SuccessFactors, Inc. Q4 2008 Earnings Call Transcript

SuccessFactors, Inc. (SFSF)

Q4 2008 Earnings Call

February 9, 2009 5:00 pm ET

Executives

Bruce C. Felt, Jr. – Chief Financial Officer

Lars Dalgaard – Founder, President, Chief Executive Officer

Analysts

Brendan Barnicle - Pacific Crest Securities

Michael Nemeroff - Wedbush Morgan Securities Inc.

Tom Ernst - Deutsche Bank Securities

Adam Holt - Morgan Stanley

Karl Keirstead - Kaufman Bros.

Terry Tillman - Raymond James

Sarah Friar - Goldman Sachs

Brad Whitt - Broadpoint AmTech

Brad Reback - Oppenheimer & Co.

Michael Wong - Think Equity

Presentation

Operator

Good afternoon and welcome to SuccessFactor’s fourth quarter and fiscal 2008 financial results conference call. (Operator Instructions) I will now turn the call over to Bruce Felt, Chief Financial Officer of SuccessFactors.

Bruce C. Felt, Jr.

Thank you operator and good afternoon and welcome everyone to SuccessFactor’s fourth quarter and fiscal year 2008 financial results conference call for the year ended December 31, 2008. The primary purpose of today’s call is to discuss our Q4 and fiscal year 2008 performance.

However, some of our discussion may contain forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially. For a listing of the risks that could cause actual results to differ materially please see our Form 10-K and the latest Form 10-Q filed with the SEC as well as the factors identified in today’s press release.

I’d like to introduce from SuccessFactors Lars Dalgaard, Founder, President and Chief Executive Officer. I’m Bruce Felt, Chief Financial Officer. Unless otherwise stated, all references to spending excludes stock-based compensation which are non-GAAP measures. A reconciliation from non-GAAP to GAAP can be found in our press release. Following our prepared remarks we’ll have a Q&A session.

Today’s call is available via webcast. A replay will be available shortly following the conclusion of the call through Friday, February 27. To access the press release, supplemental financial information or the webcast replay please consult our Investor Relations website at www.successfactors.com/investor.

Lars will now discuss the quarter before I go into more detail.

Lars Dalgaard

This is a momentous inflection point for SuccessFactors. This is not only our fifth consecutive quarter of solid results. SuccessFactors again leads the software and SaaS industry, putting out 77% revenue growth and as we have continued to do every quarter we’ve delivered significant margin expansion.

In the last year, gross margin is up 18 full percentage points from 53% to 71%. Operating margin is up almost 100 full percentage points from minus 109% to minus 10. We made a promise to you in November, 2007 at the IPO that we would be cash profitable almost two years from that date. Today we can announce that SuccessFactors turns cash profitable in Q4 2008 in almost half the time we committed to.

The whole company feels great about achieving this inflection point early. We have always said that we can get cash profitable at any time and now is the right time. And we will still grow and dominate the large category we created. Along with every other software and technology business we saw an abrupt and significant change in business conditions in Q4 2008, driven by a global credit crisis and resulting recessionary forces.

We have seen some customers reduce the size of procurements and slow or delay planned spending on software and services in our market. The challenges of new customer acquisition increased considerably. The cost of consumer acquisition increased while deal sizes turned to down. In light of this, the executive team at SuccessFactors undertook an intensive review of our operating profile and expense levels.

The decision for me, my team and board was straightforward. We felt it was sensible and prudent to reduce our hyper-investment in customer acquisition until we have indications of more stability or improvement in economic conditions at a macro level. SuccessFactors will actively manage significant expense reductions. The primary focus of these reductions has been headcount and related expenses focused on new customer acquisitions and related overhead costs. We’ve preserved our current capacity in product development, customer support, and operational excellence.

This focus on cost reduction has been grounded in the unit economics of our business that I have described to you consistently over the past several quarters. Each customer that we acquire results in significant up front expense at both a cash and P&L level during the first year of acquisition deployment and support. And in subsequent years due to our recurring subscription model and upselling expansion opportunities, these customers become significantly profitable.

We exited 2008 with a recurring revenue base of $125 million which we estimate to have an inherent contribution margin in excess of 68%. I should stress that we are still staffed to grow our business and we’ll be making some growth investments in 2009 additionally as our guidance suggests at better than 30% organic revenue growth which is a rate that will be targeted by very few companies in this environment.

We can achieve this because of the strong market leadership position we’ve built, with the strength of the team we’ve retained and the robustness of our financial model, which provides a strong, built-in growth factor from current customers. As well as expected, modest rates of new customer acquisitions.

As importantly, not only do we accelerate cash profitability but we are projecting maintaining positive cash flow from operations on a going forward basis in 2009. In the current economic and credit environment we felt it was extremely important to reach this state and preserve the cash balances that you our shareholders have entrusted us with.

Most importantly I want to assure you that we remain confident in our ability to continue to lead the market in category acquired in 2009 and beyond. We believe we have the operational strength and market coverage at our current size and expense level to continue to take market share. We also believe we have the ability, given at our venture to return to health in the overall economy, to return to a higher growth rate and new customer acquisition.

