Omniture, Inc. Q4 2008 Earnings Call Transcript


Omniture, Inc. (OMTR) Q4 2008 Earnings Call February 5, 2009 5:00 PM ET


Michael Look – Vice President of Investor Relations

Joshua G. James – Chief Executive Officer, Co-Founder

Michael S. Herring – Chief Financial Officer


Michael Huang - Thinkequity LLC

Brent Hill - Citigroup

Marianne Wolk - Susquehanna Financial Group

Tom Ernst - Deutsche Bank Securities

Keith Weiss - Morgan Stanley

Imran Khan - J.P. Morgan

Mark Murphy - Piper Jaffray

Youssef Squali - Jefferies & Co.

[Unidentified Analyst] - Robert W. Baird & Co. Inc.

Bryan McGrath - Credit Suisse

Patrick Walravens - JMP Securities

David Hilal - Friedman, Billings, Ramsey & Co.

Robert Breza - RBC Capital Markets

Dan Salmon - BMO Capital Markets

Carter Malloy - Stephens Inc.

Sandeep Aggarwal - Collins Stewart LLC


Good day ladies and gentlemen and welcome to the fourth quarter 2008 Omniture, Incorporated earnings conference call. My name is [Shamika] and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Mike Look, Vice President of Investor Relations. Please proceed.

Michael Look

Thank you Shamika. Good afternoon and thank you for joining us. Joining me on today’s call are
Mr. Josh James our Chief Executive Officer and Co-Founder, and Mr. Mike Herring our Chief Financial Officer. During the call we will discuss Omniture’s financial results for the fourth quarter ended December 31, 2008. By now you should have a copy of our press release which crossed the wire approximately 45 minutes ago. If you’d like a copy of our press release please visit our website at

Please note that we’ll be referencing both GAAP and non-GAAP financial measures and wish to note that GAAP reconciliation information is provided in the press release and on the website. Also we wish to emphasize that some of the information discussed during this call, particularly information regarding our revenue and operating margins or profit targets including expectations concerning GAAP or non-GAAP revenue and revenue growth; GAAP and non-GAAP net income and loss; and adjusted EBITDA; business strategy; customer demand; market observations and future product lines are based on information available as of today.

We believe that some of the statements we will make on today’s call including statements about expectations I just mentioned may constitute forward-looking statements within the meaning of the Federal Securities laws. Accordingly, we wish to caution you that such statements are just predictions based upon current expectations and assumptions regarding future events and business performance, and involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the reports that the company files from time-to-time with the Securities and Exchange Commission which are available on our website and contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or other forward-looking statements. Omniture undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company’s expectations.

Following the prepared remarks from Mr. James and Mr. Herring we will open up the call for Q&A. Let me now turn the call over to our CEO and Co-Founder, Mr. Josh James. Go ahead Josh.

Joshua G. James

Thank you Iron Mike and good afternoon everyone. Our Q4 results wrapped up an incredible year for Omniture with non-GAAP revenue more than doubling over 2007 to $309 million for the year. We believe we’re now the largest enterprise software company focused on CMO’s and marketers. Despite a challenging and unprecedented economic environment, we were still able to deliver top line growth and improved operating leverage to our shareholders.

We exited 2008 setting records for revenue and profitability, while capturing data from approximately one trillion transactions during the fourth quarter. To put that into perspective, that’s roughly 125,000 transactions per second with spikes well in excess of 250,000 transactions per second. These transactions are obviously valuable from an analytics and reporting standpoint, but the true value is that they represent a critical ingredient for optimizing ad spend and for enabling personalization for our customers’ websites.

The analogy we draw is that it is like our customers are sitting on large fields of oil or Black Gold that is building up pressure and waiting to be tapped. At Omniture we refer to this Black Gold as Green Gold, because it’s what make customers money and it’s also the color that Omniture has become known for.

Best Buy recently presented a case study at the National Retail Federation Tradeshow in January where they said that one of their users was able to generate tens of millions of dollars in incremental revenue in 2008 using our products. With case studies like that even in the current economic conditions, we believe we are entering 2009 in strong financial shape and well positioned to continue to invest in our market leadership.

We’ve been executing on a strategy that has transformed Omniture from a web analytics business to an optimization business. In order to accomplish this, we increased our product offerings and broadened our platform capabilities by investing in technology and infrastructure that we believe makes Omniture one of the industry’s biggest contributors to cloud computing with over 17,000 servers dedicated to our customers.

We’ve built our ecosystem to more than 200 Genesis partners and 500 distribution channel partners and we significantly expanded our global footprint to other growth regions in the world. This has resulted in the establishment of an online business optimization platform that increased our profile and broadened our position within the online marketing industry. It has been marked by the expansion of higher level executive relationships with our customers. This has led to multiple product sales into existing accounts, particularly large enterprises that increasingly rely on our products to operate their businesses.

We’re very excited by the proof points we see that signal Omniture’s successful transition to an optimization company. Our average new deal size in terms of annual contract value has grown by 50% over the last 18 to 24 months, and that increase is entirely due to our optimization products. We’re currently seeing that in a given quarter, 50% of our bookings come from cross-sell and up-sell to existing customers of optimization products. This of course also means that of our bookings only about 50% is for SiteCatalyst.

The customers that are buying multiple integrated products from us are realizing the benefits of an integrated set of products. A great example of this is Northwest Airlines who describe using Omniture’s landing page optimization and behavioral targeting in addition to our analytics platform to generate an incremental $16 million in annualized revenue. Our products were able to match up the best offers on landing pages to visitors based on search key words and other behavioral criteria our system had measured about the visitors.

