Executives
Tim Shanahan – Senior Director of Investor Relations
Daniel R. Fishback – President, Chief Executive Officer & Director
Mark A. Culhane – Chief Financial Officer & Executive Vice President
Analysts
Nabil Elsheshai - Pacific Crest Securities
Terry Tillman – Raymond James
Michael Nemeroff - Wedbush Morgan Securities, Inc.
Bryan McGrath - Credit Suisse
Tom Ernst - Deutsche Bank Securities
Keith Weiss – Morgan Stanley
Jeff Van Rhee – Craig-Hallum Capital
Jeffrey Keene – William Blair
Greg McDowell – JMP Securities
DemandTec, Inc. (DMAN) Q4 2009 Earnings Call April 2, 2009 5:00 PM ET
Operator
Welcome to the DemandTec Q4 and full year 2009 results conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This call is being recorded today, April 2, 2009. I would now like to turn the conference over to Mr. Tim Shanahan, Senior Director of Investor Relations.
Tim Shanahan
Thank you for joining us on today’s conference call to discuss DemandTec’s fourth quarter and fiscal year 2009 results. This call can also be accessed in the investor relations section of DemandTec’s website at www.DemandTec.com. With me on today’s call are Dan Fishback, DemandTec’s President and Chief Executive Officer and Mark Culhane, DemandTec’s Executive Vice President and Chief Financial Officer.
After the market closed today DemandTec issued a press release with results for its fourth quarter and fiscal year 2009. A copy of this press release is available on our website. Please note that in this conference call we will be discussing non-GAAP results which excludes stock-based compensation and amortization of purchased intangible assets. We refer you to today’s press release for a reconciliation of these non-GAAP amounts to their comparable GAAP amounts.
During the course of this conference call DemandTec’s management may make forward-looking statements regarding financial projections, plans and objectives for future operations and managements’ beliefs about potential market size and growth as well as the company’s future performance, financial conditions or results of operations. These forward-looking statements are not historical facts but rather reflect DemandTec’s current expectations and beliefs based on currently available information.
We undertake no obligation to provide updates in the future. DemandTec’s actual results may differ materially from those projected. The risk factor section of our most recent 10Q on file with the SEC discloses risks that could cause these differences. Please note that any future product, feature or specifications referenced in today’s call are informational only and not commitments to deliver any technology or enhancement.
DemandTec reserves the right to modify its product plans at any time. In terms of the structure of today’s call Dan Fishback will begin with a brief summary of our financial results and then provide an update on our achievements in the fourth quarter and fiscal year 2009. Mark Culhane will then provide more details on our financial results as well as our fiscal year 2010 outlook after which we will take your questions.
With that, I’d like to turn the call over to DemandTec’s President and CEO Dan Fishback.
Daniel R. Fishback
DemandTec’s financial results for the fourth quarter demonstrate solid revenue growth, stable non-GAAP gross margins and operating profitability and positive free cash flow. We continue to execute on our three point growth strategy in order to drive growth and establish DemandTec as the leader in consumer demand management software solutions.
First, let’s look at financial highlights of the fourth quarter. Total revenue for the quarter came in at $19.3 million representing an 11% year-over-year growth basis. From a profitability perspective non-GAAP operating income was $958,000 above the end of our guidance and non-GAAP net income was $1.2 million leading to non-GAAP earnings per share of $0.04, a penny above our guidance.
For our fiscal year 2009 total revenue was $75 million representing 22% growth on a year-over-year basis. Full year non-GAAP operating income was $3.2 million. Non-GAAP net income was $4.9 million and we had a non-GAAP earnings per share of $0.15. In the fiscal year 2009 we generated approximately $13.8 million in cash from operations and used $3.1 million in capital expenditures resulting in approximately $10.7 million in free cash flow or approximately a 14% free cash flow margin which was above our increased free cash flow guidance.
Our results for the fourth quarter and fiscal year 2009 reflect our execution against our three point growth strategy of securing new retail customers, renewing and selling ad on solutions to our customers and leveraging our DemandTec TradePoint Network or DTM to add new consumer product companies or CP companies.
Today nearly 80% of our retail customers sell items known as fast moving consumer goods or FMCG which are everyday items sold by grocery and mass merchandise retailers and their trading partners, the CP companies. As a reminder, we do not sell to soft line or apparel retailers or their trading partners.
As in the past economic slowdowns FMCG retailers and CP companies have generally faired well. Given the continued economic uncertainty we believe that FMCG retailers and CP companies will continue to invest in ways to quantify customer behavior to drive measurable and predictable sales, margin, volume and loyalty in 2009. That being said we continue to see a challenging worldwide economic environment in 2009 that will continue to lengthen sales cycles.
Our outlook for our fiscal year 2010 assumes no improvement in the worldwide economy in calendar year 2009. At the end of the fourth quarter we completed our acquisitions of Connect3 Systems allowing us to move forward with what we believe is a truly differentiated end-to-end promotion management solution. This solution will help our customers further optimize their pricing strategy as well as better manage the complex promotion process including internal and external collaboration, promotion calendar optimization, multichannel cross model advertising and marketing execution.