With more than 4.5 million paying and unique users, we believe that we have barely scratched the surface of a global market we estimate to be over $16 billion in annual revenue. We expect to continue to be the long term leader in this market which we created and believe that our rapid and proactive response to current market conditions will put us in the strongest position to lead this category.

We have the breakthrough technology platform both in terms of UI and proven scale and flexibility by geography, by industry and by size. We have the brand. We have the global customers. We have the partnerships. We have the absolute leadership. We have the right people and we have the best management.

I would like to take this opportunity to thank my management team Bruce Felt, Jay Larson, Karen Pisha, Paul Albright, Randy Womack, Eric McCluskey, Patrick Saeger, [Alex Solay], Aaron Au and frankly the whole organization for what they have done in the last two quarters to strengthen the company in this economy. We’re extremely excited to unlock the potential of SuccessFactors franchise.

Some of the other important drivers for this quarter for this profitability improvement are as follows; SuccessFactors under ending customer force actually allowed for improved customer retention rates of greater than 90% and greater than 100% dollar renewals. SuccessFactors again increased new business from existing customers to a new high of 34% of new business, up from 14% in ’05, 90% in ’06 to 26% in ’07 to a new high of 34% in 2008. SuccessFactors brand awareness has become very strong, reducing the required investment needed to generate interest in our products in the market.

Finally, [Gardner] announced that SuccessFactors position in the leader’s quadrant in its first ever measured quadrant for employee performance management. Gardner said “SuccessFactors is the clear market share leader and has the best in class performance management functionality.”

SuccessFactors now is self sufficient and can maintain a strong position in the market in even the most difficult macro-environment. Our fourth quarter demonstrated this. SuccessFactors had many consult transactions and new customer transactions in the quarter, despite customers’ nervousness about their own markets. It resulted in a record 601 total transactions, up 15% from approximately 530 total transactions in the previous third quarter. SuccessFactors also grew 1.5 million users in 2008. For comparison, that 1.5 million is more than salesforce.com added in 10 years.

Before 2008 even ended up we’re at 4.5 million users less than seven years since our founding. This up from 3 million users in 2007 and up from just 2 million at the end of 2006. SuccessFactors platform, ability to add new products to this platform, and our operational effectiveness have truly proven that we’re the only SaaS company that can tackle the enterprise, now with greater than 110,000 seat deployments.

As the trusted secure platform that touches every user, SuccessFactors can continue to add new and transformational products to this platform for customer success. Only e-mail is as ubiquitous and has similar reach and access to every desktop as does SuccessFactors.

SuccessFactors international business grew from 13 to 19% from ’07 to ’08. In 2003 we had almost no business performance in goal management or anything else in performance in goal management. But by the end of 2008 we had greater than 60% of new business from the strength of our more than 14 [orgami] build-up applications, up from 53% in ’07. This success internationally and the sale of new innovations validate the investment we made in 2004 through 2008 for longer term profitable growth.

More so on this market, CEO’s and CFO’s of our customers are saying to us that they must link strategic executions, assign accountability and maintain strict performance measures.

One customer, Orange, who is France’s leading brand for communications, selected SuccessFactors for 13,000 users as part of the CEO’s broader agenda of becoming the number one UK cellular mobile operator for 2012. They said and I quote, “Everybody uses SuccessFactors system from the CEO and senior management down. It’s not just an extra step in the process. It is the process. We’re using SuccessFactors extensively for employee performance reporting and calibration purposes as well as helping to drive salary reviews and develop career plans for staff. It is really important for us to notice our rising stars and develop talent internally.”

“Telecommunications is one of the most rapidly changing industries there is. So that we can be nimble in this environment, we need the ability of communicating cascade updated goals throughout the organizations as we adjust strategy over time. The strategic initiatives that SuccessFactors enables are board sponsored and the performance related conversations, the solution supports are vital to insure that we remain aligned as a business.”

Key to achieving this type of transformation that wasn’t possible before in people management is a quick go-live. SuccessFactors helped customers with a record 1,000 go-lives in 2008, up from the greater than 850 in 2007 or approximately four go-lives per business day. This is how we make our customers successful.

The innovation engine continues to rapidly develop new products. One recent example is SuccessFactors recently launched Stack Ranker which gives organizations and their line managers a powerful tool to quickly stack rank their teams in real time. The introduction of business accelerators has increased lead generation because of the relevancy of processes that enable effective compliance, team optimization, corrective action, and off boarding.

And finally, SuccessFactors became SAP certified with the ability of SuccessFactors Connect-a-Tool Kit 2.0 for SAP which will help customers quickly pull master data from any SAP instance and share with SuccessFactors. The latest development with our IBM relationship was our keynote speech at IBM as the sole vendor, partner, speaker at Lotusphere where SuccessFactors and IBM presented to an important audience of thousands of people, sponsored by IBM’s head of social computing. Very exciting development.

