Vocus, Inc. F1Q09 Earnings Call Transcript

Vocus, Inc. (VOCS)

F1Q09 Earnings Call Transcript

April 21, 2009 at 4:30 pm ET

Executives

Rick Rudman - Chairman, President and Chief Executive Officer

Steve Vintz - Chief Financial Officer

Analysts

Tom Roderick - Thomas Weisel Partners

Laura Lederman - William Blair

Philip Rueppel - Wachovia Securities

Brendan Barnicle - Pacific Crest Securities

Robert Breza - RBC Capital Markets

Richard Baldry - Canaccord Adams

Mark Murphy - Piper Jaffray

Steve Ashley - Robert W. Baird

Terry Tillman - Raymond James

Raghavan Sarathy - Dougherty & Company

Bradley Whitt - Broadpoint Amtech

Presentation

Operator

Welcome to the Vocus first quarter 2009 earnings conference call. The date of this call is April 21, 2009. This call is the property of Vocus Incorporated, and any recordings, reproduction or transmission of this conference call without the express prior written consent of Vocus Incorporated is strictly prohibited. The call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of Vocus' website.

I will now turn the call over to Steve Vintz, Chief Financial Officer. You may begin, sir.

Steve Vintz

Good afternoon. We are very pleased that you could join us today to discuss Vocus' results for the first quarter of 2009. I will now cover the Safe Harbor statement, and then turn the call over to Rick Rudman, Chairman, President and Chief Executive Officer.

During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the Company. We want to remind you that these forward-looking statements are based on information available to us today, as of today's date, and are subject to risk and uncertainty.

We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future. We encourage you to review our filings with the Securities and Exchange Commission, which are available at www.sec.gov, for additional information on risk factors that could cause actual results to differ materially from our current expectations.

We also intend to discuss some non-GAAP measures. A reconciliation of GAAP and non-GAAP results is also available in the press release we issued today, which is on our website at www.vocus.com.

I will now turn the call over to Rick Rudman. Rick?

Rick Rudman

Thanks, Steve, and welcome everyone to our Q1 2009 earnings call. I am pleased to report a solid quarter for Vocus with good growth and top line revenue, continued expansion and operating margins and a strong quarter in terms of free cash flow.

Revenue for the quarter came in at $20.4 million, a year-over-year increase of 14%; non-GAAP operating income for the quarter was $3.6 million, a 27% increase on a year-over-year basis. While our free cash flow grew 76% on a year-over-year basis to $9 million.

We continued to operate in a challenging macroeconomic environment throughout Q1. There were many positive results and trends for Vocus during the quarter, yet clearly PR marketing budgets are not immune to the bad economy. I would like to walk everyone through the quarter in greater detail and then conclude with an update of key market dynamics and our perspective on the longer term outlook for the business.

In Q1, we added 179 net new subscription customers ending the quarter with over 3500 customers and on track to grow our customer base in excess of 20% to over 4000 subscription customers by the end of 2009. We continue to see a healthy mix of customers in terms of geographic areas, order sizes and industry segments. During the quarter, we signed subscription agreements with small and midsized organizations such as Burton Snowboards and London School of Business as well as large organizations including Del Monte Foods, Radio Shack and Warner Bros.

Despite the pressures of the macro economy, we continue to see a wide variety of organizations make investments and public relation software. We believe that ultimately most organizations understand that it does not make sense to go radio selling in a bad economy. However, in today's business climate organizations have limited options for actualizing on cost effective public relations and we believe that many see Vocus as their best option.

While customers acknowledge the need for continued investments in PR and Vocus, they also had to deal with the realities of 2009 budgets. So although we saw subscription units generally track in line with expectations, we also saw average selling prices decline in the quarter. Customers typically select the fewer seats or fewer modules as a way to add or keep Vocus subscription in their plans for 2009 as opposed to doing nothing.

Taking a look at our small business market, we saw less impact there from the macro economy as small business sales track in line with expectations. We currently sell into the small business market with both an inside direct sales team and an online e-commerce platform. Both channels primary sell PRWeb news releases and together, form a growing and profitable part of our overall business. We saw a record number of new customer sign up for PRWeb in Q1 and we continue to see the small business market as a very large and expansionary area for future growth. We expect the small business market to continue to represent 15% to 20% of our overall revenue in 2009, but to grow at a faster pace in our overall business.

Finally, our international operations performed with similar characteristics in Q1 to our US operations. From a growth perspective, international when looked at on a constant currency basis is still expected to be one of the fastest growing areas of our business as it has been for the past few years.

So, in summarizing Q1, we clearly saw a business climate that was worst than what we expected and one that now reflects the PR marketing cuts that organizations are fully incorporated into their 2009 budgets. Based on what we saw in Q1 with the expectation that the business climate remains unchanged for the remainder of the year, we think it makes sense for us to moderate our expectation somewhat on the top line for 2009.

However, we are also pleased that the Vocus business model allows us to focus on the future and proactively run the business. So even with the more modest revenue expectation, we believe we can deliver continued top line revenue growth, expanding operating margins, strong free cash flow and greater sales capacity and support of future growth.

Also, as we look at our business from an organic growth perspective taking out lost partnerships and the effect of exchange rates, I am very pleased with the fact that the areas of our business we had previously identified as key to our long-term growth strategy namely our core PR mid market, our PRWeb and our emerging small business market and international are all on track to grow in excess of 20% this year.