Examples like this and the data points I referred to earlier establish us in the minds of our customers and partners as an optimization company with several optimization products built on a very robust analytics platform. This transformation is also positively affecting our business as seen by our Q4 and 2008 operating results. We had record non-GAAP revenues for both Q4 and the fiscal year of 2008 of $84.8 million and $309 million respectively. We had non-GAAP operating profitability of 12% in the fourth quarter which is in line with our guidance.

Operating margins for 2008 were 11% representing more than 550 basis points of improvement over 2007. And despite difficult economic conditions, the team delivered record bookings in Q4 which represents year-over-year growth of 42%. In Q4 we added over 250 customers including Carnival Cruise Lines, Express Inn, Hyundai, Irish Life and Permanents; Kohl’s; Norwegian Cruise Line; Redbox Automated Retail; Star Brands; the Scotts Miracle-Gro Company; Timex; and United Way of America. And we have 46 customers with a revenue greater than $500,000 annually and 31 customers paying us more than $1 million per year.

One of the items that has been driving our bookings and growth has been our channel business. We nearly doubled the number of our channel partners to over 500 and these partners contributed to over $50 million in revenue in 2008. These partners include names like WPP; SAPIEN; Demandware; GSI Commerce; Sofbank; and many others. And although we have hundreds of relationships with agency partners, no single agency relationship has historically accounted for a material amount of our revenue.

That being said, collectively these relationships are generating tens of millions of dollars in revenue. After jointly selling, servicing and consulting for a few customers it became clear to a few of our partners that there is a big opportunity for both Omniture and the partner in these relationships.

WPP recognized this and their commitment to drive this from the top of their organization, including their CEO and many of their other executives, was punctuated by our announcement last week. I’d like to spend a few moments describing the strategic relationship with WPP in more detail.

As you know, WPP is the world’s largest advertising agency holding company representing dozens and dozens of agencies, media buying companies and other technology companies and they control in aggregate about 25% of global ad spend. We believe the size and breadth of this industry changing strategic relationship emphasizes the current phase of our market opportunity. The details of our agreement with WPP include many tactical commitments as well, including consulting services; data and information sharing; and collaboration on technology development.

As a sign of WPP’s commitment to the success of the relationship, WPP also made a $25 million long term investment in our company and has committed to having 500 WPP employees from various agencies trained on Omniture’s products and solutions this year. We’re excited about entering 2009 with such an industry changing relationship to kick it off.

We believe relationships like our new partnership with WPP are a natural byproduct of our market position. The need for more effective data driven solutions globally across traditional and digital channels is reaching the highest levels of all organizations. And market leaders like WPP are increasingly aggressive in their efforts to participate in that transformation.

We expect to see several more relationships like this, albeit with other global agencies; global consulting organizations; and/or technology giants later on this year. Although we’re very pleased with these accomplishments, there’s always room for improvement. Some of the opportunities for improvement include the following.

Despite the fact that we’ve consistently had industry leading data availability in up time, we’ve unfortunately had some rare latency issues affecting a minority of our customers caused by the installation of a SiteCatalyst upgrade that was rolled out on January 5, 2009. It’s important to note the issue affected reporting performance only and there was no outage of data collection.

But there was a backlog of data processing, so some of our customers’ data was behind and this caused an inconvenience for our customers for which we are certainly disappointed. No data was lost or compromised but that said all of us at Omniture of course took this incident very seriously, as the real time nature of our products is one of the hallmarks of our business and something our customers have come to expect from us.

Besides fixing the technical problem, which is behind us now, we are using the situation as an opportunity to improve our internal processes and procedures and importantly to improve our communications with customers which we will roll out over the next few months.

There’s no doubt that Omniture like every other company and individual in this world is being impacted by current macroeconomic conditions and our Q4 results reflect some of this. Some of our customers are being forced to reduce their workforces or even to declare bankruptcy in some cases. Those situations are very unfortunate for those individuals and their families, and of course that impacts our business. We saw pressure on customer retention particularly with our smaller customers as they’re more likely to go out of business or to leave the internal resources to leverage the data and optimization services we provide.

Additionally, many companies facing lower consumer spending have scaled back their overall marketing spend in an effort to maintain ROI of their marketing investments. We believe this is manifest in their use of our products several different ways, including the following. We’re seeing customers delay some new projects, particularly in certain industries. Activity based revenue has been flat or in some areas declining, a fact that impacted over usage and ad spend based search center revenue throughout 2008.

And we’ve also seen some contract reductions, where customers are requesting reduction in commitment levels on renewal dates, which is generally caused by less traffic to their site or smaller budgets. It appears to be most prevalent in our mid-market segment. Fortunately most of our customers have instead chosen to maintain or increase their online optimization investments to improve conversions.

We’re seeing particular strength and demand from the enterprise segment. For example, in the fourth quarter we saw up sales and cross sales outpace contract reductions by existing customers by a factor of six to one. That was really the first quarter where we had experienced this offsetting trend. We’re bracing for a prolonged continuation or perhaps even a worsening of economic conditions. Prudent cost management therefore remains one of our top priorities. However, it must be balanced.

We believe we are sitting at the center of an increasingly important online marketing ecosystem, including ad optimization; behaviorally targeted ad networks; remarketing; personalization; product and content recommendations; and much more. We believe that all of these segments have the potential to generate billions of dollars in incremental revenue for our customers, but none of it is feasible without the underlying data that we provide or the Green Gold as we call it here at Omniture.