IDC Retail Insights in a recent research note published February 6, 2009 said, “DemandTec’s acquisition of Connect3 Systems is music to the ears of retail merchants as no other software application has been fully able to fully integrate on a single platform demand, price, space, promotion optimization with merchandising and marketing execution.”
Our acquisition of Connect3 Systems allows DemandTec to provide our customers with a seamless business process from deal negotiation over the Internet via our DTM to multichannel ad management that includes circulars, Internet promotions, mobile devices and more given them access to proven science based customer insights in order to optimize their trade spend that according to Cannondale Associates exceeds $70 billion annually in the North America alone.
We continue to believe that investing in our business for the long term is the best way to create long term shareholder value given our unique solution, the competitive landscape and the challenges our customers face in pricing.
Let me now give you an update regarding our three point growth strategy. The first component to our growth strategy is to continue to extend our industry leadership position with the world’s leading retailers. During the fourth quarter, Schnucks, a large privately held grocery chain in the US with over $2.5 billion in annual sales selected DemandTec and our everyday price management promotion planning optimization and deal management software services.
Schnucks chose DemandTec after extensive due diligence and customer checks that resulted in detailed understanding of the depth of our product offering and our long history of working with well respected retailers worldwide. Choosing DemandTec gives Schnucks access to advanced analytical services allowing them to simulate different merchandising strategies and measure merchandising decisions before execution.
The DemandTec promotion, planning and optimization software service provides Schnucks access to a comprehensive solution for managing in an increasingly complex promotional process including internal external collaboration, planning, optimization, execution and measurement. When combined with deal management it will help Schnucks more effectively manage its online trade promotion and help drive efficiencies in to an increasingly complex process. DemandTec retail customers now represent more than 100 unique banners of some of the largest and most respected companies in the world with more than 55,000 stores worldwide.
The second part of our growth strategy is to deliver measurable business results to our customers in order to drive renewals as well as adoption of our full suite of other solutions. Safeway, one of the largest food and drug retailers in North America with approximately 1,800 stores and annual revenues of over $44 billion renewed everyday price optimization and promotion planning and optimization software services for the fourth quarter.
In addition, Safeway is working strategically with DemandTec on the development of our next generation promotion management and promotion optimization solution. Also during the fourth quarter Best Buy a leading consumer electronics specialty retailer with annual revenues of over $40 billion early renewed their use of everyday price optimization and markdown optimization software services. BestBuy, a DemandTec customer since 2004 extends their relationship with us in order to continue to achieve sales, volume and profit objectives and to gain a better understanding of store specific consumer demand.
HEB, a privately held Texas based supermarket chain with stores across Texas, northern Mexico and with annual revenues over $12 billion renewed their investment in our markdown software service. HEB a DemandTec customer for over seven years extended their agreement to help them answer key questions about customers, categories and business performance to derive powerful insights to help them refine merchandising and marketing strategies.
Finally, the third part of our growth strategy is to leverage our success with retailers to provide our software services to CP companies. Along those lines during the fourth quarter Nestle US with annual revenues in the US of over $74 billion renewed their agreement of advanced deal management or ADM in the fourth quarter. This renewal was part of the strategic approach of using ADM as a corporate best in class practice across all operating units of Nestle US for all their retail partners currently using the DTM.
Also in the fourth quarter Kraft Foods, a global supplier of package food and grocery products with annual revenues of $42 billion selected DemandTec’s trade planning and optimization or TPO software service that will allow them to differentiate how they promote their broad portfolio of grocery brands and drive improved category performance for their retail customers. Kraft Foods was an existing subscriber to the DemandTec deal management software service and now added a multimillion dollar per year agreement for our TPO software service.
Also in the fourth quarter Unilever USA, a division of the world’s second largest consumer products manufacturer with annual revenues in the US of approximately $44 billion expanded their ADM relationship with us as part of their overall strategic approach to leverage our DTM to be used across all their retail partners currently using the DTM.
During the fourth quarter one of the largest global manufacturers of snacks, foods and beverages expanded their use of the ADM to be used across all their US operating divisions for all their current and future retail partners using the DTM. In addition to the DTM, this global CP company selected our TPO software service to optimize the investment of trade dollars and increased profitability by creating better promotion plans for their retail partners.
The Schwan’s Food Company a large privately held company in the US with annual revenues over $3.5 billion selected our TPO software service as well. Schwan’s choose DemandTec to leverage our advanced analytical services to gain a better understanding of trade promotion effectiveness with their retail customers. We also added over 60 other CP subscribers to our ADM software services on the DTM, our largest quarterly increase to date.
Now, nearly 2.2 million trade promotion deals have now been collaborated and negotiated on the DTM since its inception. The network is current driven by a community of more than 7,500 end users. This dynamic network represents a significant opportunity for DemandTec to deliver science based trade spend solutions that drive and quantify consumer behavior for both retailers and CP companies alike.
DemandTec is trusted by many leading retailers and CP companies for mission critical trade spend collaboration as the DTM continues to grow with each new retailer and additional CP companies are invited to participate by those retailers. The cost of collaboration that is shared by both parties is ultimately reduced.