Now, I would like to take a moment to look beyond the short-term economic situation and talk briefly about our longer term opportunities and plans. Vocus remains the emerging leader on the large and unpenetrated market for public relation software. While Vocus plans to end the year with over 4000 customers, we believe the market for PR software consists of over 150,000 large and midsize organizations in the US alone. We are transforming this market with our on-demand software for media relations, news distribution and news monitoring with automated analysis.

In small business market, PRWeb is introducing the advantages of public relations and online visibility to an entirely new market. The million of small businesses that could use PRWeb to promote their businesses online drive traffic to the website and increase sales. These markets together with similar opportunities in Europe and Asia represent a total available market opportunity in excess of $6 billion.

So, with this long-term opportunity as a backdrop, I just want to briefly outline the impact of the current economy on our plans to not only remain the emerging leader in this space, but to become the dominant player in this market. First, we think Vocus' highly leverageable business model allows us to continue to make investments on our business in 2009 not only improving our capabilities to better penetrate the existing Greenfield opportunities but also widening the financial and operational gap that exist between Vocus and its competitors. Many of our competitors are announcing layoffs or deeply in debt and most will see revenue decline in 2009.

In stark contrast, Vocus plans to grow top line revenue, expand our already strong operating margins while also expanding our sales capacity. Vocus is also continuing our record of product innovation. In Q1, we announced the latest release of our public relation software featuring significant enhancements that make Vocus quicker to implement, easier to use and more integrated with today's emerging social media landscape.

In Q1, we also launched PRWeb in the UK and we are now one of the leading online news release services there. Later this year, we will be announcing new releases of our news monitoring and social media monitoring software and also rolling out PRWeb to other regions of the world. Again, where other companies maybe forced to limit their investments in R&D during these difficult economic times, we are able to continue to make significant investments in technology creating an innovation gap that will further differentiate Vocus' long term leader in the market.

Together, we believe these financial, operational and innovation gaps will not only put further distance between Vocus and other players in the industry, but will also support our emergence as the dominant leader in this $6 billion industry.

So, in summary, despite the challenges of the current business climate, we are pleased that our performance in Q1. By the opportunity in front of us, we believe Vocus is moving towards an even stronger position within a large and untapped market which is why despite a more cautious outlook, we remain so positive about the remainder of 2009 and the long term prospects of our business.

I will now turn the call over to Steve Vintz who will provide us with some additional information on the business. Steve?

Steve Vintz

Thank you, Rick. I can start today by covering some detail on the income statement. Revenues for the quarter were $20.4 million, which is down 1% sequentially but up 14% over the prior year. In addition to the macro environment and as discussed on our last call, top line growth for the year is also impacted by the movement in the exchange rate and the exploration of the business via partnerships.

So just to know, when you look at revenue on a constant currency basis and when you normalize the loss in the business via partnership, our growth for the quarter would have been 4 percentage points higher. Total active subscription customers increased by 179. We ended the quarter with 3,558 active subscription customers compared to 2,646 at the end of Q1 2008 and 3,379 at the end of Q4 2008. Looking ahead, we still expect to grow our customer base in excess of 20% for the year and exit 2009 with over 4,000 subscription customers.

On a cost side, our non-GAAP gross margin for the quarter was 83% compared to 82% last year and 83% last quarter. The expansion on our gross margin over the year has put us well within reach of the target long-term range of 85% to 87%. Non-GAAP operating expenses for the quarter were $13.2 million, an 11% increase over the prior year and a 1% increase over the prior quarter.

As a percentage of Q1 revenue, sales and marketing cost were 42%, R&D was 5% and G&A was 18%. Sales and marketing expenses were $8.7 million this quarter, which is up from $7.5 million last year and $8.6 million last quarter. Sales and marketing expenses for Q1 do include lower sales commissions in comparison to Q4 which is a higher commission based due to seasonally strong bookings at the end of the year. I would like to mention for our new participants today that we expense all our sales commissions as they are earned in the period of sale rather than amortize the expense of the periods in which we recognize related revenue. This treatment is different from many of the other SaaS companies.

The lower sales commission for Q1 were offset by the investments we made in expanding our direct sales organization and the increase spend in marketing to scale our PRWeb e-commerce channel. We ended the first quarter with 146 quota reps compared to 110 this time last year and 133 last quarter. This is in line with our expectations for the quarter and is tracking in line with our guided range of 160 to 165 reps for the year.

Now, most of these reps will be added in the small and mid-market segment and when you factor the ramp up will contribute little revenue this year but help position us for continued growth and success beyond.

R&D expenses were approximately $940,000 this quarter compared to $1 million year and $890,000 last quarter. G&A expenses were $3.6 million this quarter, compared to $3.3 million last year and essentially flat compared to last quarter.

In terms of profitability, Q1 non-GAAP operating income was $3.6 million; a notable increase compared to $2.9 million in the first quarter of 2008 and essentially flat in comparison with the last quarter. Our operating margin was 18% this quarter compared to 16% last year and 19% last quarter.

Non-GAAP net income was $2.9 million for the quarter compared to $2.8 million last year and $4.5 million last quarter. Non-GAAP diluted earnings per share were $0.15 for the quarter, compared to $0.14 last year and $0.23 per share last quarter. Now, it is worth noting that our tax provision was approximately $1 million in Q1 which in comparison to the modest tax benefit that we recorded in Q4 represents $0.05 per share more of tax expense in the quarter.