SuccessFactors successfully managing the business through macro-conditions and we’ll use this as an opportunity to increase our market share and dominance in this wide open and large market opportunity.

Bruce.

Bruce C. Felt, Jr.

Thank you Lars. In response to the change in the economy and overall business climate, SuccessFactors made the conscious decision to maintain substantial but lowered growth spending. As we have consistently stated, SuccessFactors business model with moderate growth is profitable. As our numbers show, this change in investment focus dramatically and immediately increased our profitability and enhanced our cash position.

As stated by Lars during Q4 we therefore have become cash flow positive from operations. Our cash balance was higher from operations at Q4 than the previous quarter for the first time in over five years. Our cash balance at quarter end was $102.3 million compared to $101.5 million in Q3. As of the close of business last Friday, February 6, our cash balance is even higher demonstrating the continued cash profitability of our operations and I am confident that this will continue to build through the rest of the quarter.

Even with this adjusted growth in investments, SuccessFactors posted a good fourth quarter and a strong fiscal year. Our customer count increased a solid 230 new customers. We continued to upsell to our install base and retain our customers at a higher rate. We completed a record 601 transactions in the quarter, demonstrating a healthy overall business and high demand for our products.

Fourth quarter revenue was $33 million, a year-over-year increase of 72% and 11% sequential growth. We continue to be one of the fastest growing public software companies and have growth rates three times that of anyone in our space. Likewise we experienced strong revenue growth for the full year 2008, finishing at $111.9 million, an increase of 77% over 2007. This is primarily a result of revenue from our existing 1,750 customers at the end of 2007 and the approximately 850 net new customers added during the year.

I’d like to point out that we have surpassed the $100 million revenue mark as a company, a very important milestone for a software company and one that few rarely achieve organically. We are now at a $136 million annual revenue run rate. The mixture of these fields came from both the enterprise and mid-market. We grew our SMB business as a percentage of our overall new business from 17% 2006 to 22% 2007 to 27% 2008.

On spending, total spend for Q4 ’08 was $36.3 million, down a substantial 24% at sequential rate from Q3 ’08 due to managing costs and as stated adjusting our growth spending. We entered Q4 with headcount at 596 compared to 769 at Q3. Every employee contributed to cost savings idea via our cost savings survey and was so complete that we have developed it into a product and released it as a service offering during Q4.

We recovered $3.7 million in legal settlements that covered legal expenses and a profit margin related to our efforts to protect ourselves against improper actions by competitors. Although this is a one time event we could have hit cash profitability without it. In 2007 total spending was $128.7 million of gross of 101%. Focused on building a dominant, sound, scaleable and leverageable infrastructure for growth, 2008 total spending was $169.3 million, up 32%. Providing additional growth in infrastructure and capacity while at the same time moderating spending sets that our profitability was able to improve by 104 percentage points.

On gross margin on an annual basis, the company’s gross margin improved from 56% 2006 to 59% 2007 to 66% 2008. As Lars mentioned, gross margin improved four full percentage points in the quarter to 71%. This is striking considering our unique gross margin structure relative to most on demand software companies in that we recognize all of our personal service – professional services revenue component of our deals over the life of the contracts, while we incur all the costs up front.

Operating expenses decreased 30% sequentially to $26.5 million and the expense management and moderated investment mentioned above. Non-GAAP operating margin has improved 51% sequentially and more than 99% less in four quarters from minus 109% in Q4 2008 to minus 10% in Q4 ’09. We plan to improve operating margins during 2009.

For Q4 ’08 earnings per share non-GAAP net loss per share was $0.06 which includes stock-based compensation expense of $2.7 million and improvement of 82% quarter over quarter from non-GAAP net loss per share of $0.33 in Q3, an improvement of 88% year-over-year from the non-GAAP net loss per share of $0.49 Q4 ’07. We’re using 55.8 million weighted average shares outstanding during the quarter.

For 2008 our non-GAAP net loss per share was $1.05 which excludes stock-based compensation expenses of $8.6 million, an improvement of 39% year-over-year from 2007 loss of $1.73 per share. We’re using 53.8 million weighted average shares outstanding during the year.

Next, cash flows in the balance sheet. We’ve communicated that we have always had the ability to accelerate positive cash flow from operations by allowing the profitability of the renewal stream to flow through the financial statements by moderating our growth investment. That is what we did in Q4, allowing our five year investment in growth strategy – following our five year investment in growth strategy.

Cash flow generated in operations was positive $691,000 compared to Q3 ‘08’s $2.3 million use and compared to prior Q4’s $12.3 million use. For the year the company used $12 million of cash and operating activities improvement from the $28.5 million used in 2007. Our cash flow pattern this year is anticipated to be the highest in Q1, the current quarter we’re in, because of the combination of our lowered expense run rate in Q1 and the collection of our seasonally high year-end receivables.

Cash flow during the subsequent quarters is expected to be much more moderate because new business is expected to follow the seasonal patterns and the spending is expected to be slightly higher as we continue to invest in growth, albeit at a less aggressive rate. Expect positive but moderate cash flow during Q2 to Q4 ’09.