Therefore we remain committed to the long term growth of our business and we will continue investing in those opportunities while remaining very cognizant of the uncertainty in the market. In closing, 2008 was another incredible year of growth in progress for Omniture and our customers. We believe we’ve been successful in transforming from a web analytics company to an optimization company, with solid proof points to that effect as I mentioned earlier.

We have a strong balance sheet with access to capital for additional growth and acquisitions. We believe we are the largest enterprise software company focused on CMO’s and marketers. Our market leadership has enabled us to achieve very unique things within the industry such as an ecosystem that has been built around us. We must remember that and continually invest in the long term opportunity here as we believe really it’s just the beginning.

We believe 2009 will be a key year for us. Our company theme for 2009 is “Seize the Day”. We must take advantage of all the opportunities we’ve worked so hard to create and are so fortunate to have. And we expect to emerge an even stronger industry leader than we are today.

I’d like to thank our customers for their business and their belief in us and recognize the hard work of the Omniture team in producing these results. And with that I’ll turn the call over to Mike Herring.

Michael S. Herring

Thank you Josh and good afternoon everyone. As Josh mentioned, 2008 was a solid year for Omniture. We believe our strategic transformation from web analytics to optimization is clearly strengthening our market position and helping us deliver strong revenue growth and consistent improvements in profitability.

We exited 2008 with total annual non-GAAP revenue having more than doubled to approximately $309 million with the deferred revenue balance that has grown by more than 150% year-over-year to $112 million and with Q4 non-GAAP operating margin of 12%, approximately 450 basis points higher than the year before. We are proud of the fact that disciplined cost management has enabled us to consistently achieve and beat operating margin targets.

Equally important, we entered 2009 in strong financial shape and on solid footing. Total cash and investments as of December 31, 2008 were close to $100 million before adding the recent $25 million investment from WPP. We also established a credit facility with Wells Fargo Foothill, a $50 million credit facility of which about $17 million has been utilized, the majority of which drawn down to retire our former Silicon Valley Bank equipment line.

And third we continue to generate positive cash flows quarter after quarter. We are excited about our market opportunities in 2009. However, we recognize that it does not appear that the current economic conditions are likely to change anytime soon. So we plan on maintaining tight controls on expenses and hiring, which we believe has enabled us to achieve our stated financial targets to date.

Taking a closer look at Q4’s financials, total revenues for the fourth quarter were a record $83 million on a GAAP basis and $84.8 million on a non-GAAP basis. These numbers were within our guidance ranges and represent increases of 93% and 94% over the same period a year ago respectively. Organic growth, which we define as revenue growth excluding the acquired revenues from the Offermatica, Visual Sciences and Mercado acquisitions was 46% on the year-over-year basis in the fourth quarter and 51% for the year.

For the full year, GAAP revenues of $296 million were up 107% and non-GAAP revenues of

$309 million were up 113% from the prior year, both figures within the guidance range we provided last quarter. Now turning to revenue mix, product revenues for the fourth quarter totaled $74.4 million on a GAAP basis and $76.2 million on a non-GAAP basis. Special services revenue for the quarter was $8.6 million and approximately 10% of total non-GAAP revenues.

In terms of geographical mix, as we have stated before we continue to benefit from our previous investments in international markets. These geographies, which continue to offer excellent opportunities for growth, are currently facing zero headwinds in the form of a strengthening U.S. dollar versus certain foreign currencies, the British pound in particular. In fact, from June to December of 2008, currency fluctuations were responsible for 3.5% or $3 million reduction in recognized revenue for the fourth quarter.

Despite these currency affects, non-GAAP revenues from our international operations grew 107% year-over-year, $22.6 million and continued to represent approximately 28% of total revenues. Non-GAAP revenues from U.S. operations meanwhile grew 90% year-over-year to end at $61.2 million or 72% of total revenues.

Turning to margins, Q4 non-GAAP product margins fell 80 basis points to 65%. This level of product gross margins reflect continuing headwinds associated with our data site and migration efforts and the impact of the foreign exchange fluctuations. The data center migration was substantially completed the end of Q4 and although we no longer have duplicative hosting costs in 2009, additional infrastructure that is associated with that migration will take some time to absorb.

That fact, combined with the reduction in revenue due to the strong U.S. dollar will likely prevent gross margins from improving significantly in 2009. The dollars exchange rate versus the British pound alone resulted in a negative 120 basis point impact to gross margin in Q4. We remain confident that we can expand progress margins to 70% over the long haul. Several areas of opportunity include a mixed shift of less CapEx intensive products and better software efficiency as the new functionality in integration focus over the past 12 months improves our ability to scale.

We continue to dedicate teams to this effort and are confident that they will find continuing opportunities for improvement. Non-GAAP professional services gross margins in Q4 were 52%, up significantly from 38% in the fourth quarter last year and basically in line with the margins we have seen throughout 2008.

Operating expenses in the fourth quarter were 66% on a GAAP basis and 54% on a non-GAAP basis. Our 100 basis points sequential improvement of non-GAAP operating expenses as a percent of revenue reflect the tighter cost controls I mentioned earlier. For the full year, operating expenses as a percentage of revenue were 72% on a GAAP basis and 56% on a non-GAAP basis. That translates to over a 500 basis point improvement from fiscal year ’07 levels.

Sales and marketing expense for the fourth quarter was 32% of the total revenues on a non-GAAP basis, down from 34% in the prior quarter and 35% during the same period a year ago. This is despite our seasonally high booking quarter and the associated sales expenses. We exited 2008 with 156 QBSR’s or quota bearing sales reps, up 9 from the third quarter’s 147.