In terms of share count, we repurchased approximately 224,000 shares of common stock under our stock purchase program at an average price of $15.60 per share. Since its inception in Q4 2008, we have repurchased over 628,000 shares or 11 million of the 33 million authorized under the program.

Now on to our balance sheet and cash flow statement. Our balance sheet is very strong as we closed the quarter with $92.8 million in cash, cash equivalents and marketable securities, up from $87.2 million at the end of Q4. The net increase in cash and interest-bearing investments to exceptionally strong free cash flow, offset by the use of cash required to repurchase shares of our stock.

We generated a record $9 million in free cash flow this quarter compared to $5.1 million last year and $4.8 million last quarter. This represents 76% year-over-year growth and 44% of the total free cash flow we expect to generate for the year. Accounts receivable decreased to $9.7 million from $10.8 million last year and DSOs for the quarter were 43 days. Deferred revenue totaled $41 million at the end of the quarter and represents an increase of $5.3 million over last year.

Now, let us turn the guidance for the second quarter and the full year of 2009. For the second quarter of 2009, revenue is expected to be in the range of approximately $20.6 million to $20.8 million. Non-GAAP EPS which excludes amortization of intangible assets and stock-based compensation is expected to be in the range of $0.15 per share to $0.16 per share assuming an estimated weighted average of 19.7 diluted shares outstanding and an estimated non-GAAP effective tax rate of 15%.

Amortization of intangible assets and stock-based compensation is expected to be $0.20 per share. GAAP EPS is expected to be in the range of a loss of $0.05 per share to a loss of $0.04 per share, assuming an estimated weighted average 19 million basic and diluted shares outstanding.

For the full year 2009, revenue was expected to be in the range of $84 million to $85 million. Non-GAAP EPS before amortization of intangible assets and stock-based compensation is expected to be in the range of $0.63 per share to $0.65 per share assuming an estimated weighted average 19.7 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 19%.

Amortization of intangible asset and stock-based compensation is expected to be $0.76 per share. GAAP EPS is expected to be in the range of loss of $0.13 per share to loss of $0.11 per share assuming an estimated weighted average 18.1 million basic and diluted shares outstanding.

Free cash flow is expected to be in the range of $20 million to $21 million for 2009, which assumes approximately $1.4 million of CapEx and $500,000 of cash tax.

Now I would like to spend some time reviewing our guidance for the year in greater detail so you can understand what is driving some of these changes. The midpoint of our revenue guidance today represents 8% to 10% growth year-over-year and a 5% reduction to the guidance provided at the beginning of the year. As a result of a more challenging business climate that Rick discussed earlier, our guidance contemplates bookings growth that on an annual basis lags revenue growth.

However, looking ahead to the second half of the year and Q4 in particular, we expect bookings growth to lead revenue growth which is a trend that we expect to continue into next year. I would also like to discuss the assumed changes in our EPS guidance for the year which is higher than what we provided on our last call. Previously, our non-GAAP EPS guidance for the year was $0.61 per share to $0.63 per share compared to our guidance today of $0.63 to $0.65 per share.

There are a few noteworthy items driving the change in EPS today that I think relevant to discuss. First are taxes which should be less than expected. The lower tax expense is due to an overall lower non-GAAP effective tax rate of 19% compared to 24% previously from efficient tax planning strategy and lower projected profit before tax for the year. This results in $0.05 per share less of tax expense for the year.

Next is a lower share count primarily due to the buyback of stock in the first quarter which is expected to be accretive to EPS for the year by $0.02. The accretive effect of any additional shares repurchase in future quarters are not contemplated in our guidance today. So, taxes and stock buyback are positively impacting EPS.

However, I would like to discuss a couple of factors which we expect will negatively impact earnings. Interest income is one. We are modeling $0.02 per share of lower interest income due to further declining yield in our investment accounts. The current forecasted yield on our investment portfolio is less than 1% resulting in $0.02 per share less of interest income for the year.

In addition, we are projecting lower operating income versus our previous guidance due to our revised revenue guidance for the year. This results in $0.03 per share less of earnings. However, it is important to note that our operating margin for the year remains unchanged from the previous guidance at 18% and is up from the 17% up margin we achieved in 2008. As previously discussed, we believe this is the right level of expansion in our margin this year given our large adjustable market, the opportunity to make selective investments in our sales force to have a clear ROI and a significant expansion in operation margin over the past few years.

As a point of reference since going public in 2005, we expanded our operating margin from negative 2% to a projected 18% this year. We are pleased that in the face of expanding margins, we still plan to grow our sales force over 20% for the year. So, in summary, despite the difficult macro environment and a more cautious outlook for the year, we expect to continue to grow revenue, expand our operating margins and add sales capacity which we believe will pave the way for a continued growth and success.

As discussed earlier, our non-GAAP results and guidance does not include stock-based compensation expense and amortization of purchased intangible assets. In the press release that we issued today, we provided our guidance both on a GAAP and non-GAAP basis for earnings per share for the second quarter and full year 2009. Please refer to the press release for additional details.

At this time, I would like to turn the call over to the operator so we can take your questions. Operator?

