of October, but if you – even normalizing for that we had better linearity in the quarter. We had deals that were not expected to close in the third quarter that closed early in the fourth quarter.

Bob Burke

Brad, we still would have had double-digit growth by the way, in the fourth quarter.

Brad Mook – MKM Partners

Exclusive of those early closes?

Bob Burke

Yes.

Brad Mook – MKM Partners

And then, the lower ratable recognition on those bookings, is there anything trend-worthy in that or anything related to the environment going on there?

Julie Bradley

I don’t think so. So the number in fourth quarter was lower than where we had trended for the year and last year we gave annual guidance. It was within the range, approximately 50% kind of on an annualized basis, because remember they’re deal specific so if you have a very large deal that also buys optimization service, that would be deferred so that can swing the percentage from a quarter-to-quarter basis like we’ve seen in a couple of quarters where it was substantially larger than the 50%.

Our guidance into Q1, the 30 to 40% expectation, I would still expect approximately 50% for the year, but as you give quarterly guidance we have a better view into the deals that have already closed and with the deals that we expect to close and that’s where it’s more precise, so we wanted to give that to you.

Brad Mook – MKM Partners

With the lower numbers, is that related at all to aversion to signing optimization-related deals; that people are just focusing on putting their dollars towards the ecommerce piece or anything like that?

Julie Bradley

No I don’t think – I wouldn't read a trend into that. As we've spoke about in the past, buyers have different procurement cycles where sometimes they start with re-platforming and come back later to get the optimization services, and sometimes they buy it all at once. So it’s more – I think the reason that we gave the lower number versus the annualized number is for a more precise view into the mix of deals that we expect to close in the first quarter.

Brad Mook – MKM Partners

And then just finally on the competitive front, I mean obviously you’ve principally gone against IBM and Home Grown and I don’t know if there have been any changes competitively there in terms of your win rates.

I’m also curious about kind of the next tier down and whether there’s any financial insecurity within that tier of providers that’s benefiting you at all. Obviously you’re doing a nice job with the big deals, but are you seeing any uptick kind of the next layer down, or are those deals not even in your bracket?

Bob Burke

Well some are. It depends on how aggressive people in kind of the next bracket down view their online business and what their growths are. So there’s certainly more layers below that that we don’t try to target as much.

I think the good news is when people look at ATG; we are one of the few public companies in this sector and really the only software company that sells licensed software of note that actually breaks it out separately. So obviously IBM, our competitor, is in this game as well, but it’s hard to tell what they do because they don’t break out their ecommerce results.

So I think people look around – I certainly think that they would prefer to go with somebody that’s more stable. So I think that will help us in the long-term and I think it certainly brings deals our way. I think that’s why you see big names signing up with ATG, even though we’re a relatively small company compared to some of the customers we certainly have, but I don't think it’s changed the dynamics of the competitive market really that much right now.

Operator

Your next question comes from the line of Mike Latimore – Northland Securities.

Michael Latimore – Northland Securities

So you have a new hat of marketing a lot of On-Demand history there it looks like. Maybe can you talk a little bit about any new initiatives or new projects in the on-demand space for 2009, I guess separate from Click to Call – I’m just talking ATG On-Demand though.

Bob Burke

So yes, you’re right. Nina by the way, has a great background in both enterprise licensed software and also in software as a service, so given the company sells both, we’re glad to have her coming on board. In terms of the ATG On-Demand as you might remember, 2008 a good chunk of the year was us moving from one infrastructure provider over to AT&T, and the good news is most of the sites have moved and had a great holiday season of stability running on the new AT&T infrastructure.

So this new year, one of the things we do have is a brand new reference application that we are launching called Livestore that we think that there’s going to be a lot of advantages for people, especially those who want to have, as I mentioned earlier, a business that’s going to grow over time and that they may want to have different deployment options over time as well.

So I think there’s a lot of enthusiasm about this business and especially now that we have not only a new infrastructure provider, but one that can also help us with our international initiatives, given their worldwide data center locations.

Michael Latimore – Northland Securities

And then maybe in terms of the fourth quarter then in ’09, can you give a rough split of percent of license revenue that comes from your install base versus new customers and whether that trends one way or another in 2009?

Bob Burke

Yes if you look at it, I think it’s still usually in that 80/20 rule, so 80% comes from the install base and 20% from new customers and I think that’s probably true of the fourth quarter as well.

Michael Latimore – Northland Securities

Is it fair to say that will be a similar mix in ’09? That would be the best guess at this point?

Bob Burke

I would expect, especially given the nature of enterprise software, I would expect that on the enterprise license part that that will continue to be the case.

Michael Latimore – Northland Securities

And then the number – the sort of net new adds in the eStara segment that was established in that quarter – I mean when do you think that kind of basis maybe starts to increase and then kind of turning down the net new adds?

Bob Burke

I think we’re going to go through a few quarters of this where we’re actually churning through some of those accounts. A lot of them were smaller accounts based in Europe, for example. I think it's going to take a while to work out of those. Obviously we don’t want to just drop people in too harsh a manner and we have contracts with some of them, so I think it’s going to take a few quarters to work our way out of that.

Michael Latimore – Northland Securities

You may have said this already, but what percent of your bookings did come through your partner channel this quarter?