R&D expenses were 9% of total revenues and at the low end of our long term business model. G&A expenses in the fourth quarter were 12% of total revenue as we continue to build out the infrastructure necessary to scale our business and to fulfill our reporting and other requirements as a public company. As a result, non-GAAP operating margin for the fourth quarter improved to 12%, achieving the target we had previously guided to. This is up approximately 450 basis points from the 7% in the fourth quarter of 2007 and up from 11% in the prior quarter. For the full year, non-GAAP operating margin was 11%, up from 5% for fiscal year 2007.

GAAP net loss diluted share for the fourth quarter was $0.11 and slightly below our guidance of $0.09 to $0.10 due to foreign exchange losses. Non-GAAP net income per share was $0.12, within our guidance range despite significant foreign exchange headwinds. Adjusted EBITDA which we define as loss from operations less appreciation and amortization of stock-based compensation and the acquisition and amortization from acquisitions and related adjustments to deferred revenue was $17.3 million, up from $16.2 million in the third quarter and within our guidance range of $17 to $18 million.

Turning our attention to customer metrics, transactional volume across our entire customer base continued to experience healthy growth as we captured approximately one trillion transactions during the quarter. Our network now consists of nearly 17,000 servers and close to 22,000 total network providers.

ACV in the quarter was quite strong, reflecting our seasonal pattern despite tough economic conditions. In fact, total ACV bookings during the quarter grew 42% both sequentially as well as year-over-year. We added more than 250 new customers during the quarter, bringing our total number of customers to north of 5,100. A significant portion of these 5,100 customers, however, are smaller customers that we inherited through the various acquisitions we have completed.

We believe the better number to focus on when analyzing our business and performance is the roughly 4,200 platform customers and within that group, the 1,900 enterprise customers and partners that we have. The 4,200 platform customers represent 95% of total revenue and average approximately $75,000 of revenue per year per customer. They own on the average 1.35 products and continue to have nominal retention rates greater than 92%.

The 1,900 enterprise customers and partners represent 77% of total revenue and average approximately $136,000 in revenue per customer per year. Nominal retention rates within these 1,900 customers is about 95% and within our 350 largest customers nominal retention rates consistently are greater than 97%. Value retention across our entire 5,100 strong customer base remained above 110% in the fourth quarter.

Finally, looking at our balance sheet, cash and investments as of December 31, 2008 were at $95.2 million, down from $134.7 million at the end of 2007 but basically unchanged from third quarter 2008 levels. Operating cash flow for the quarter was $7.8 million and accounts receivable increased $10 million with year-end billing activity to $107 million. Adjusted free cash flows after $3.5 million in capital expenditures was $4.3 million.

DSO’s at the end of December were 112 days while adjusted DSO or DSO calculated after removing the deferred portion of the AR balance, remained consistent with prior quarters at 54 days. Headcount at the end of the year was 1,189 and reflects the addition of employees related to the acquisition and certain assets from Mercado, Inc. that closed in the fourth quarter.

Turning to the outlook for 2009, while our results in the fourth quarter were as expected and our business continues to perform well in a tough economy, the current macroeconomic environment continues to create a high degree of uncertainty regarding the future unless we are cautious in our outlook for the first quarter and beyond. For the first quarter of 2009 we expect revenue to be in the range of $85 to $87 million on a GAAP basis and $86 to $88 million on a non-GAAP basis.

We estimate GAAP net loss per share in the range of $0.07 to $0.08 and non-GAAP net income per share in the range of $0.11 to $0.12. Note that we are estimating the effects of the 2.8 million in shares issued to WPP in connection with their $25 million investment in January and that EPS figures are down slightly from the fourth quarter.

Adjusted EBITDA is expected to be in the range of $17 million to $18 million. Due to the seasonality of certain expenses related to payroll taxes, sales events and our customer summit, we do not expect profitability margins to improve in the first quarter. For the full year, we expect revenues to largely be a function of the health of our customers and of the economy as a whole, and thus we believe that top line revenue growth can range from 15 to 20% if the economy continues to struggle, with a potential upside if the environment begins to improve and we can benefit from increased investment in marketing initiatives.

We believe that margin expansion will still continue in 2009 but at a much slower pace as we balance our continued investment in our business with the desire to improve bottom line results. In conclusion, we have high expectations for ourselves at Omniture and we are executing towards meeting those expectations with focus and discipline. For those investors listening, we look forward to seeing you at our upcoming analyst meeting in Salt Lake City on February 17.

And with that, we would like to open the call for questions. We would request that each caller stick to a single question so we have time to address as many questions as possible. Operator.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Michael Huang - Thinkequity LLC.

Michael Huang - Thinkequity LLC

So I just wanted to clarify, did you guys outperform your Q4 revenue and EPS guidance on a constant currency basis or was it already factored into your assumptions going into Q4?

Joshua G. James

The quick answer is we did not expect the dollar to strengthen as aggressively and particularly versus the British pound as it did in Q4. So you’re correct. We would have had – the impact was substantially in November and December in the currency fluctuations for those months.


Your next question comes from Brent Hill – Citigroup.

Brent Hill – Citigroup

Mike, you mentioned you don’t expect the 500 basis points expansion that you saw in 2008, but can you give us a sense in terms of how you’re thinking about the bottom line margin for this year? Is it 200 basis points? Is it – any context around it that would be very helpful.