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

I wanted to ask you just in terms of how you are constructing your guidance for the rest of the year. I know you made the comment, you both the comment around assuming no change in the environment from what you saw here in Q1 for the rest of the year. So, I guess as we think about the sort of being in the third quarter now in a row where the environment has gotten tougher for everybody out there and you have tampered your forward numbers, your forward guidance here again just by a bit, what gives you comfort that we will see some stability in that environment that gives you no change and as you kind of look at that into your pipeline, what does that mean for the size and quality of your pipeline? Thanks.

Rick Rudman

Well, I think part of what we are looking at is just the monthly trend that we saw through the Q1 quarter and we actually saw I think things open up a little bit tougher which is what we have heard other people experienced as well. So, we started to see actually within the quarter things kind of stabilize and improve a little bit as we work through March. And the rest of it really, Tom, is just based on our outlook from this point forward with the visibility that we have into Q2.

Frankly beyond Q2, you are probably right. I mean, there is somewhat limited visibility I think into how the economy is going to be performing in the second half of the year but I think we have seen enough in Q1 here now with the outlook into Q2 that gives us some confidence in the guidance that we have provided.

Tom Roderick - Thomas Weisel Partners

And when you talk about things getting better as you came in the margin, it sounds like maybe even given the extra few weeks into this month; can you talk about what gives you some added comfort? Is there less discounting going on out there than had been with previously necessary or folks just signing up on deals more quickly? Are there particular segments that are opening up for you more positively?

Rick Rudman

Yes, well, we have really seen an enormous amount of changes really in our discounting policies. What I was referring to in my script was we did see our average selling prices go down primarily because clients would either select fewer seats or fewer modules as opposed to just getting discounts off of our subscription. So, it is not really a discounting issue. But once again, I think it is probably just characterized as macroeconomic impact across the Board and once again, we just saw it a little bit stiffer in the beginning of the quarter and starting to be consistent in loosening up towards the end of the quarter. That combined with our outlook for Q2 gives us our guidance.

Tom Roderick - Thomas Weisel Partners

Okay, and last question for me, Steve, I was hoping you could clarify your commentary around the bookings growth with respect to 2009. I think you mentioned that you have seen a lag revenue growth historically but now you expect it to lead revenue growth in the back half of the year. Can you just clarify what you meant by that and should we still think about an overall bookings growth trend line for the year that is perhaps exiting the year at a faster pace than that 8% to 10%? Any help you can add on that would be helpful. Thank you.

Steve Vintz

Sure. Well, I think for the quarter, it is important to note that revenue grew 14% and bookings were essentially flat. So, that is what we are doing within Q1. As we look ahead for the full year, we guided the 8% to 10% revenue growth, the midpoint is 9% and that contemplates bookings growth less than the guided revenue growth which means as you look ahead into the second half of the year, we expect the revenue growth to moderate and we are pleased to see the bookings growth actually start to accelerate a bit.

There are also a couple of things to note when it comes to bookings. First in Q1 of last year, it was extremely strong for us. We were bookings over 44%. So, the growth that you are seeing in Q1 was off for the stronger comp. But I think all things told, we are expecting the revenue growth to moderate because booking is a leading indicator and as we look out from the second half of the year, we expect a slight lead on bookings growth. This will be revenue growth.

Operator

Your next question comes from the line of Laura Lederman - William Blair.

Laura Lederman - William Blair

A few things, Rick, can you talk a little bit about renewal rate? You did mention that customers when they renew are buying less. Can you also talk about renewal rates and were they below the range and were they below Q3? Obviously they will be below Q4, were they were still good? Also following up on Tom's question, was April better? In other words, does it look more like March or does it slowdown again or maybe a good here in April this year versus April last year? And finally following up on Tom's question again, could you give me a sense of why you would expect bookings to accelerate just on an absolute basis in the second half or there will be just easier comps that assuming the economy gets better thinking?

Rick Rudman

Laura, this is Rick. Let me take the first couple of questions and specifically on April, I do not think that we have created that scientific of a breakdown so I think just once again based on what we have seen here through the earnings call today and based on our outlook and visibility in terms of how far out we can see, we have provided guidance that we think reflects the current state of the business.

So, in terms of renewals, renewals came in below our expectations in Q1. I do not think it is productive to start comparing renewals to a variety of different previous quarters from 2008. I think the best way to look at that is renewals in this economy are gong to lag behind what we would expect to see in a good economy and also once again, I think it is safe to say that the environment in Q1 was a little tougher than we expected and renewals came in below our expectations.

Steve Vintz

And in terms of the second half, I do think it is so much a question of whether or not bookings will accelerate but we do expect revenue to moderate. So, the 14% growth that we posted in Q1 where we guide it to 8% to 10% growth that clearly suggests that revenue growth to second half of the year is going to come down and then we do expect in our guidance to contemplate bookings growth for the full year.

So, just looking at the current business at hand and some of our key metrics that gives us confidence that booking is going to grow ahead of revenue at the second half of the year.

Laura Lederman - William Blair

Can you give us a rough feel of what bookings; even it is a range, is implied in the revenue?

Steve Vintz

Well, it is less than the 8% to 10% revenue growth that is in our current guidance today.

Laura Lederman - William Blair

One final question and then I will pass it on which is just a clarification. So, you are assuming the business environment out there does not get any better.

Rick Rudman

Yes, our guidance assumes it does not get any better and it does not get any worse.

Operator

Your next question comes from the line of Philip Rueppel - Wachovia Securities.