CapEx was just $300,000 in Q4, as we have a capital efficient new customer acquisition model that is down from $1.6 million in Q3. On the balance sheet, total cash, cash equivalents, marketable securities ended the quarter $102.4 million at 1% sequentially, maintaining over $100 million cash balance in a tough economy first with operational working capital discipline to help the company manage through a down economy of any length. And to balance itself against the backdrop of being cash flow positive means we’re very healthy financially and have a balance sheet that can sustain us through even the most pessimistic of global economic forecasts.

As mentioned on prior calls, our marketable securities are invested in secure U.S. Treasury Bills and we have no investment exposure to the distressed financial markets, credit or auction rate securities. Accounts receivables increased from $40.6 million in Q3 to $44.4 million in Q4 due to our seasonally high year-end business. Adjusted DSO’s decreased by 2 days to 85 days. Despite economic deterioration we have not seen a deterioration in terms of our accounts receivable aging.

On our outlook we’re initiating guidance for the first quarter of fiscal 2009. We expect revenue for Q1 ’09 to be in the range of $34 million into $34.5 million which equates to approximately 46% year-over-year revenue growth. I’d like to point out that the Q4 ’07 revenue used to calculate this growth includes $1.2 million of non-recurring revenue. Also, for modeling purposes I believe it is also important to note that we closed first year value of $3.4 million in large deals in Q1 ’07 that we suggested at the time should be treated as non-recurring.

Excluding the impact to stock-based compensation expense we now expect Q1 ’09 non-GAAP net loss per share to be in the range of minus $0.10 to minus $0.12. This estimate is against an average weighted share count for the quarter of approximately 56.3 million shares. For the full year 2009 revenue is expected to be in the range of $145 million to $146 million which equates to approximately 30% year-over-year revenue growth.

Although we note that many companies are abandoning annual guidance because of their lack of visibility and predictability, I’d like to remind you that we continue to have high revenue visibility and high predictability in our recurring revenue base.

Non-GAAP net loss per share excluding stock-based compensation expense is expected to be in the range of minus $0.23 to minus $0.27. This estimate assumes a weighted average share count for the year of approximately 57 million shares.

Now turning it back to Lars.

Lars Dalgaard

This is a very special moment in SuccessFactors life. The first three years of the company’s life was cash flow positive with both growth and customer success at 100%, a unique culture that’s been rewarded with being the best company to work for, and a seemingly endless market we embarked on a five year strategic investment plan to build dominant and profitable global scale.

As a result, we grew to $100 million organically faster than anyone we compete with, and now have a higher gross profit margin. And with 4.5 million paying users and a very profitable $126 million recurring revenue stream, we’re excited about continuing to innovate and grow our culture and top line sales as a profitable company.

Let me turn the call back to the operator and open up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brendan Barnicle - Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Guys I was wondering if you’re seeing some customers use the product in any different way or see a different emphasis on a product that you’ve got as a result of the economic environment.

Lars Dalgaard

Yes, we’re absolutely seeing customers use it differently and more because this is a tool that they can use immediately to make the decisions right now around who should stay and who shouldn’t, and exactly what people should be working on and what they should not be working on. And we can of course track that with their own systems since every one of our users are on demand, we can exactly track that. And we have built our own systems to track and it’s very exciting to see how solid we are inside of these accounts. And maybe that’s why our sales to existing customers are up that much as well as our renewals are improved.

Brendan Barnicle - Pacific Crest Securities

And Bruce gross margins had a nice up tick. You see that usually this time of year. Should we think about that rate as sort of the sustainable rate or is that just seasonality?

Bruce C. Felt, Jr.

Yes. That was an up tick. It’s not actually always an up tick in Q4. I mean you might note Q4 of last year, it actually went down. So the fact that we were able to have it go up at the same time having the higher quarter of overall business I think just shows how well we were able to manage the costs that go into cost of goods sold. We are hopeful overall on both gross margin and operating margin to improve it during 2009. We aren’t going to specific quarter-by-quarter but we do expect to see improvement going forward.

Operator

Your next question comes from Michael Nemeroff - Wedbush Morgan Securities Inc.

Michael Nemeroff - Wedbush Morgan Securities Inc.

Lars, when you guys decide that market conditions are sufficient to grow at the rates that you were growing prior to the start of the economic downturn do you anticipate ever going back to burning cash? Or will the company – will you make a commitment to keep the company cash flow positive going forward?

Lars Dalgaard

Thank you Michael. There’s just so much richness in the renewal stream and it’s now so large that that would be extremely hard for us to imagine that than any consideration. And it’s just – we’re just a company where everybody has been so focused on getting us through these five years of getting the global scale, getting the global suite, complete suite and getting all the geographies and all the segments out. And we’re where we need to be now with that. And we can begin to really harness it and still grow and penetrate and grab market share with the scale where we’re at now.