In summary, our fourth quarter and fiscal year 2009 financial results were solid in a challenging economic environment. We believe that this is the time for us to continue to invest, innovate and extend our market share based on our market leadership position and the significant market opportunity we are addressing.
Before I turn the call over to Mark I’d like to discuss the economic environment and its implications for the DemandTec business. To date, there is little evidence to suggest that the macro environment will be improving in the near term. Trying to estimate the significance or the length of the current economic downturn or predicting how customers will respond based on historical trends is nearly impossible.
Having said that, we believe that continuing to execute against our three point growth strategy will allow us to navigate these difficult times. With that, let me turn it over to Mark to go through the fourth quarter and our full year financial results.
Mark A. Culhane
I will provide more details on our fourth quarter operating results followed by our fiscal year operating results and I will then provide our financial outlook for our first quarter and fiscal year 2010 which ends February 28, 2010 before opening the call for questions. Let me begin with our fourth quarter operating results.
Total revenue for the fourth quarter was $19.3 million an increase of 11% over the comparable period last year and 2% sequentially over our third quarter. We generated $16.2 million or 84% of our fourth quarter revenue from the retail industry with $3.1 million or 16% coming from the CP industry. This compares to vertical mix of 90% and 10% respectively for the fourth quarter of fiscal 2008.
Geographically we generated $16.6 million or 86% of our fourth quarter revenue from the United States compared to $15 million or 86% of total revenue in the fourth quarter of fiscal year 2008. Revenue from international operations was $2.7 million for the fourth quarter or 14% of our total revenue as compared to $2.4 million or 14% of total revenue in the fourth quarter of last year.
Turning to costs and profitability for the fourth quarter we will be discussing our results on both a GAAP and non-GAAP basis. Please be sure to look at our press release for a reconciliation of non-GAAP to GAAP amounts. I’ll begin with a summary of our non-GAAP results which exclude non-cash expenses associated with stock based compensation and amortization of purchased intangibles including the write off of acquired in process research and development costs.
Non-GAAP gross profit was $14 million in the fourth quarter representing a year-over-year increase of 12%. Non-GAAP gross profit in the fourth quarter excludes $469,000 of stock based compensation expense and $153,000 of amortization of purchased intangibles. Non-GAAP gross margin was 72.2% for the fourth quarter an increase of approximately 80 basis points over he fourth quarter of last year and up slightly compared to the third quarter of this fiscal year 2009.
Turning to non-GAAP operating expenses for the fourth quarter non-GAAP R&D expense was $6.4 million a 13% increase year-over-year and represented 33% on a percentage of revenue basis. Non-GAAP R&D expense excludes $580,000 of stock based compensation expense. Non-GAAP sales and marketing expense was $4.5 million during the fourth quarter a 2% increase year-over-year and represented 23% on a percentage of revenue basis.
Non-GAAP sales and marketing expense excludes $564,000 of stock based compensation expense. During the fourth quarter non-GAAP G&A expense was $2 million a 25% increase year-over-year and represented 11% on a percentage of revenue basis. Non-GAAP G&A expense excludes $521,000 of stock based compensation expense.
The increase in non-GAAP G&A expense from the prior year’s quarter is primarily related to the cost associated with being a public company particularly Sarbanes-Oxley compliance costs. Our non-GAAP operating income was $958,000 in the fourth quarter or a 5% operating margin. This is an increase of approximately 120 basis points year-over-year when compared to the $659,000 in the year ago quarter.
Non-GAAP operating income in the fourth quarter excludes $2.1 million of stock based compensation and $643,000 of amortization of purchased intangibles. Total non-operating income was $228,000 during the fourth quarter compared to $821,000 in the year ago quarter and $437,000 in the most recent third quarter.
The decrease in non-operating income was primarily due to significant reductions in interest rates resulting lower returns on our invested cash balances. Going forward we continue to anticipate approximately a 1% rate of return on our invested cash and investment portfolio.
Non-GAAP net income was $1.2 million or non-GAAP earnings per share of $0.04 based on 31.9 million fully diluted weighted average shares outstanding compared to $1.3 million or non-GAAP earnings per share of $0.04 in the year ago quarter. Looking at our results for the fourth quarter on a GAAP basis including stock based compensation expense and amortization of purchased intangibles our GAAP gross profit was $13.3 million.
Our operating loss was $1.8 million. Our net loss was $1.5 million and our GAAP loss per share was $0.06 based on 27.9 million weighted average shares outstanding. This compares to a GAAP loss per share of $0.04 in the year ago quarter. We expect stock based compensation expense on a quarterly basis to be approximately $2.5 million per quarter as we enter fiscal year 2010.
Now let me turn to our fiscal year 2009 results. Total revenue for the year was $75 million an increase of 22% over the $61.3 million we reported in fiscal year 2008. For fiscal year 2009 we generated 86% of our revenue from the retail industry and 14% from the CP industry. This compares to a vertical mix of 90% and 10% respectively for the fiscal year 2008.
For fiscal year 2009 we generated $64.7 million or 86% of total revenue from the United States and $10.3 million or 14% of total revenues from international operations. This compares to fiscal year 2008 results of $53.7 million or 88% of total revenue from the United States and $7.6 million or 12% of total revenue from our international operations.