Philip Rueppel - Wachovia Securities

Just if I could a little bit color on sort of the bookings outlook again, you mentioned that renewal rates were below expectations. You talked about new business signings, the lower ASPs. As you look forward, do you see weakness in general along all those metrics as well as the transaction business or is it more skewed towards one area or another?

Rick Rudman

I think what we saw on Q1 was a skew more towards once again the average selling prices being below what we expected. Volume in general about the PRWeb and just transactions of subscription volume was generally in line so it was really more the pricing and I think once again, at this point given the macroeconomic environment, I think customers are doing what we would expect customers to do in this environment which is look for ways to cut expenses and look for ways to reduce their subscription prices. I think the good news from our perspective is they have obviously shown a desire to want to do PR and to want to buy Vocus subscription albeit at lower prices. We are assuming that is going to continue through the reminder of the year.

Philip Rueppel - Wachovia Securities

And then on, Steve, you talked a lot about sort of the pluses and minuses that are affecting your EPS outlook. Could you give us a little bit of flavor on the cash flow guidance that looks like it is a little bit better? Is that just the lower taxes or is there an assumption about collections receivables that might be a little bit better going forward?

Steve Vintz

I think it is all of the above really. So, our expectation for bookings is lower for the full year and obviously bookings, there is a strong [coded] in bookings and cash flow. So, lower bookings, well that helps us in part due to some working capital changes, more prudent cost controls and then lower overall cash taxes that we expect to pay.

Philip Rueppel - Wachovia Securities

Okay, thanks and then finally on a fundamental basis sort of the PRWeb business, now you have had a quarter of the, without the relationship with Business Wire, can you talk about the effects there? Are you seeing customers that were former Business Wire customers coming back to you? Is the ending of that relationship pretty much been as you expect it?

Rick Rudman

Yes, it is pretty much been as expected. We have not seen any negative effects of the competitive environment. Obviously, we lost the flow-through revenue that we were getting from the partnership that we expected to loss but other than that, everything else is pretty much been as expected.

Operator

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

Brendan Barnicle - Pacific Crest Securities

I just wanted to follow up on the lower ASPs. Is the PRWeb business in any way sort of cannibalizing that low end of the Vocus business and any end to small business partner? And if so, does that turn around or how do you turn that around as the economy recovers?

Rick Rudman

No, we are not; I do not think the PRWeb business in any way is cannibalizing the core Vocus business. So, the PRWeb business, both the transaction part of it and even the small business part work is specifically targeting companies with revenue below $5 million which has always been outside of the target market of our core subscriptions. So, PRWeb once again both transaction and our small business addition are both targeted at a totally expansionary market place and we do not really see a lot of crossover there; 90% of PRWeb customers have revenue of less than $10 million and very rarely do we run into any type of channel conflict or cannibalization.

Brendan Barnicle - Pacific Crest Securities

Okay, great and then can you remind us again based on what you got in deferred now and on balance sheet deferred of where you think you are in terms of Q2 visibility in the revenue you guided today as well as the remainder of the year?

Steve Vintz

Yes, I would characterize it as normal ranges and levels.

Brendan Barnicle - Pacific Crest Securities

Can you run us with this where again with the historic event?

Steve Vintz

Well, most of what, I mean our business is fairly transparent so most of what we sell gets invoiced. That makes us go into the balance sheet. So, we do primarily one year deals. No change in payment terms when we transact the deal. Our customers pay us usually within 60 days. So, much of what we sell goes right onto the balance sheet. So, occasionally there is some payment terms that is less than 10% so we have characterized that as backlog and is no different this quarter. So, normal levels in the context of the guidance that we provided today.

Brendan Barnicle - Pacific Crest Securities

Okay, great and then does tax rate, Steve, you think that will continue into next year as well? Should we be thinking about that when we model this when we think about next year's modeling?

Steve Vintz

One of a lot of movement in our tax rate, I think we got at the 24% non-GAAP effective tax rate. We are discussing the 19% tax rate now. So, I think we discussed that the tax rate would be between 20% and 30% in the out years and I think that still makes sense on a consolidated basis.

Brendan Barnicle - Pacific Crest Securities

And then lastly, up margins, you are still committed to about 100 basis points improvement this year. You talked about at 100 plus to 200 a year. Is that still the long-term goal if we think about next year and additional years of modeling?

Steve Vintz

Yes, I think 50 to 100 basis points improvement in the operating margin of the share makes sense. Obviously that is what we have mentioned on the call on the long term, 100 to 200 basis points makes sense. Some years will do more than that and some years potentially less and this is one of those years in light of the outlook that we are giving today.

Operator

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

Robert Breza - RBC Capital Markets

Quick question for you, Rick. If you look at the sales force, I think you said in your prepared comments that most of the new reps would be in the kind of small to medium or smaller range. Any thoughts as we get through the year? Do you see that shifting more towards the higher range or leveling out as you get into the back half of the year or what is your thought as you look at the sales force going forward? Thanks.

Rick Rudman

Well, I think in terms of the large market, we feel that the sales force that we have in place and have had in place for the last 12 months really is the appropriate size. So, going forward, we really do not expect to add to what we call our field sales organization. There is a six number of larger companies and I think we have it covered and frankly we believe that there is more opportunity and potentially even more ability to run an inside sales organization more profitably in the mid-market so, going forward, the adds will be in the mid market and the small business market. I think this year, the adds will probably be actually weighted more to the mid market with some balance of that being in the small business market.