Bob Burke

We did mention it, but it was actually in excess of about 50%, so it was actually a little higher than normal.

Michael Latimore – Northland Securities

And then just last – a couple of deals slipped in the September quarter. Did they all close in the fourth quarter? And then were there any deals in the fourth quarter that might have slipped as well?

Bob Burke

The deals that should have been booked in the third quarter, in fact all did close in the fourth quarter. And there’s always deals that move in terms of timing but there wasn’t slippage, per se, from the fourth quarter onwards.

Operator

Your next question comes from the line of Derrick Wood – Pacific Growth Equity.

Derrick Wood – Pacific Growth Equities

So you guys have historically given only annual guidance and partly due to the uncertain timing of closing the large deals, so pinpointing a product license bookings number in Q1, I’m just trying to get a sense for what gives you the confidence in that number.

It seems to me like a pretty good number. Have you already closed some decent deals and or are you pretty late in the stages of closing some other big deals?

Bob Burke

I think, as I mentioned earlier, we’ve had good traction in the quarter. We obviously have pretty good visibility into our pipeline. So I think right now we’re confident in terms of what the projections are. I mean given our – beyond that I think obviously things could impact what we see in any given quarter, so but in terms of Q1, I mean obviously given our lead times that we have, we generally have fairly good visibility.

Derrick Wood – Pacific Growth Equities

Okay and I think you did mention that you’ve already closed some business in Q1, I mean obviously you would have, and in terms of the hiring I think you went over where you’re hiring it sounds like definitely in sales, a little bit in R&D. Is there anything international? And just curious how long it takes for sales reps to really ramp up the productivity?

Bob Burke

Good question, so the – as you mentioned, most of our hiring is in sales or in engineering. In terms of productivity and where they’re located, we are hiring by the way, both internationally and in the North American market, so it's split between the two.

I think it depends, obviously depending on the background of the rep and what experience they have. Obviously, it takes them a while to ramp up on the accounts, so generally it takes you know six to nine months for a rep to ramp up and start getting traction.

One good thing though, is that we’ve had the fortune, given our success, and maybe other people’s lack of success, that we’ve actually been able to hire some people that have actually an e-commerce sales background. And in fact in some cases have been working at ATG and then with one of our direct competitors over the last few years. So we feel pretty good about some of the ramp capabilities of some of the new hires that we’re bringing in.

Derrick Wood – Pacific Growth Equities

I think you guys were going to modify your go to market focus a little bit and try to resonate it better with CFOs and around cost-cutting. Can you just give us an update on what you’re doing and how that’s going?

Julie Bradley

Sure. I think we all know some of these buying decisions are coming to the CFO’s office to get signed off. In fact, at sales kick-off just a couple of weeks ago, I presented to them about the things that I look for, such as total cost of ownership, ROI, cash payback and so forth, and how we’ve developed tools, more enhanced tools, for the sales team to use and to help demonstrate the value proposition, both from an increase in revenue, but also the cost savings that are associated with implementing a new e-commerce system, especially as compared to the brick and mortars.

So we’re definitely arming our sales force with enhanced tools and case studies to help them have that conversation with the CFOs of their prospects.

Derrick Wood – Pacific Growth Equities

And could you remind us how long – what the ROIs are typically like, in terms of time to return on the investment?

Bob Burke

Obviously it depends very much in terms of what the customer if focused on. Some can be in terms of months, certainly in terms of optimization of service it can even be faster than that. But some e-commerce sites are actually justified within months to a year or two. Obviously some people are looking more over a three year time frame.

Derrick Wood – Pacific Growth Equities

And last question, there were a lot of outages from major sites on cyber Monday and I think a lot of them were homegrown built or homegrown run. Has this given you a sales tool to demonstrate that these problems are probably going to be seen a lot more often than the complexity of e-commerce systems? And I guess if you could just share with us if you have any insight into what you think that the market’s growing at in ’09 in terms of e-commerce platform sales.

Bob Burke

Yes. So you bring up an excellent point. There was a higher than normal number of extreme outages that occurred right around the Thanksgiving time frame and then even on into the rest of the holiday season.

Fortunately none of them were ATG powered sites and it certainly does arm with a lot of reasons why, particularly people that have critical sites, should re-platform and should think about different technology and approaches.

So it’s a great lead-in to why somebody would buy ATG. In terms of the overall e-commerce market, we have seen significant growth; we thought that it had slipped into the low double-digits. This is a market that as we’ve described before, endless don’t exactly give the precise numbers out there, so we’ve had to derive many of the numbers based on what we think our market share is, IBM’s and other people.

I would expect that percentage to continue this year, because as I mentioned earlier, we do see people shifting their priorities just spending on e-commerce over other types of systems.

Derrick Wood – Pacific Growth Equities

Great, thank you and congrats again.

Operator

And there are no further questions at this time.

Bob Burke

Okay, let me just close the call and say again we're very pleased with what happened in this past year and this past quarter and we look forward to seeing a lot of you on the road this quarter. We think we’re going to be out at four conferences and probably other road shows and thanks again for joining us. Take care.

Operator

Thank you. This concludes today’s conference call. 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 US 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: [e-mail]. Thank you!