So there’ll be a lot of working capital coming out of this machine as we’ve been projecting it in all sorts of scenarios for the next many years. And we’re quite comfortable that we will never become un-cash flow positive again.

Michael Nemeroff - Wedbush Morgan Securities Inc.

And then I know that you guys are very goal oriented at SuccessFactors, probably using your own products there. Would you care to make a guess or create a goal of non-GAAP profitability and by what quarter possibly over the next couple of years?

Lars Dalgaard

Well, it used to be when we’re doing the IPO and the road shows and the secondary six months data that people were talking about 2013 and ’12 and things like that and ’11. And it’s definitely not that any more. It’s definitely 2010 but who knows whether it could be earlier. We’re just seeing the whole company step up and increasing getting more customer renewals, more sales to customers. So we feel that we can continue to execute in this Tyson, Toyota-like drive towards finding new improvements in cogs and OpEx every single quarter.

And you know we have the meeting this afternoon with the group that is responsible for that and they’re just extremely driven and motivated and make all the right decisions all the time to continue to get us that improvement.

Michael Nemeroff - Wedbush Morgan Securities Inc.

And one follow-up for Bruce if I may, if you could maybe define positive to moderate in terms of the cash flow and what your expectation is for total cash flow from operations for 2009, that would be helpful. Thanks.

Bruce C. Felt, Jr.

Yes. Q1 will be the largest quarter just because of what we’ve done on the cost structure and because it’ll be the strongest collection quarter. From that point on, it’ll be much more modest. We aren’t managing just to maximize cash flow as you might imagine. It could be a very large number with $125 million recurring revenue, we still are a growth company. We still have an under [payment] market to go after. We still have a very large market to go after.

We still have almost limitless number of products that we can deliver to our customers via the platform that exists and the footprint that we have and the fact that we touch every user. So I would just recommend very modest cash modeling during for 2009, not because it’s not possible for us to achieve it’s just that we’re again choosing to achieve that as we still take advantage of our market opportunity.

So I don’t know if I can be more specific than that, but I think conservative numbers are just good numbers to have in terms of models from this point going forward.

Operator

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

Tom Ernst - Deutsche Bank Securities

I wanted to ask you about the recurring revenue base of $125 million. What have you seen in terms of trends in your renewal rates first?

Lars Dalgaard

Well, we saw we call it the customer retention rates we saw still within greater than 90% but what we did note is we saw a tick up, that is an improvement during the quarter. You would – it’s a bit counter-intuitive given the market environment on the one hand, but a possible explanation for that is just the fact that we value our current customers. They’re more important than ever. The company’s organized around efforts to make sure that we take care of them. And I think at least in this quarter we saw that we were able to retain more than what we had last quarter.

Tom Ernst - Deutsche Bank Securities

I would have expected perhaps a tick up on a dollar basis because of up sold product with the product suites, but do you mean that you had an up tick on the unit basis as well?

Lars Dalgaard

That’s correct. That’s what we mean by that. And of course dollars were even larger given the amount of upsell.

Tom Ernst - Deutsche Bank Securities

And then a follow-up to that, looking forward in a tough environment what is your insight into your customers’ usage that gives you confidence that you can maintain those kind of renewal rates? And what do you think is the at risk customer base, those that haven’t actually – that aren’t using the product in the timeframe you hope them to?

Lars Dalgaard

So the whole company is aligned around a standard operating procedure that tracks not only – it starts simply with the rep, right? You want to make sure that the rep is accountable for what they sold and so unlike other software companies our rep has to be there when you kick off the process. And so internally we have an operating dashboard that shows all the steps in that value creation chain. You know, specific drivers that we need to drive into the analytics dashboard, when you’d launch the product, when you’d like to see specific behavioral pattern in terms of how the product is launched and how it’s being used.

And all along this time we can by exception rather than to have to drive after each account track how that usage is. And so it’s that detailed insight and the very close relationship with the customers that makes us confident in seeing how they’re using it and have an early warning system if they’re not using it the way it should be for them to have success with it. And of course we’ve got a bit of experience with that now, right? Because we’ve been watching it for seven to eight years.

And so whether it’s Lego or it’s a bank or whether it’s a post office, we have very good understanding of what their operations are and how they need it to use it depending on which product they use or which ones of the products in the suite that they use are more daily use and some are more sort of a quarterly, monthly use. And so that’s how we have an insight into that. And it’s by far the farther thing that we watch the most intensely as a team.

And we have a meeting every single week where we review any issues; any stress; any cracks there might be in the system; anything that the system didn’t pick up, where we as a management team need to step up our game and go after it. And it’s an extremely strong meeting, very strong participation from the field. And it’s an action board where we can immediately go after anything that might not be the way it needs to be even though the systems might have given you a false positive, etc.

Tom Ernst - Deutsche Bank Securities

Any trends there? Any trends in terms of cracks, strains and how big of your base is that part of the base that really has to get to that usage level where you feel like they’re deeply engaged?