Our non-GAAP gross margin for the fiscal year 2009 was 72% an increase of 230 basis points over the 69.7% for fiscal year 2008 and above our guidance of 150 basis point increase for the year. Our non-GAAP full year operating income was $3.2 million or a 4.3% operating margin an increase of 310 basis points year-over-year when compared to non-GAAP operating income of $742,000 in fiscal year 2008.
Our fiscal year 2009 non-GAAP operating income excludes $8 million of stock based compensation and $1.85 million of amortization of purchased intangibles and also came in above our guidance for the year. The company generated non-GAAP net income of $4.9 million or non-GAAP earnings per share of $0.15 based on 31.7 million fully diluted weighted average shares outstanding in fiscal year 2009.
This compares to non-GAAP net income of $1.8 million or non-GAAP net income per share of $0.08 in the year ago period. Looking at our results for fiscal year 2009 on a GAAP basis including stock based compensation expense and amortization of purchased intangibles our GAAP gross profit was $51.7 million.
Our operating loss was $6.6 million. Our net loss was $5 million and our GAAP loss per share was $0.18 based on 27.4 million weighted average share outstanding. This compares to a GAAP loss per share of $0.25 in fiscal year 2008. Turning to the balance sheet cash and marketable securities were $87.9 million at the end of fiscal year 2009 an increase of approximately $12 million when compared to the end of fiscal year 2008.
Please note that the cash balance at the end of fiscal year 2009 includes the cash used in our acquisition of Connect3 Systems since the purchase price was paid after our Q4 ended on February 28th, 2009. Our accounts receivable balance net of allowances at the end of the year was $11 million representing an adjusted DSO of 55 days taking into consideration changes in deferred revenue given we have a subscription based business model.
This compares to 59 days at the end of the third quarter. We ended the fourth quarter with short term deferred revenue of $46.4 million a 5% year-over-year increase and $836,000 higher compared to the previous quarter. As expected long term deferred revenues continued to decrease coming in at $2.4 million about $2.1 million less than the previous quarter.
As a reminder our multi-year multi-million dollar retail customers are generally billed on an annual basis. Prior to being a public company we would bill certain of our retail customers for the entire multi-year contract value upon signing resulting in long term deferred revenues. Going forward as we anticipate continuing to build our retail customers on an annual basis long term deferred revenues are expected to eventually decrease to zero.
Please also remember that changes in deferred revenue quarter-to-quarter plus revenue in a quarter are a proxy for billings in that quarter but not for bookings given we enter into large multi-year agreements and generally only bill the first year up front.
Finally looking at our cash flow in fiscal year 2009 we generated $13.8 million in cash flow from operations and used $3.1 million on capital expenditures resulting in $10.7 million of free cash flow for the year above our revised $10 million free cash flow target. This compares to the year ago period where we generated $7.1 million of free cash flow which resulted from $11.2 million in cash from operations less $4.1 million used for capital expenditures.
Our free cash flow margin for 2009 was 14%. Before turning it over to questions let me finish by providing our outlook for our first quarter which ends May 31st, 2009. The operating income and earnings per share guidance I’m going to give are non-GAAP and exclude non-cash charges related to stock based compensation expense, amortization of intangibles and non-recurring acquisition and restructuring related charges.
I want to remind you that we expect that our recent acquisition of Connect3 which closed at the end of our fiscal year ending February, 2009 will be dilutive for the first to quarters of our fiscal year 2010 which ends February 28th, 2010 on an operating income, earnings per share and free cash flow basis before becoming accretive over the second half of fiscal 2010.
We now expect this acquisition will contribute $3 million to $5 million in revenue and have a $0.04 to $0.06 per share dilutive impact to non-GAAP earnings per share in fiscal year 2010. As Dan mentioned previously we continue to see a challenging worldwide economic environment throughout calendar year 2009 that will continue to lengthen sales cycles.
We cannot estimate the significance or the length of the current economic downturn or predict how customers will respond and the resulting impact that will have on our business. Therefore we continue to believe it’s prudent to be conservative in presenting our fiscal year 2010 outlook.
DemandTec has operated in challenging markets in the past and we’ve grown the business, strengthened our market share and grown our brand and we are focused on doing the same in fiscal year 2010. With this in mind we expect our first quarter revenue to range from $19.3 million to $19.5 million.
We expect the dilutive impact of our Connect3 acquisition will result in a non-GAAP operating loss for the first quarter in the range of $500,000 to $700,000 and non-GAAP net loss per share of $0.02 based on fully diluted weighted average shares outstanding of approximately 33.5 million. We also expect to incur in the quarter non-recurring acquisition and restructuring related charges of approximately $350,000 to $500,000.
As mentioned in my earlier remarks I’d also like to remind you that the Connect3 acquisition will be dilutive to free cash flow for the quarter. The outlook for fiscal year 2010 is more uncertain than it was when we entered fiscal 2009 given the macro economic environment.
Accordingly we currently a revenue growth profile in the range of 10% to 18% and a non-GAAP earnings per share in the range of $0.08 to $0.16 assuming fully diluted weighted average shares outstanding of approximately 35 million. So we expect the rate of return on our invested cash and investments to yield approximately 1% given the current interest rate environment and we expect minimal tax expense given our net operating loss position.