Robert Breza - RBC Capital Markets

Okay, maybe as one quick follow up, Rick. As you talk through in your comments about rolling out to new geographies I think is what was implied, can you give us some sense of how much new geography do you expect to enter maybe over the next nine months? Any kind of color around that would be helpful. Thanks.

Rick Rudman

Sure, when I referred to new geographies, I was specifically talking about PRWeb and really the two geographies that we have targeted next are two of the largest economies out there with large scale small businesses for us to market to and that would be Germany and China.

Robert Breza - RBC Capital Markets

Great and you expect those to be both complete by the end of the year?

Rick Rudman

I think a lot of that is going to depend really more on the operational plans that we put in place meaning no question the product has been prepared and can be launched in those markets. There is a lot of obviously a lot of operational support that goes with that for instance in China. There is a whole business environment that we have to move into and there are a lot of legal and accounting issues that need to be dealt with.

So, I think the actual timeline to launch in those areas will probably be more dependent on working out the details of the operational plan and it will be on getting the product ready to market. Now, with all that being said, probably towards the end of the year.

Robert Breza - RBC Capital Markets

Well, now that will be a solely by character enabled on the China side?

Rick Rudman

Yes.

Robert Breza - RBC Capital Markets

Fantastic. Thank you.

Operator

(Operator's instruction) Your next question comes from the line of Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

I was wondering if you could tell us what the total headcount exiting the quarter was. I missed writing down the number of sales quota reps you had exiting the quarter and maybe talk, go back to circle one, sort of qualitatively the time it takes to ramp new quota reps either at the mid market or the lower end market so we get sort of a feel of maybe how much that could impact second half bookings. Thanks.

Rick Rudman

Sure. We ended the quarter with 450 employees. We had a 146 quota reps and in terms of the ramp up time associated with scaling the sales team, it is approximately 9 to 12 months in the large market, 6 to 9 months mid market and 3 to 6 in the small market so, not a lot of change there.

Richard Baldry - Canaccord Adams

Then can you maybe talk about the philosophy behind the buyback? It looks you actually spent less and at a lower price per share on the buyback this quarter versus last and adding your long-term investments, your actual cash on the balance sheet has gone up so is there a sensitivity to the microenvironment in the buyback side or maybe you are looking at the M&A environment as maybe more attractive to the player cash too. Thanks.

Steve Vintz

Well, I think the committed landscape in terms of acquisition is certainly a considerations really to a buyback but that said, I think it is really a consequence of the window of time which we had to repurchase shares so there is a small window of time in this quarter compared to last and if the $30 million that we have earmarked for the buyback is over the next 12 months. So, I do not think there is, we are at a point where feel though that we are compelled to buyback as much as we can given where the stock trades and really our potential use of cash down the road.

Operator

Your next question comes from the line of Mark Murphy - Piper Jaffray.

Mark Murphy - Piper Jaffray

Steve, I was wondering if you could comment on the PRWeb ASPs, the level and the trend there?

Steve Vintz

Well, as Rick commented earlier, we are pleased with the growth that we are seeing on PRWeb on organic basis as we strip up via the Business Wire partnership and if you look at that growth in Q1 and what we see in the quarters ahead, we are expecting growth not only in the ASP but probably accounts for a good part of the growth but also growth in the volume itself.

Mark Murphy - Piper Jaffray

Okay, so that ASP you said was around 200.

Steve Vintz

On a blended basis?

Mark Murphy - Piper Jaffray

Yes.

Steve Vintz

A little less.

Mark Murphy - Piper Jaffray

Okay, slightly below 200, and then are you able to comment at all either quantitatively or qualitatively on the customer adds that came from the small business addition as opposed to the other additions?

Rick Rudman

We really do not breakout our customer additions or business by the large, mid and small.

Steve Vintz

And the only thing I will add there is that there is not a lot of surprise for us in terms of the net adds this year. So, if you look at the guidance that we actually provided on our last call, I mean the net adds that you are seeing in this quarter and what we are expecting in terms of our customer base worked out in plus customers, there is not a lot of changes.

Mark Murphy - Piper Jaffray

Okay, and then also Rick just in terms of your sales rep productivity, your customer adds I believe are down just slightly year-over-year. Your sales headcount is up, I think about 33% and then the customers that you are adding are kind of skewing down to a smaller ASP level because of the small business addition. Can you share some insight on why would not you choose to maybe moderate the hiring plan incrementally if the demand is not there in the same way that it had been?

Rick Rudman

Yes, I think the short and simple answer is we are delivering 18% operating income and if I moderate the hiring, we will deliver more operating income and we believe that money is better invested into the business today even if it is invested in sales reps than are not quite as productive as we would like them to be due to the macro economy. Keep in mind the economy will improve at some point and we would rather have a larger, fully ramped group of sales people here ready to power our bookings growth simply due to improvement in their achievement rates. So, that is where we are investing in.

Mark Murphy - Piper Jaffray

Okay, that makes sense and then also on, just back to the topic of PRWeb, was the growth there kind of in line with the overall growth of the business?

Rick Rudman

No, the growth there as we said before is leading the overall growth of the business and we believe it will continue to do so and that PRWeb and our small business market overall will become a bigger part of our business.