Michael S. Herring

Yes. We generally have been working towards about 400 basis points a year over the last three years in operating margin and have outperformed against that plan in every year. Two-thousand-nine is going to be a different year than we’ve seen and so we expect a much lower pace. I think we would expect it to be a fraction of that growth and likely be happy with 200 basis points growth expansion through the year. We don’t expect to cut costs or expenses in order to show profitability. We still believe we’re in an expanding market that deserves proper investments, and therefore we’re going to make that trade-off appropriately in 2009.


Your next question comes from Marianne Wolk - Susquehanna Financial Group.

Marianne Wolk - Susquehanna Financial Group

First of all in the revenue guidance you suggested for 2009, does that assume that the $13 million in non-GAAP revenue you pulled forward into 2008 comes out, so that we should pull that out of the GAAP figure? And then also on the $25 million you raised from WPP, should we expect that that might be invested in other M&A opportunities because that’s been a big use of your cash in the past. Thanks.

Michael S. Herring

Thanks Marianne. So the $13 million I’m assuming you’re referring to the GAAP to non-GAAP adjustment in 2008. That wasn’t pulled out of 2009. That’s purely a haircut from acquisition revenue that we acquired that we backed out of 2008 revenues for GAAP purposes. So that really – when we’re talking 15 to 20% we’re actually comparing the non-GAAP revenue achievement of 2008 with our expectations for 2009 assuming the economy stays similarly situated as it is now.

Related to the investment from WPP, that we look at that cash investment as an addition to our working capital and it helps strengthen our balance sheet. It doesn’t have any specific use. We would consider using that cash just like we would consider using our cash for operations or any other purposes to help improve our business going forward. So there’s no earmarked use for that money.

Joshua G. James

But definitely acquisitions is one of those things that we’ve historically did – have been historically involved in and having an incremental $25 million there could be useful. We’re going to continue to evaluate those opportunities as we have historically.


Your next question comes from Tom Ernst - Deutsche Bank Securities.

Tom Ernst - Deutsche Bank Securities

I think the biggest surprise in what you’ve told us is the strong continued bookings growth, 42% in the quarter. So my question is a couple fold on that. Did you see that bookings tail off as the quarter went done? You know, the perception of investors I think is that you would have faced a lot harder time making new sales. And it seems I think in follow on to that that as you talk about 15 to 20% growth looking forward you must be assuming much more difficulty in generating sales because it sounds like you’re still planning on investing in more sales capacity. Thank you.

Joshua G. James

Sure Tom. Thanks for the question. This is Josh. So I think in terms of the way that those bookings came about, it was surprising how back loaded it was. We were at a conference a few weeks before the end of the quarter and didn’t anticipate anything like what happened. And we’re expecting things to be much less than what they ended up being. So our sales team certainly did a good job. It’s definitely challenged right now.

On the one hand we’ve got this horrible economic environment and on the other hand we’ve got our sales team – I talked to one of the sales guys afterwards, a guy named [Steve-O] and he just hit 150% of his quota and reminded us that he can’t apolo – he says, “I can’t apologize for being awesome.” He’s out there with all these sales opportunities and feels like he’s just continuing to find great opportunities to sign up incremental dollars from our customers because they’ve got all this data. They’ve got a trillion transactions. They’re trying to figure out how to optimize. They’re being told to cut their ad spend.

They’re using our products to figure out which 10% to cut and then how to make that 90% perform the same way that the 100% they had last year was performing. And so on the one hand we’ve got this bad environment but on the other hand we have this big opportunity. And it certainly is – those sales we had in Q4 are not reflected in our guidance, relative to the way we’ve done guidance historically.

Because one of the things we talked about in Q4 that was different than we’ve ever had are some of the down sells; you know, some of the customers that are going out of business. Some of the customers that are coming in saying my budget’s declined. And we haven’t had those experiences before. So that’s kind of offsetting the great sales performance that we had in the fourth quarter.


Your next question comes from Keith Weiss - Morgan Stanley.

Keith Weiss - Morgan Stanley

In the quarter your CapEx spend seems to have come down considerably from 3Q levels. Can you talk a little bit about how you’re going to achieve some of those efficiencies? What portion of that was due to ending that data center migration and if that was an impact how that impact is going to carry forward into 2009? And then if you’d give us some kind of view on what you think CapEx spending will be like in 2009 that would be great.

Michael S. Herring

If you remember we had pretty robust CapEx expenditures in Q2 and Q3. Part of that was a restructure for the data center moves as you point out. And part of that also was building our infrastructure for business that we were signing up and in preparation for our Q4 events that were coming. In particular, everything from the World Series to the election to the retail season which however you might have thought it might turn out, we need to prepare for the large end of the actual results.

So assuming those three events all drove significant traffic, we had spent a lot of time particularly in Q3 building out the network. And so Q4’s lower CapEx definitely reflects at some level us having a large capacity coming out of Q3 in order to handle that growth and that subsequently washes a little bit into Q1. So we’re purchasing that’s clear at the end of Q4. That said we continue to see traffic grow across the board, month over month. And we will continue to be adding capacity in order to manage that traffic and manage it effectively.

So I think that’s a seasonal trend that we’ve actually seen in prior years as well, where Q4 tends to be down a little bit relative to other quarters because of that preparation we do in Q3. In terms of anticipating what 2009’s capital, I mean one of the things are very uncertain is to how much bookings we can expect this year. One of the reasons why we haven’t given annual revenue guidance, for example, we still have 20 to 25% of our revenue this year to go out and earn, whether it’s through variable activity or through new contracts or professional services engagements.

And the market just allows – just gives us a lot of uncertainty as to where that number could land. That same uncertainty, i.e. the incremental business that we need to close, is what drives CapEx. And so it’s really hard for us to estimate at this point how much CapEx we’re going to need to spend in 2009.