In summary our fourth quarter and fiscal year 2009 results were solid and we are confident we will continue to grow and expand in fiscal year 2010 while we invest in our business. With that we will now open the call up for any questions.
Question-And-Answer Session
Operator
(Operator Instructions) Our first question comes from Nabil Elsheshai - Pacific Crest Securities.
Nabil Elsheshai - Pacific Crest Securities
A couple of things real quick, first of all that 10% to 18% includes the Connect3 of what was it again?
Mark A. Culhane
Nabil we can barely hear you but yes it does.
Nabil Elsheshai - Pacific Crest Securities
Then if you look out to next year do you have a sense in terms of, I know you’d set the goal of eight to 12 customers this past fiscal year, are you willing to put a goal out there for next year and also did you actually hit that goal? I think last call you had talked about lower end of that eight to 12 range.
Daniel R. Fishback
For fiscal ’09 we came in the low range of that eight to 12 and we believe that’s realistic for fiscal ’10 as well.
Nabil Elsheshai - Pacific Crest Securities
Then last question, on the assortment just a quick update if you have a status on release and uptake and what kind of feedback you guys are getting on that module.
Daniel R. Fishback
Localization of assortment continues to be one of the hot buttons in the markets we serve. Certainly combined with pricing we still have a lot of confidence that’s a win/win opportunity for our customers. We’ve made investments in that product and we’re optimistic that it’ll drive revenue in fiscal ’10.
Nabil Elsheshai - Pacific Crest Securities
Is it out in the field yet or is it still in beta, alpha, still in development?
Daniel R. Fishback
We can bring parts of that service to the market today in its current form so I wouldn’t describe that as being alpha or beta or some kind of a pre-release version but we can bring those services to market in more of a consulting manner today and we’re doing that.
Operator
The next question comes from Terry Tillman – Raymond James.
Terry Tillman – Raymond James
Dan, it seems like to me a theme on the call was the strength on the CP side and I guess I’m going to throw some acronyms at you here that you were throwing at us. The ADM, Advanced Deal Management, can you give us a sense again in terms of when you’re getting to the point where you’re getting what I call more full monetization, how big does the economics get on that front and then when you add the TPO side, then how much incremental?
Just trying to get a sense on the overall economic opportunity in some of these bigger ones like Kraft or Nestle, etc.?
Daniel R. Fishback
Just to remind everyone on the call, our DemandTec TradePoint Network the initial fee is paid by the retailer and the access to the network is subsequently free for every manufacturer. The Advanced Deal Management is the upgrade service so today we announced the largest upgrade service or new subscriptions to the network in my opening comments I believe that was approximately 60 new in the quarter.
The monetization of that can be anywhere from tens of twenties to $500,000. On the other hand, our Trade Promotion and Optimization solution, or TPO, is the optimization of forecasting tool used by the manufacturer to develop and sell in trade deals to the retailer. It’s not uncommon for those licenses to be in the millions or $2 million, $3 million or larger per year for a certain size manufacturer.
So again the network first and foremost drives efficiency and reduces costs for both the retailer and the manufacturer. Our participation in providing that service certainly, there’s economics there in ADM but the ceding of the manufacturer to come back and upgrade to TPO, or the Trade Promotion Optimization, is the real opportunity on an economic basis.
Terry Tillman – Raymond James
Just my other questions and I don’t know if this is for Dan or Mark, but I’ll throw it out there. in terms of Connect3 I don’t have a great memory but I thought it was $4 million to $6 million was the original target and I think you guys said $3 million to $5 million so maybe could you reconcile what’s going on there or is it just say from the broader weak micro commentary or was there something new there?
Then as it relates to Connect3 you had mentioned a couple of joint prospect opportunities, have you seen any early synergies and/or your sales force trained?
Mark A. Culhane
Our original profile for the impact of the Connect3 acquisition was the $4 million to $6 million in revenue, $0.03 to $0.05. Obviously we’ve closed that transaction, we’ve had time now to digest it and get in there and do some things and our current outlook is $3 million to $5 million and $0.04 to $0.06.
What we’re really excited about is their core technology, their ad version or ability to leverage multi-channel Internet and wireless promotions, etc., there’s other pieces of the business that candidly are redundant and so forth so there’s pieces to that that now we have a better understanding with the allocation of resources and so forth.
That’s largely what’s changed on that front. It’s candidly just we’re 30 days post close and our teams are working together day by day every day now. With the second part of the question, in terms of synergies and so forth, I’ll have Dan jump in as well but yes we are seeing customer interests, customer engagement around the combined synergy of that product. Dan, you may have some thoughts there.
Daniel R. Fishback
Yes, certainly today and I think we all are consumers, today we’re all looking for a bargain. What see consistently across our customer base our retailers trying to figure out how to entice not only volume and revenue but loyalty through bargains.
Really this is front of mind so I continue to be very enthusiastic not only around the core technology but how we can extend that to drive promotional deals to the Internet in ad campaigns as well as down the line actually to a wireless device so that we can actually put a targeted promotion in the hand of a specific customer or type of customer. So yes, we’re very pleased.