Lars Dalgaard

We were very helped by the fact that we actually accelerated our implementation speed in 2008 over 2007. So that’s kind of a key area is if you don’t get the customers up and running, you’re definitely in trouble. And we’ve been hitting faster rates than we expected there which is what has driven that almost trailing indication which is retention of customers.

And so we are largely through the majority of customers which would be the biggest potential indicator of eventual you’d say loss of renewals. And we’re not at the rate where that is anything but exciting actually that we’re seeing ourselves accelerate through that, renewals and implementation at a speed which is better than it has been before. So that’s exciting.

Operator

Your next question comes from Adam Holt - Morgan Stanley.

Adam Holt - Morgan Stanley

My first question is I guess a follow-up to the previous question with respect to I guess the renewal cycle. Obviously you all have been able to continue to expand your seat count in an environment where a lot of firms are having to reduce their number of employees, unfortunately. Have you seen any correlation or any anecdotal evidence within your base of the ability to continue to expand your footprint, even though you might actually be seeing an aggregate number of employees or potential install base actually decrease?

Bruce C. Felt, Jr.

Hi Adam. It’s Bruce. As you might recall we have historically and this has been ever since the beginning sold very few a minority of our modules two to three in every one of our accounts and only a fraction of the number of users. So we’ve always had a very large what we call white space to go after.

That means that we still have six, seven, eight, nine more modules that we can sell. So we’ve been organizationally organizing more and more against that proposition, with the view that we have such a wide open market with our current customers that we think getting new customers is really going to be the challenge in the tough economy. Let’s focus on that. And it really hasn’t been a focus before where we’ve naturally sold more product into them. We think with our focus we can even do better.

And because we have sold so much product and we just brought out new products in Q4 and actually in Q1 that we fully expect to see more adoption across the modules. And that naturally leads to just more people using it, too, because we tend to sell into a division or line of business or geography. So when one of those is successful it just spills over the spill over effect to the other ones. So we fully expect to continue to see that trend. And we think it’s a great asset to have as a company in this kind of environment.

Adam Holt - Morgan Stanley

If I could turn for a minute to the cost side, you obviously had a significant headcount reduction in the quarter. Could you maybe detail, and I know you don’t break out all of the different line items the way your people are, but where some of the larger areas of reduction were? Maybe give us a sense of where you are in terms of sales capacity? And then I think you mentioned that you still have plenty of scale to grow. At what point – I guess what sort of growth rate do you think from a billings perspective your current capacity can support?

Bruce C. Felt, Jr.

Sure. So in terms of where we focused on, we focused on our customer acquisition costs. And we built in 2007 we really built out an infrastructure with a very large sales force whose purpose was to get as many new customers as possible. And that was successful. So when it looked like the market in the macro environment was going to make that more difficult on a per unit basis, then we decided that’s where we really need to be diligent in costs.

So it was really about customer acquisition. At the same time we had to be very careful going through that process not to have customer service go down. So we protected customer service, the data center and our capability to build new product. So that’s where it was. We therefore did bring our total sales headcount down. However, we believe we still have an incredible amount of investment in new business acquisition infrastructure. Therefore we can still grow without adding to it.

So we feel we’re very well positioned if the market kind of allows us to do that. In terms of growth rates, we aren’t getting any guidance as to specific growth rates but we just see new customer acquisition as challenging. We suggest everybody take a conservative view. We model a very conservative view with what the new business will look like. We think it’s prudent. If the market actually allows for more or picks up or there’s a turnaround or anything changes and we find a geography that’s really working for us, then we are prepared to increase what we need to to kind of capture that opportunity.

But we do still have the capability to grow with what we have now because of such a you know, such a significant investment that we’ve made in 2007 and even through most of 2008. So it’s still there.

Operator

Your next question comes from Karl Keirstead - Kaufman Bros.

Karl Keirstead - Kaufman Bros.

I’m wondering if you could comment on the extent of pricing pressure in the industry and push back from clients on pricing if you did see it and it wouldn’t be surprising in this environment how you’ve dealt with it. Thanks.

Lars Dalgaard

I’ll say one of the interesting statistics of this quarter was the unit pricing was higher over Q3. What our real challenge was simply the size of the deals and number of users. It wasn’t pressure on pricing, it wasn’t what we got a deal of really having to discount to get it. So that’s a I think very interesting statistic that came out of this quarter. Overall it was a very strong quarter in the number of transactions. And on the pricing again it was higher than it had been before so we’re very optimistic about that.

It’s just companies were really cautious in how much they bought and how many users they bought it for. That’s the bad news. The good news is that the rest of the users are still there. They didn’t go away. And because we’ve had so much success upselling once we’re in, that’s not a lost opportunity for us. It’s more of just a postponement and a deferment.

Karl Keirstead - Kaufman Bros.

Bruce, at the end of ’07 you cited a bill to unbuild backlog ratio of about 1.1 and if I’m not mistaken indicated you’d update us as of the end of this fiscal year. Do you mind providing an update? Did it stay about 1.1 to 1?

Bruce C. Felt, Jr.