Mark Murphy - Piper Jaffray

And then Rick, if that is the case, is that leading the growth of the core business whether you include Business Wire in the comp or exclude it?

Rick Rudman

Yes.

Mark Murphy - Piper Jaffray

Okay and then just one final one for Steve, in terms of the annual free cash flow guidance, what is being assumed in that line item for the tax benefit from stock options?

Steve Vintz

Well, we talked in terms of free cash flow so free cash flow will exclude any effects of tax benefit related to the exercise of stock options. To do so, we will have to make some estimates about where our stock price would trade and what the level of exercises would be. So that will exclude it in the free cash flow definition.

Mark Murphy - Piper Jaffray

Can you remind me, Steve, what is the adjustment that you are making in your definition of free cash flow?

Steve Vintz

There is no adjustment to free cash flow as we look out over the next couple of quarters because we do not know what the level of option exercises will be. However, as a point of reference if we do look on our statement of cash flows, you will see in the financing section an excess tax benefit and that excess tax benefit was approximately $700,000.

Mark Murphy - Piper Jaffray

Okay and that is the line item but you are saying you are not putting that into the free cash flow calculation?

Steve Vintz

No, we are not including, in our free cash flow definition, it excludes the add back and the excess tax benefit that is in the financing section.

Mark Murphy - Piper Jaffray

Okay, understood.

Operator

Your next question comes from the line of Steve Ashley - Robert W. Baird.

Steve Ashley - Robert W. Baird

I guess my first question is if we look at the existing customers who are renewing, you normally see them renew for dollar amount of I do not know, maybe 115%. Was that consistent or maybe you could comment about what you saw in that area?

Steve Vintz

Well, we said that when customers do renew, they spend more and this quarter was no difference. When customers renew, they spend 15% to 20% within that range. However, we saw fewer customers renewing so we are not a 100% plus on the current base of the business.

Steve Ashley - Robert W. Baird

Sure. And then my question around renewal rates and just qualitatively, was there any divergence between the renewal rates of larger customers and midsized customers?

Rick Rudman

Not significantly now.

Steve Ashley - Robert W. Baird

And maybe lastly, do you expect deferred revenue to resume sequential growth in the second quarter?

Steve Vintz

We did not comment on deferred revenue but check here, what we did discussed was bookings growth. Bookings growth at overall would lag revenue growth for the full year revenue growth with 8% to 10%. However, we commented we expect to see bookings growth exceed in revenue growth in the second half of the year.

Operator

Your next question comes from the line of Terry Tillman - Raymond James.

Terry Tillman - Raymond James

I just have few questions. First one just relates to, earlier you articulated the areas you still expect to grow in excess of 20%, the core PR then market PRWeb small business and international. So, I just want to understand this, if the area of weakness primarily is in bookings, is it more of the large enterprise business? So, you are signing maybe less customers at a lower dollar value, is that the right way to think about this?

Rick Rudman

Well first of all, keep in mind because we are not expanding the field sales organization, if we are not adding more sales reps there and this is in just a normal economy and they are at full quota and we are not really changing the quota as much, we would expect new sales right from the field to flatten out at some point. So, right there you are looking at an area of the business that is not really driving growth for us going forward.

In terms of how it performs in the current economic conditions, I think generally speaking, our issue in Q1 across the board was really more once again of getting some lower average selling prices both in the large and the mid.

Terry Tillman - Raymond James

Okay, and if I am not mistaken in your proxy that was filed last week, I think there was a resignation of the managing director of international. I guess, could you comment, is that role being taken over by someone else or is there a plan to hire somebody new for that?

Rick Rudman

Yes, we are, the personnel who was heading up our unit in London retired and we have replaced that role with somebody that came on board a few weeks ago and he is now up and running in London.

Terry Tillman - Raymond James

Okay and just the last question related to just the concept of lead generation whether it is and I do not know exactly the different way to track it but I am assuming you have some science there in tracking leads and whether if folks are signing up for webinars, click throughs, etc. could you maybe talk about the actual lead generation and flowing into the pipeline side? I mean, is that also just based on this horrible economic situation? Has that diminished somewhat or is it actually still kind of seeing good growth there but it is just more of a closure rate issue? Thank you.

Rick Rudman

Sure. Actually, Q1 we saw normal levels and very good quality strength in our lead generation, normal flow of leads and demos and we are really pleased to see that type of activity and even on the close rates once again, keep in mind that the units were fairly in line with our expectations. So, that whole process of generating lead and doing demos and closing business look good to us in Q1. Once again, I think what helped reduced the bookings there a little bit is although people still took the demo and bought, they were really trying to get in at a lower average selling price, something that would fit into their new 2009 budgets.

Operator

(Operator's instruction) Your next question comes from the line of Raghavan Sarathy - Dougherty & Company.

Raghavan Sarathy - Dougherty & Company

So, Rick when you talked about this ASP, are you referring to the entire customer base or you are saying to the new customer base; in other words, new customers? In other words, how the ASP for new customers is trending?

Rick Rudman

Yes, we are referring to the whole customer base and we saw that dynamic both on the new sale side and we saw it as well on the renewal side.

Raghavan Sarathy - Dougherty & Company

So, how much of that is, because you are selling more ASP units now versus customer probably looking for a price concession?