Operator
Our next question comes from Michael Nemeroff - Wedbush Morgan Securities, Inc.
Michael Nemeroff - Wedbush Morgan Securities, Inc.
Just a couple of questions, specifically around the Connect3 acquisition, assuming it generates $3 million to $5 million now backing that out from the Q1 guidance that implies that the organic growth of the core business X Connect3 is going to be down sequentially. I’m just trying to reconcile how that actually happens with your subscription model. Was that due to some customer churn or some product churn somewhere?
Mark A. Culhane
No, keep in mind any time you do an acquisition the business you carry forward is significantly reduced from a deferred revenue perspective until those customers come up for renewal at which point you get 100% of those renewable dollars. The contribution across the year of $3 million to $5 million the impact in Q1 is very little.
Michael Nemeroff - Wedbush Morgan Securities, Inc.
How much is the deferred write down in Q1?
Mark A. Culhane
Generally you get about $0.30 on the dollar so whatever they had on their deferred revenue balance versus what you carry forward but once you work through the accounting rules and what you’re allowed to carry over and how you have to value it, on average it’s probably $0.20 to $0.30 on the dollar for most companies and we’re certainly within that range.
Michael Nemeroff - Wedbush Morgan Securities, Inc.
Then also from what I remember when you did the acquisition I think there was a $1 million hold back that’s paid out about 16 months after the close of the acquisition. I would assume pending certain operating hurdles met would this new lower assumption on the Connect3 business cause that to, would you not hold that back any more or would you actually just not pay out that $1 million?
Mark A. Culhane
First of all there is money being held back effectively in escrow but not because of an earn out, there was no earn out in this transaction. It’s held back for contingencies that could arise that are unforeseen, that are your normal standard things in any type of an acquisition.
In fact in this transaction there’s $2 million that are held back, $1 million of it which will get released at point in time and a second $1 million which will get released at a point in time depending on what claims against the escrow would occur.
Michael Nemeroff - Wedbush Morgan Securities, Inc.
Then you talked about the difference between billings and bookings. It sounds like given some of the large household names that you talked about in your prepared remarks that you signed to quite a bit of new business in the quarter. Would you care to tell us what the new bookings amount was that you signed in Q4?
Mark A. Culhane
We talked in our prepared remarks about a number of new things both on the retail side as well as the CP side and we have mentioned a number of the CP companies that renewed their Advanced Deal Management as well as subscribed to our TPO service. We don’t break out new versus existing bookings or talk about or disclose overall bookings but obviously we were pleased with the performance we had in Q4.
Michael Nemeroff - Wedbush Morgan Securities, Inc.
The eight to 12 that you commented before, is that net new customers? Does that include up sell into the Connect3 customer base or is that just brand new logos?
Mark A. Culhane
On an eight to 12 basis it’s retail customer names, new names. That is not including the new C3 customers that we had.
Operator
Our next question comes from Bryan McGrath - Credit Suisse.
Bryan McGrath - Credit Suisse
Couple questions here, as far as Connect3, going back to that, is the revenue that you’re going to be recognizing from them since you’re not going to be selling the on premises solution any more, is it almost all maintenance meaning no special license and no services?
Mark A. Culhane
The mix is highly geared towards the maintenance renewals but there are other analytical services we can sell into that customer base. We are not forecasting a lot of stand alone C3 types of sales but clearly we’re getting interest across our customer base as well as prospect base around the combination of a complete end to end promotion system.
Daniel R. Fishback
Let me put a little color just a little bit around Connect3 from an operational perspective. The core technology of being able to run versions to be able to create circulars or to create ad content to be driven to any multi-channel output. We’ve made and executed all the integration decisions, actually funded, developed and have in place two development teams, one to support the core technology as well as begin the work on the re-platforming.
We have a sense of urgency to get the re-platforming candidly and ultimately drive sales with that new platform. In the interim we’re going to continue to focus on securing the confidence of the customer base, make investments in the product to elipt all the commitments that have been made and again like Mark said sell analytical services and our tools to their customers or to the Connect3 customers if you will.
Bryan McGrath - Credit Suisse
You mentioned in your remarks that Best Buy had an early renewal in the quarter and I just wondered, what would drive someone to renew early before their term was up and then how does that affect bookings and changes in deferred revenue?
Daniel R. Fishback
Best Buy did early renew and approached us on early renewal. That’s not unusual, that’s happened several times in the history of this company with different customers who will approach us one to two quarters before the current contract expires. So that happened in this instance. In terms of how it affects billings and bookings, obviously when we sign it it affects bookings. When we bill it will determine how it affects deferred revenue.
But that was billed and reflected in the quarter.
Bryan McGrath - Credit Suisse
What’s the motivation for them doing it? Do you typically pair that up with an add on sale or additional deal on top of the original?
Daniel R. Fishback
That’s happened in the past where they’ve done that, will come back and want to negotiate an add on service or an add on product or they just want to get it locked and loaded and don’t want to take it to the end of the term and then try to negotiate something there and potentially have a lapse in the service because we can’t reach agreement.