Your next question comes from Imran Khan - J.P. Morgan.

Imran Khan - J.P. Morgan

How many of the customers who came on this quarter came from Mercado? How many were organic adds? And secondly, with regards to potential economic weakness, have you looked into the potential bad debt risk like if customers go bankrupt – file for bankruptcy what kind of risks are there? Thank you.

Michael S. Herring

I’ll answer that backwards. We definitely look at the bad debt risk. At every balance sheet date we look at payment history and we look at the customers themselves and what we know about them from a variety of sources to give us a sense of customer health. Some of them are big and on headlines on The Wall Street Journal that we all can see, and others are more subtle, especially at the mid-market level. So we spend a lot of time looking at that, setting our reserves appropriately and forecasting our revenue appropriately based upon what it looks like – what the market might give us and what struggles our customers might be going through.

To answer the first question when we talked about north of 250 new customers we’re talking about organic customer adds. We’re not talking about customers added through Mercado.


Your next question comes from Mark Murphy - Piper Jaffray.

Mark Murphy - Piper Jaffray

I was wondering if you could share your thought process around the spending trends in online advertising in e-commerce, particularly if you look at the forecast for 2009 and just to what extent you feel that you’re linked to that or relatively de-coupled from those trends.

Joshua G. James

Well in terms of what we’re seeing I think anyone’s guess is as good as ours. In terms of how related we are to those, you know there’s some people out there that are really performing. We’ve all seen Amazon’s results. You know, they’re certainly performing. We all know that over time the web’s going to continue to grow. E-commerce is going to continue to grow. I think it will grow relative to the rest of the market or decline not as much as the rest of the market, whatever it is.

In terms of how related we are to that, though, I think it’s – we’re more tied to the number of transactions from a page view perspective, from a clicking perspective. So one of the things we’ve seen with many of our customers is that there’s more people that are looking before they’re buying. There’s more research that’s being done before they’re buying. And that offsets some of the actual clicking to buy. So there’s that component..

And then we did discuss a little bit about the ad component. And to the extent that people are spending less money on ads, on the one hand it’s less search center revenue for us. On the other hand, if you already have 100 people coming into your store and nine of them are purchasing and you want to try to get that to 11, that drives use of our products. And that’s why we were surprised as anybody the last two weeks, the last week-and-a-half of December.

But that’s what’s really driving a lot of these bookings and revenue are the fact that people are trying to figure out okay, I’ve got all this data. I’ve made the investment in the data. I have people in my organization – I have hundreds of people in my organization that are looking at the Omniture data. Now let’s use it. Let’s put it to good use. Let’s automate the landing pages. Let’s these 10,000 key words that we buy on Google. Let’s make sure that we’re not showing the exact same landing page to every single one of those people. We’ve got 12 choices.

Northwest Airlines, should we show a companion fare? Should we show a business class seat? Should we show discounted fares? Which one should we show depending on which key word we use? And using that and based on the behavior targeting information that we have, there’s really a combination of three different products. They are really able to drive their revenue by I think $12 million, or $16 million. I can’t remember the number. But that was – those types of examples are the things that despite the fact the economic situation is not that positive, it helps people make more money with what they already have and so that is driving our business.


Your next question comes from Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

I apologize, Mike, if you’ve addressed this but I think – I’m talking between two earnings calls here. The 15 to 20% you refer to, is that what you think you could do in ’09, organic and a non-GAAP basis? And then in terms of churn, can you talk a little bit about the number of customers that may have traded down and kind of your ability to hold pricing power in renewal negotiations?

Michael S. Herring

Sure. So yes I was referring to organic year-over-year growth in 2008 to 2009 in that estimate, not assuming any acquisitions or benefits from acquisitions year-over-year. And in terms of attrition, Josh mentioned essentially a six to one ratio of up sales that essentially are what we call the total APV that is either reduced from existing customers or canceled outright. So it’s a trend that is new to us and we’re still getting our arms around.

I would say that it’s not pricing renegotiation 99% of the time. It is volume reduction and so they are reducing the size of their contract. And that’s much more common, in particular among enterprise customers where business has slowed down whether their retailer or whatever, traffic levels have dropped some, and so they are out looking for a reduction in their total contract size. Now when that happens, they usually actually move up in a pricing tier because that’s the way our pricing works. But in the majority of cases what we’re looking at is just tracking a smaller amount of traffic and therefore the size of the contract’s reducing.

Joshua G. James

One of the things we’re seeing less of is the customers’ aren’t spending as much money on advertising. They’re driving fewer people to their site. They have less micro-sites, less promotions, and so that’s the correlating loss in traffic. But at the same time many of these customers have been planning and budgeting to buy incremental products from Omniture over the last 12 months.

And our customers come – that’s one of the things – really the event that leads to many sales throughout the course of the year. Which is why we’re definitely still having that event this year and we still expect well over 1,000 people to our customer summit this year. So that will continue to drive sales.

But even in this economic uncertainty, I was just visiting with the CMO of a very large customer and a very large company and they’re not having the best results right now in their own business, but they said we green lighted one thing, one incremental project this year, and this is a multi-billion dollar company. One incremental project and it was Omniture – it was this business that we’re doing with Omniture. It was the optimization products that they bought from us.

So we feel good. We feel like we definitely are a must-have because we’re driving incremental revenue when revenue is very, very difficult to find.


Your next question comes from [Unidentified Analyst] - Robert W. Baird & Co. Inc.