No, I just gave you the actual dollars. So the dollar to off balance the backseat backlog is $110 million at the end of this year. The difference in the ratio is attributed in part to the fact that the mix of the new customer acquisition moved more in favor of SMB which tends to have a smaller contract lengths or shorter contract lengths so to speak.

Lars Dalgaard

But larger per seat price.

Bruce C. Felt, Jr.

Yes, but larger unit per seat price which we think over time obviously would given our cost to deliver a seat is the same way that enterprise is small. I mean it should be more profitable over time.

Karl Keirstead - Kaufman Bros.

And just that shift a little bit more towards SMB have any affect on your invoicing cycle, cash flow, any other impacts we can think about for ’09?

Bruce C. Felt, Jr.

No. Those are all the same, whether it’s a one year deal or a three year deal, it’s invoiced a year in advance. That’s held up very well through the whole company’s history. It held up well through this quarter. Payment terms are the same, net 30. It was actually a bright spot was the small business was the strongest component this quarter. And I mean if you’ve followed us every quarter something does well. It happened to be the small business which I don’t know that people really expected that to be the case. But that was the case for us.

Lars Dalgaard

Alliances in Q3 and surprise in Q2, and Europe were the other candidates [inaudible] in 2008.

Operator

Your next question comes from Terry Tillman - Raymond James.

Terry Tillman - Raymond James

Lars you had indicated I think you used the word “abrupt” change especially in terms of new customer acquisitions so I guess maybe part of my question was just answered. So was it primarily enterprise and mega-enterprise where that just turned off? And then secondly I mean are you seeing any different trend or any improvement in closed rights in that part of the business here in the first quarter?

Lars Dalgaard

I wouldn’t say there’s a positive off-site surprise in Q1. It’s pretty much the same story and that sort of is in line with what we’re guiding.

Terry Tillman - Raymond James

And Bruce in terms of the guidance for ’09, the 30% top line growth if I’m not mistaken a lot of that is from the visibility and the strength of bookings especially in the first nine months of ’08 I would think. So could a situation where what the Street characterizes as bookings or billings or either or could that be materially lower than in ’09 and still that 30% top line growth is achievable?

Bruce C. Felt, Jr.

Yes, Terry, most of the visibility comes from what’s already on the balance sheet. So that doesn’t go away no matter what. The next level of visibility is the recurring revenue, some of which is already under contract. So it’s not cancelable. That’s a high degree of visibility. The rest is apparently what does renew that has an option that we have a very good track record of doing that. So and then lastly there is an assumption for what new business needs to be but it would – the guidance really allows for very conservative new business assumption. And we’re still able to hit that.

Terry Tillman - Raymond James

And Lars this last question just relates to maybe there’s more of a discretionary nature to even a [Tolectus] that should be useful and has an ROY. Is there anything you can do to even further tweak kind of your messaging? I know last quarter I had asked about maybe this helps with restructuring. I don’t know if this Stock Ranker is going to be helpful. But is there anything you can do to even further tweak to just make this kind of that tool that’s just a must have regardless of the situation? Thanks.

Lars Dalgaard

Yes. That’s really an exciting question because that’s what we’re spending a lot of time on as a team. We’ve had several weekend sort of off-site in the office where team members from across the company have gathered together to leverage the ways that we are seeing customers using this product differently right now. And we’re engaging a lot of customer research in service. It’s very exciting what’s coming out of that.

I guess it comes from the fact that when you have a team that is really passionate about the mission that we’re on to significantly increase top line and bottom line performance for companies through engagement of people and how to motivate them and drive more alignment. Then you find people not hiding and getting scared in a market like this but instead getting excited about how to leverage the opportunity more.

And so we’re definitely seeing that and stay tuned. One of the things was the business performance accelerators that we launched. And I’ve actually been personally surprised to see how many leads that’s generated. It’s been really a very exciting positive story, you know. You get a little bit jaded when you do this for as long as I’ve done it but I was kind of surprised that was an off pattern sort of off the charts success in a very short period of time from when we launched it. So that was exciting.

Operator

Your next question comes from Sarah Friar - Goldman Sachs.

Sarah Friar - Goldman Sachs

Bruce, on the bookings growth rate it looks like it’s a number that’s coming out kind of in low single digits year-over-year. Bruce is there something else within that number either currency or kind of a tougher comp from last year maybe like a one or two large deals or something that we should be taking into account when we think about what kind of a normalized growth rate that is sustainable given the environment we’re in?

Bruce C. Felt, Jr.

The comment that I made in answer to the other question was it was really about the deal size and that’s the number of users. So we did see difficulty in just getting the larger deal sizes in Q4. So when you compare – this is why I highlight for Q1 in ’07 – I’m sorry, Q1 ’08 we had $3.4 million of large deals that doesn’t recur so in really driving your models for ’09 to take that into consideration.