We’ve had our customers approach us strategically on early renewals and we’ll certainly entertain those conversations.
Bryan McGrath - Credit Suisse
One last question, you talked a little bit last quarter about doing some discreet packaging of your solutions and price to win was the package you talked about. Of the new wins that you provided earlier, was any of them from this price to win package?
Daniel R. Fishback
Yes, I think we called it the recession or package. Yes we clearly are starting to see interest and we closed a couple deals in the quarter and we’ll continue to use this to gain share in what we think is a good opportunity for us. We’ve yet to see what the long term impact will be on how many new customers this can bring but there is some interest in moving ahead. If we can make it easier for them to do, we’re seeing interest and it’s beginning to work.
Operator
Our next question comes from Tom Ernst - Deutsche Bank Securities.
Tom Ernst - Deutsche Bank Securities
Couple of questions, one was sort of partially answered. I was wondering what modules are now more popular in your cross sell efforts given the macro environment? Anything more you’d like to add on top of the previous question?
Daniel R. Fishback
It continues to be that most of our new retail customers start with our everyday low price base pricing system or service, if you will. The thing that is really interesting today is that just given everybody’s trying to drive some loyalty and enthusiasm into their customer base, promotion is becoming more and more of interest.
Certainly what we’re seeing is an additional interest in assortment. I think we’re seeing a shift toward anything that can drive more precision of a price or an offer to a more specific customer or to a specific assortment in a specific store. We’re seeing more and more interest in bringing the economic value of a promotion or a price to a targeted audience. I think that’s the shift that we’re seeing and we subsequently have been making investments in this area for a long time.
Tom Ernst - Deutsche Bank Securities
Is that driving more users on TradePoint as well?
Daniel R. Fishback
Yes, you bet. Certainly we’re seeing an increase of trade dollars. That’s a $70 billion North American number alone that’s invested by manufacturers in trade spend. So yes, we continue to think we’re in a really good spot because there’s a lot more work being done by the manufacturers today. In many cases they’re having a hard time passing along any price increases to the retailer given the economic environment worldwide.
At the same time they have a certain amount of inflation built into some of the commodity costs in their business. So pricing continues to be front of mind for both parties given that the consumer is really unwilling to spend more for goods and services today.
Operator
Our next question comes from Keith Weiss – Morgan Stanley.
Keith Weiss – Morgan Stanley
I just wanted to ask about the competitive environment real quick. I think IRI just came out with a solution around pricing. Talking to SAS it sounds like they’re looking to target the space a lot more. Are you seeing these competitors at all or are you seeing any change in the overall competitive dynamic out there?
Daniel R. Fishback
We have never seen SAS nor IRI in a sales cycle that I’m aware of. They have participated in and out, jumped in and out and I wouldn’t view them as a credible competitor today, either one of them in our core market. The basic market kind of looks the same. It really hasn’t changed. You continue to have the big guys who say we’re broad and thin in our offering and some smaller competitors.
But I don’t see a fundamental change that I can point out based on our last 90 days at least.
Keith Weiss – Morgan Stanley
Just on the deal metrics themselves, any change in the average deal length out there?
Mark A. Culhane
On the retail agreements, we’re still seeing two to three year agreements. Probably this year that mix was closer to two years than three years. On the deal length side, we haven’t seen a big change on that front.
Operator
Our next question comes from Jeff Van Rhee – Craig-Hallum Capital.
Jeff Van Rhee – Craig-Hallum Capital
A couple of quick questions, the 2010 cash margins, could you comment there and then also directionally either on absolute well or directionally, what should we think about in terms of DSOs over the next quarter or two?
Mark A. Culhane
For 2010, the full year numbers given the uncertainty that’s been created by the macro environment, we’ve talked about our revenue growth profile and EPS and that’s all we’re prepared to comment on at this time for the full year. I couldn’t hear the second part of your question.
Jeff Van Rhee – Craig-Hallum Capital
The second part was DSO expectations, just days sales outstanding, was there anything unusual this quarter that brought them down? Directionally what should we expect over the next few quarters?
Mark A. Culhane
We’ve always had a long term target of 60 to 70 days. We’ve obviously done better than that. I think we’ve had great collection hygiene. So I don’t see them improving dramatically from where they are here. They could elongate a little bit back into that 60 to 70 day range, but I think we’re pretty comfortable with where they’re at at the moment.
Jeff Van Rhee – Craig-Hallum Capital
Two last very quick ones then, the Connect3, to be clear, are they in the balance sheet this quarter. Then the last question, the earlier question about organic growth I wasn’t clear, are you in fact in your numbers expecting organic growth in Q1?
Mark A. Culhane
Connect3, yes. It closed right at the end of our fiscal year so all of those numbers are in our balance sheet. Keep in mind I mentioned on the prepared comments that the actual cash to buy them was not released until after year end given we closed it right at our year end and obviously it takes a few days for stock certificates to get in and paperwork signed before you release the cash.
So the cash is still on our balance sheet but that effects of the acquisition are in our balance sheet from that perspective. In terms of the impact of Connect3, what I mentioned was the revenue contributions for the first half of the year, it’s large over the second half then it’s going to be in the first half as these customers come up for renewal.