Unidentified Analyst - Robert W. Baird & Co. Inc.

Just a quick another question on CapEx, in the past you’ve talked about spending about $0.30 on the dollar to support your subscription growth. I’m just wondering if you’ve seen or expect any changes in that metrics going forward either due to new efficiencies or perhaps the changing mix of your business skewing towards the enterprise. Thanks.

Michael S. Herring

If our business continues to become more enterprise-focused again, we will see a higher CapEx spend as a percentage of revenue. It’s just the way the pricing model works where the larger sites tend to move farther down the pricing model with deeper discounts for traffic volume. And then tend to be lower margin. And we’ve seen a lot of them – big purchases made from us tend to be from enterprise level customers. You know, we’re seeing significant bookings off of a very consistent number of customers that we’re signing up every quarter.

So we haven’t seen a big change in the dynamic around the calculation. But that mix, if it continues to go that direction, will also keep us from driving gross margins up rapidly.


Your next question comes from Bryan McGrath - Credit Suisse.

Bryan McGrath - Credit Suisse

Have you seen any changes in contract planks? In other terms, are any contracts like a mix of payments versus annual up front or quarterly or anything along those lines?

Michael S. Herring

You know, nothing dramatic honestly. We’re still seeing about 50% of our customers to pay us in advance. I think that was a little bit lower in Q4 but still 45 to 50% of customers’ contract lengths still tends to go average about a year-and-a-half, maybe a little bit longer than that. Generally two year contracts are more the standard rather than the exception these days. And payment terms, I mean and I think people are paying in about the same amount of time.

We haven’t seen payables stretch out other than for customers that are obviously in trouble, where they’re either not making payments or they’re publicly entering bankruptcy or considering bankruptcy where you start to get in line with other creditors. And in that situation, we factor that into things like bad debt and allowances and such like that. So we haven’t seen any surprisingly any big movements in that, but a lot of those terms are pretty locked in with our existing customer base which is the large majority of the contracts we have out there.


Your next question comes from Patrick Walravens - JMP Securities.

Patrick Walravens - JMP Securities

First question and then the second one is related, first question is have you thought about building and owning your own data centers? And then Mike can you give us a range of CapEx just for Q1. Thank you.

Michael S. Herring

When it come to data centers we’re always evaluating what our options are. I think the point in time where it makes sense for us to actually build our own is not a short term decision for us. It’s definitely a longer timeframe decision. We currently have pretty long term contracts with our existing data center providers that we’re generally happy with. The biggest issue always being expansion, so if we ever ended up going that direction we’d likely do it in a piecemeal fashion where we’d be looking for incremental growth, not wholesale moving or building a large data center all at once. And if we did that we’re talking two or three years at least out into the horizon.

But that’s under the current economics. Right now we’re in the mode where keeping our balance sheet stable and the company stable is probably the top priority over trying to save some money in data center costs in the short term.

And for CapEx in the first quarter it’s a good question. My guess is it will be somewhere around where we in average had been on the average for the last year or so, around $10 million or so this quarter in CapEx.


Your next question comes from David Hilal - Friedman, Billings, Ramsey & Co.

David Hilal - Friedman, Billings, Ramsey & Co.

Josh you had mentioned areas where you’re seeing customers downsize and try to manage their own costs as their bigger challenge. How often are you seeing this before the contract’s up for renewal versus at renewal?

Joshua G. James

We see it – we see them at both, but there’s not a whole lot of leverage that they have mid-contract. So what typically will happen if they’re doing something mid-contract it’ll be mid-contract in conjunction with an incremental purchase, so they’ll come and say, “we need to get a little bit of a discount here because we’re struggling and I need to bring this line item down and our traffic’s lower and we’re paying for pages and transactions that are not taking place. But if you guys are willing to work with us on that, then we’re willing to buy this incremental product.”

So in almost - like Mike said 90+% of those cases, the overall contract will go up in a very meaningful way. It’s just the rates for some of the initial services may come down a little bit on a couple of customers. Or if not the rate generally it’s just less traffic, so the total amount of that contract for that particular product will come down a bit.

David Hilal - Friedman, Billings, Ramsey & Co.

I wanted to ask you about WPP. How long will it take to get those 500 folks trained and when do you think you could actually start seeing some of the cross sale activity? Thanks.

Joshua G. James

Sure. We’re already starting to see some of the activity. It’s been really interesting. Just in that press release, internally at WPP and internally at Omniture I think is where we’ve seen the most benefit. Because there’s a lot of people that are raising their heads and saying, “Hey, we want to be involved with this. Can we get some people out here and can we start building relationship?”

And really what drives these relationships are some of our bigger customers will call a bunch of agencies and they’ll put their business up for bid. And as part of the RFP’s for their agency business being bid out, one of the questions that they have to answer is what kind of relationship do you have with Omniture? How tightly integrated are we to Omniture? How well can you consult on Omniture’s products?

And one of the things that we do at WPP is we gave them access to all of the Best Practices Guides that we have created and we’re committed to training them on how to use the best practices and information that we have. We have thousands and thousands of pages of Best Practices guides for various verticals and various initiatives you may have as a marketer.

And that’s the thing you know that these big agencies are really looking forward to because they’ll be situations – in some cases where we have a customer who’s paying us X for our products and services who might be willing to pay 2X or 3X for the consulting dollars associated with those services. And so the big consulting companies and the big agencies are certainly interested in that revenue. So that’s partly what’s driving these relationships.


Your next question comes from Robert Breza - RBC Capital Markets.