But in Q4 ’08 we did also have some large deals there so if the deal size is coming down in terms of number of users again not pricing but number of users and we compare it to a quarter that has many more large deals then of course it looks like deceleration when in fact from a number of transaction put of view it was the largest quarter we ever had. So that’s the one area that we’re paying attention to. We still think it was a healthy quarter. We are coming out with different approaches and how to go ahead and get more users or get more products at the users up front.

We have more products to offer. We think that’s a very reasonable kind of objective to work on during the year. And as we are able to bring out new products consistent with what people want to do today and how they want to use them like the Stack Ranker and on boarding and off boarding and compliance and optimization products, these are all resonating pretty well with our customers and help us see what we can do to get bigger deals in these enterprises.

And we also want to note with 100 customers greater than 10,000 users we know how to get the big ones. So we want to continue to do that but just make sure we can penetrate deeply enough so that we continue to have some nice new business momentum when we do get these transactions.

Operator

Your next question comes from Brad Whitt - Broadpoint AmTech.

Brad Whitt - Broadpoint AmTech

Just curious, Lars, are you seeing any seasonal patterns as to which modules customers are buying?

Lars Dalgaard

We are pretty surprised by the fact that we’re seeing – I mean what’s really unique about this business that I can honestly tell you this was something we did set out to build was because I’d had a pretty bad experience personally, I generally was buying from one of the big ARP vendors where you don’t really have the flexibility to do what you’d like to do for your business process.

And that’s really the big difference this company is making is that for the business applications and the category we’ve created you can accommodate any type of real business transformation process that you have organized yourself around. And so it gives you the flexibility that you could be in a situation where you just need some a new strategy clearly communicated and make sure that absolutely nobody is working on anything but that.

Or you could be in a situation where you need to reduce headcount massively. Or you could be in a situation you would be surprised how many customers we have in this situation where you’re expanding in a new area to take care of the opportunities that are opened up in markets like this. Or you could be in a situation where you have just done a climate survey and you’re finding out that your employees are really angry about the way comp is being distributed, compensation.

Or you could be in a situation where they’re getting so many resumes right now. You’d be surprised. We’re actually seeing companies buying the recruiting product, probably less so than some of the other areas but we’re seeing people and it’s big companies buying this. Then for sure the core product in terms of getting great coaching, great assistance around that. We’re seeing people expand in other languages. And we’re seeing still the good old train that could which is our 360 products and getting feedback from the entire organization.

So it’s pretty bland and pretty varied distribution of pick up and demand and that has surprised us. We thought it would just be one type of application around, for instance the Stack Ranker, but it’s across the board. And our employee profile really allows you to have a complete management suite for your entire organization. And so we’ve seen that pick up especially internationally more than we expected.

Operator

Your next question comes from Brad Reback - Oppenheimer & Co.

Brad Reback - Oppenheimer & Co.

Bruce I think you had mentioned something about a one time revenue benefit in 1Q. Is that correct?

Bruce C. Felt, Jr.

Yes it was. It was – we had in Q1 2008 $1.2 million revenue pick up that we said was non-recurring and the point being when we gave guidance for Q1 you know it’s 46% growth without that it’s 54% growth. So I just wanted to point out that we’re having 46% growth even though it’s built on a base of revenue for Q1 ’08 that had $1.2 million of non-recurring revenue.

Operator

Your next question comes from Michael Wong - Think Equity.

Michael Wong - Think Equity

So given the aggressive reduction in headcount how is the morale as a company and do you believe that the restructuring impact at selling efforts in Q4 or early in Q1 on top of a very tough environment? Thanks very much.

Lars Dalgaard

Thank you. Of course it’s not easy to lay off people ever for anybody. I think you’re a pretty weird human being if you think that’s easy. But it was easy to show why it was the right thing to do. And we used our own Stack Ranking product frankly. You know just as we were talking I was asking a couple of key people right now in the organization you know did we cut into any of the A players? And the fact is that we did not. And so that’s kind of the key. You’re left with the absolute top performers. And that’s of course an extremely exciting place to be once you are there.

But we hired those people for a reason and so of course that was hard. But the organization knows why we did. We’ve been extremely clear in how we communicate around it and had very elaborate discussions around what is going on in the economy and how we need to respond to it. And what’s been personally extremely humbling is the many letters I have personally gotten from people, hand written, thanking me and the organization for the best place they ever worked for. And that they’d like to come back if they have a chance. And we have actually hired one or two back because of how we’ve seen the numbers come through.

So that’s the situation. I think the morale is as I told you early on one of the other answers spectacular because this is a bunch of winners. They really want to go on and change the way the world works for a living. And that passion has not become smaller from this. It’s become stronger from this. And so I’m very impressed and very proud as I formally thanked in the prepared remarks how well everybody has executed. We’re coming out of this with an absolute A team that is feared by everybody in this industry. And we’re extremely excited about the success we’re going to see in the many next years to come.

Operator

We have reached the end of the allotted time for questions.

Lars Dalgaard

Great. So we’re at the hour here and I really can follow off from what I just said. That’s about it. We’re extremely thankful for your time and we look forward to meeting you out there and delivering more great results for you. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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