Rick Rudman

We did not really see a lot of people just looking for a price concession. I think what we typically saw was once again people simply were dealing with the realities of budgets that they had for 2009 that were much smaller than what they had in 2008. They wanted, on the new sales side, they really wanted to get in to a Vocus subscription. So, instead of buying of what they might have purchased a year ago, they scaled down either in seats or modules.

On the renewal side, same thing; they wanted to keep their solution and keep using it but their budgets were simply trimmed so they would either drop a seat or they might drop some of the functionality that they thought they could live without for 2009.

Raghavan Sarathy - Dougherty & Company

So, is there any way that you can quantify the reduction in ASP from new customers?

Rick Rudman

Well, we will just give you example on our mid-market. Our ASPs have always been about $10,000. It has been $10,000 for as long as we can remember. We saw 20% to 25% reduction in the ASP in that specific segment and categorically, it is probably down to 15% to 25% as a whole.

Raghavan Sarathy - Dougherty & Company

Alright and then one final question, so Steve you talked about increasing the net customers to over 4,000. So, you added 179 in the first quarter. So, that would imply you are looking at, if I have my numbers right, 160 on average for the rest of three quarters. So, I am wondering, given that if the bookings are slight in the first quarter, I was wondering how bookings is going to improve through the rest of the year.

Steve Vintz

Well, I want to make sure I understand your question. With booking and the absolute dollar amount of the booking is a consequent of a lot of things; A, seasonality; B, mix of business between new and renewal. So, that is all factored in the guidance that we have given you today in terms of growth on an absolute basis on a year-over-year. Now, on net add, there is a lot of things that can skew in net add and it tends to vary from quarter to quarter but the net growth on our customer base, we think make sense given the current selling environment in our outlook for the full year. So, the 4,000 plus customers at the end of the year makes a lot of sense to us.

Operator

Your next question comes from the line of Bradley Whitt - Broadpoint Amtech.

Bradley Whitt - Broadpoint Amtech

I just wanted, one of point of confusion for me going back to Mark Murphy's comment about the tax benefits and whether or not that is concluded in the free cash flow guidance because on the first page of your press release and the last page of the press release and in your comments said you had $9 million in free cash flow but I guess there, you have to had in the tax benefits. I just want to make sure that the $20 million to $21 million in free cash flow guidance that you have given for the year, does that include tax benefits from stock options or does it not include tax benefits?

Steve Vintz

You are adding the tax benefit back which is in our definition of free cash flow in the press release and Brad, in order to, you would have to in order to model out operating cash flow for the year, you would have to make some sort of estimate about the stock price and the level of option exercises. Yes, and that is just extremely difficult to do. We never want to put ourselves in that position. So, we just want to be…, so when we are talking about free cash flow, we would normalize the effects of any excess tax benefit and keep in mind, the way the accounting works here is that you are actually increasing your payable for that tax benefit so it is actually increasing accounts payable which is a reduction in operating cash flow for a check that you will never write to the IRS. So, that makes a lot of sense to us in terms of normalizing that tax benefit.

Bradley Whitt - Broadpoint Amtech

Right, so when I am doing my free cash flow calculations for the year for Q1 of this year, am I assuming you had $9 million in free cash flow or am I assuming you had $9 million minus the $703,000?

Steve Vintz

Good question, $9 million in free cash flow.

Bradley Whitt - Broadpoint Amtech

For the quarter?

Steve Vintz

Right and then for the full year, $20 million to $21 million.

Bradley Whitt - Broadpoint Amtech

So, we are giving you credits for $9 million this quarter even though tax benefits from exercised stock options is technically not cash flow from operations.

Steve Vintz

That is right and that cash flow represents the actual cash that we are generating and collecting in the business.

Bradley Whitt - Broadpoint Amtech

Okay, and then the question around, I am sorry, did you say that the last question I may have missed it, ASPs were down 15% to 20%? Is that what you said?

Steve Vintz

Yes.

Bradley Whitt - Broadpoint Amtech

Roughly? Okay. I mean, I got to believe Rick, are you doing some kind of, I mean did you do anything special at the end of the quarter here to get new stand for a pricing perspective or are you seeing anything creative from the competition in that regard?

Rick Rudman

We have not seen any changes in the competitive environment so I will just go to that part first. We do formal win-loss analysis every quarter and if anything we saw more customers go to nothing, and then go to our competitor than we have seen in the past so, so no real changes there. In terms of promotions, we have historically run a variety of different I guess what I would call promotions and when I say historically, I mean we did those really throughout 2008 and even before we had the macroeconomic turn bad. So, other than that, it was all normal stuff to us. What we consider typically to be promotions are not, we do not go out and do broad base discount offers or even really give away anything that we think we can get value for down the road. Typically what we like to do for instance, one of our promotions that we offer and then we will probably do on an ongoing basis is we will allow you as part, if you purchase today, you will get 90 days of free PRWeb press release service.

So, we view it as really an incentive that we can offer that is really like a free trial of our PRWeb service and if goes well, then hopefully we come back to you after Q1 and get an upgrade order out of this. So, those are the types of promotions that we typically do. That is what we did in Q1, really no change there.

Operator

At this time, we have no further questions in the question queue. So, I would like to turn the call back over to Mr. Rudman for any additional or closing remarks.

Rick Rudman

Great! We would like to thank everybody for joining us today. We look forward to talking with you soon.

Operator

This does conclude today's teleconference. You may disconnect and have a great day.

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