Robert Breza - RBC Capital Markets

Maybe as a follow-up to that Josh as you think about partnering here and adding more partners, how should we think about the services revenues? You know, should we expect to continue to farm more of that out? I mean, should services plateau out here? Or how do we think about this trend for services? And then maybe as a follow-up, Mike, is there any slanting thoughts around like data centers or from a cost perspective, anything in 2009 that should – you’d tell us to just kind of watch out for as we kind of take our first shot here for 2009 at the model? Thanks.

Joshua G. James

Sure. So in terms of the relationships with the agencies and the kind of correlating services revenue and how that affects us, I don’t think it’s going to have a meaningful impact on our services revenue. In many cases these are incremental opportunities and the challenge has been like I said in the press release, the challenge has been one of the biggest limiting factors for our customers has been they get a products and services installed and they want to know what to do next.

And we have a services arm so that when those customers don’t have agency relationships or when our agency partners don’t necessarily have those experiences that we can be there to fulfill those needs. And it also really educates us internally. The best practices organization that we have or Omniture Consulting as we now call it is something that really educates the rest of our firm and helps us understand where the market’s headed. So it’s an important business for us in that regard. But in terms of affecting our revenues, I think that will be mostly incremental opportunities for the agencies.

Michael S. Herring

Yes, and if you mean large CapEx projects like establishing a new data center, moving a data center we don’t anticipate any major projects like that. We’re always – we might add a data center but it wouldn’t have the same impact on gross margins that moving the data centers did in 2008. So that’s not expected at this juncture.


Your next question comes from Dan Salmon - BMO Capital Markets.

Dan Salmon - BMO Capital Markets

On the WPP deal as well it sounds as if they’re sort of already starting up the matchmaking between your employees and theirs. But in terms of the 12 to 18 month integration period, what are sort of the next steps in terms of some of the bullet points you reeled off in the prepared remarks and in the press release, the Genesis integration, beginning to develop technologies and best practices together. And then just as a sort of related note, is WPP going to be paying you directly for the consultants that will be training them? Thanks.

Joshua G. James

Yes. There is a component there that in terms of paying for the education and the training and that was a component of the transaction and the relationship there. In regards to how that affects us for the next 12 to 18 months in terms of integration, they have several different technologies. They’ve got T&S, they’ve got [Compete] which is a part of T&S and they have 24/7. And those are all technologies that our customers use, so bringing that data and that technology into our systems through Genesis is something that was an important component also.

And we were able to outline on both sides what would the expectations would be in terms of cooperation and in terms of data sharing. And so we’re certainly excited about that. And that’s going to be – those initiatives are all underway. And those initiatives started before the press release came out. So that piece will continue to drive our business. And it’s interesting. That’s an area where WPP touches customers that have nothing to do with their agency business on the technology side. And they have many customers on the technology side that are customers of other agencies.

And so that whole business is interesting the way that many agencies will touch multiple customers and touch the same customers. In regards to new products and services, it really gives an opportunity because of the commitment that WPP was willing to make to us from a financial perspective and from an integration perspective. We felt like that commitment would - in return we would be happy to educate them and help educate our own people and our own consultants so that when an opportunity came up for a WPP customer we’re aware of what it is that WPP provides and which agency provides that and what their capabilities are.

So we’re going to educate our customers on that. And then we’re also going to be able to from a new products standpoint interface with their big customers. And so we have a couple of products underway right now that we’re going to be launching over the next several months. And you’ll see those announcements coming out and in many cases they’ll be WPP’s customers and WPP’s agencies who have been able to provide input into the creation and the shaping of some of those products.

And that’s for WPP and there’s also going to be a couple of other agencies that are involved, because it’s really important for us to get the high level relationships with these executives. And that’s what the agencies have. They own the CMO’s and those relationships from an ad spend standpoint. So that relationship is helpful from guiding our products roadmap.


Your next question comes from Carter Malloy - Stephens Inc.

Carter Malloy - Stephens Inc.

You talked about how things progressed through the first three months of the quarter but can you tell us if you saw any significant changes in January and kind of maybe what your comfort level is in the Q1 guidance?

Michael S. Herring

We gave our guidance kind of based upon information up until today. So that guidance is where we think the business is headed and that’s why we gave the ranges we did.


Your last question comes from Sandeep Aggarwal - Collins Stewart LLC.

Sandeep Aggarwal - Collins Stewart LLC

Josh and Mike, one question if looking at your Q2 to Q4 avenue in ’08, you know they progressively did better from the higher quarter and given that you are in the subscription business should we expect a similar type of linearity? And if not, what other things you are more concerned about? Is it a renewal rate or retention rate or maybe the addition of a new customer? Thank you.

Michael S. Herring

It’s hard to apply any historical patterns onto 2009’s expectations honestly. We’re taking each quarter one at a time this year. We think our business is set up well to survive well and it’s running well as we sit here today. That said, I wouldn’t say that the patterns of last year or the year before are applicable to the economy that we’re working in today. And it’s a combination of things and a combination of things that we haven’t seen. So there are positive things as Josh mentioned.

We’re seeing cross sells success and the adoption of our products at a higher rate within existing customers. And we’re also seeing some of our customers struggling or having a more difficult time than we are in this market and looking to reduce the size of their contracts. And it’s the balance between those things that’s going to determine how the pattern works itself out in 2009. So we appreciate your trying to figure it out and we are, too, but I can’t give you any more insight than that.

Joshua G. James

Thank you everyone for your time. We look forward to seeing you at our analysts day and seeing our customers and partners at our customer summit here in a few weeks. Thank you.


Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect.

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