So yes, we are expecting organic growth in Q1 from the recurring business that carries forward out of Q4. The impact from Q3 is not significant in the first quarter from a revenue perspective.
Jeff Van Rhee – Craig-Hallum Capital
I promise last question, what was the impact to deferred revenues from Connect3 in the quarter?
Mark A. Culhane
We haven’t disclosed the individual amounts that we recorded. What we’ve said is on average you’re going to bring about $0.20 to $0.30 of that contractual value that’s still under contract when you close onto your balance sheet. That amount was not a significant contribution to deferred revenue as of the end of February.
Operator
Our next question comes from Jeffrey Keene – William Blair.
Jeffrey Keene – William Blair
Could you talk about deal size for the price to win contracts and also about pricing on renewals?
Mark A. Culhane
On the price to in recession package, that is a get started kind of thing. I don’t even know if I can characterize what that, but that clearly is not a $2 million on average type of price tag. Could it be? Sure, but generally not because someone’s not starting out for their entire store. They’re starting out with a subset of items to get rolling under that situation. Dan, if you have some comments on that.
Daniel R. Fishback
My only comment would be is we target a subset of categories. In many cases categories that the retailer believes are items of interest right now for their customers and, hey how can we make and drive behavior and shape that behavior that would drive a quick hit or a quick win. The hope is that we’re successful and then we expand that over time.
On an annualized basis, that get started tool kit could be as low as $300,000 to $500,000, somewhere in that range on an annualized basis. But it would be very common for the retailer in that get started program to pay us monthly getting started, not like our typical agreements which would be an annual or multi-year agreement with cash when it closed.
Jeffrey Keene – William Blair
Can you talk about pricing on renewals?
Mark A. Culhane
We continue to see mid-$90’s renewals both customer counts, renewable dollars. We’ve had a strong renewal year through FY ’09.
Jeffrey Keene – William Blair
What about demand difference between overseas and domestically?
Daniel R. Fishback
In my travels, and I do a fair amount of international travel, I think the symptoms of this economic challenging environment are the same around the markets we serve. That being said, I do sense that Europe is in a more difficult position than we are. So if those European retailers don’t have stores or facilities or operations in Asia or around the globe and I sense that they’re not real strong investors this year.
We’re not making significant additional investments in international markets. We’re cautious about those markets today. On a personal basis, I just feel like that may be the economic story of the second half of the year is the real issues abroad on an economic basis in my opinion.
Operator
Our next question comes from Greg McDowell – JMP Securities.
Greg McDowell – JMP Securities
My first question would be just around investors who are looking at the story and saying it sounds good, but I would like to see some operating margin expansion and I think if you take, I just did it roughly, but if you take the midpoint of the guidance, it seems like you’re looking at around a 3% non-GAAP operating margin in 2010.
Can you just comment about how you guys think about as a management team in terms of what kind of operating margin you want to deliver and how that corresponds with the guidance you gave?
Mark A. Culhane
For full year FY ’10 we haven’t commented on operating margin specifically. Obviously the impacts of the Connect3 acquisition are going to dampen that this year given the dilutive effect over a couple quarters. But we’ve always said we’ve taken a long term view to this business. We’re going to invest strategically to drive share and drive growth and we’ll continue to use some of that into FY ’10.
We’re obviously mindful of continuing to build the business model and drive scalability into the business and that continues to be our focus. We haven’t set a specific target for the year yet. Dan if you’ve got any other comments you’d like to add to that.
Daniel R. Fishback
You know our business, we’re not going to go hire 12 new sales reps but we do sense right now that the competitors particularly in the high end are cutting back their development efforts today. We’ve always been an investor. We’ve always had a premium in a high percentage of our expense for R&D and will continue to do so.
As a management team, we’re looking at every dollar and every headcount saying where should be put that and in many cases, engineering gets that headcount because we’ve got great customers that really take any of the magic out of deciding what to build, they tell us. We’re going to continue to be investors and that’s the trade off the management team makes is do you put another dollar to the bottom line or do you invest in another engineering headcount.
Because we know what we can go turn into revenue and the economy is going to come around, those sales cycles are going to get shorter and we added a couple of sales reps this quarter. We’re going to continue to do that modestly but I would rather be in position with more product when this economy comes around then a few extra more sales people. Potentially a few more points drop into the bottom line. That’s how we think about it.
Operator
This does conclude our question-and-answer session for today. I would like to turn the call to Mr. Dan Fishback for any closing remarks.
Daniel R. Fishback
Thanks again for joining us today. In summary our fourth quarter was a solid finish to fiscal 2009. As the leader in the consumer demand management market, we believe we are positioned to leverage our investments in fiscal 2010 despite a more challenging macro environment. From a longer term perspective, we are confident in our three point growth strategies, strong competitive position and proven value proposition.
We look forward to updating you on our next quarter call and thank you.
Operator
Ladies and gentlemen, this concludes the DemandTec Q4 and full year 2009 conference call. If you would like to listen to a replay of today’s conference, please dial 1-800-405-2236 using the access code 1128111 pound. ACT would like to thank you for your participation and you may now disconnect.
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