Omniture, Inc., Q1 2009 Earnings Call Transcript

Apr.23.09 | About: OMNITURE, INC. (OMTR)

Omniture, Inc. (OMTR) Q1 2009 Earnings Call April 23, 2009 8:00 AM ET

Executives

Mike Look - VP of IR

Josh James - Co-Founder, President and CEO

Mike Herring - EVP and CFO 7

Analysts

Steve Ashley - Robert W. Baird

Tom Ernst - Deutsche Bank Securities

Michael Huang - ThinkEquity

Imran Khan - J.P. Morgan

Mark Murphy - Piper Jaffray

Bryan McGrath - Credit Suisse

Brent Thill - Citi

Youssef Squali - Jefferies & Company

Marianne Wolk - Susquehanna

Robert Breza - RBC Capital Markets

Patrick Walravens - JMP Securities

Keith Weiss - Morgan Stanley

Richard Baldry - Canaccord Adams

Shyam Patil - Raymond James

David Hilal - FBR

Dan Salmon - BMO Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Omniture's First Quarter Fiscal 2009 Financial Results Conference Call. My name is Jasmin, and I will be your operator for today. At this time, all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the call over to host for today's call, Mr. Mike Look, Vice President of Investor Relations. Please proceed, sir.

Mike Look

Thank you, Jasmin, and good afternoon and thank you for joining us today. Joining me on today's call are Josh James, our Chief Executive Officer and Co-Founder, and Mike Herring, our Chief Financial Officer.

During the call, we will discuss Omniture's financial results for the first quarter ended March 31, 2009. By now you should have a copy of our press release, which crossed the wire approximately 45 minutes ago. If you would like to review a copy of the press release, please visit our website at www.omtr.com.

Please note that we will be referencing, both GAAP and non-GAAP financial measures and we wish to note that GAAP reconciliation information is provided in the press release and on the website.

Also, we wish to emphasize that some of the information discussed during this call, particularly the information regarding our revenue and profit margins or profit targets, including expectations concerning GAAP and non-GAAP revenue and revenue growth; GAAP and non-GAAP net income and loss; and adjusted EBITDA; business strategy; customer demand; market observations and future product plans are based on information available as of today, April 23, 2009.

We believe that some of the statements we will make on today's call, including statements about the expectations I just mentioned may constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the Securities Act of 1933.

Accordingly, we wish to caution you that such statements are just predictions based upon current expectations and assumptions regarding future events and business performance, and involve risks and uncertainties that could cause actual results to differ materially.

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

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

Josh James

Thanks a million, Mike, good morning and thanks for joining us, everyone. As you can see from our press release issued earlier today, our financial results from the first quarter were mixed.

Despite a challenging economic environment, we delivered strong top-line growth and hit the high-end of the revenue guidance range provided last quarter. And during the quarter, we incurred higher than expected costs and expenses in a few areas that Mike will discuss in detail in just a moment, which results in the company not achieving its profitability goals for quarter.

Clearly, we are not satisfied with these results, and we have already began to take specific actions to ensure we achieve our profitability goals going forward. I will discuss these actions in just a moment. But before I do, I would like to share a few thoughts on the quarter.

First of all looking at our performance in the first quarter, we saw a 26% year-over-year revenue growth was good, especially considering the state of the economy. We exited Q1 delivering total non-GAAP revenues of $87.8 million, essentially hitting the top-end of our guidance range.

At a minimum Q1 annualized non-GAAP revenue level, already represents nearly 14% revenue growth over 2008, which is just shy at the bottom end of the 15% to 20% annual growth outlook for 2009 that we provided last quarter.

Bookings for the first quarter were flat year-over-year as we added more than 200 new customers in the quarter. That metric is down from the 250 new customers added in the same period a year ago, and reflects the effects of the current global recession.

We believe that our bookings and revenue performance in such a difficult budgetary environment demonstrates how critical our products and services are to the success of our customers. And despite the financial stress many of our customers face, the use and penetration of our suite of products continues.

Traffic growth continue to be healthy with over 1 trillion transactions being captured during the quarter, data center perspective that represents more than double the number of transactions we captured in the first quarter two years ago.

As we have been saying for quiet some time, we believe these transactions represent a critical ingredient for optimizing ad spend and enabling personalization for our customers websites. And increasingly, other parts of their business from the stream video to interactions of content delivered through mobile devices.

A very small percentage of these 1 trillion transactions are being optimized today. I'm sure 100% are being optimized and personalized, these 1 trillion quarterly transactions will services few future opportunity.

As many of you know in February, we held our eighth Annual Customer Summit in Salt Lake City, Utah. Our Summits are critical sales and marketing opportunities like no others we see are here.

They help us solidify our places with leader with the most important customers and give us very focused and committed time with those customers to get the feedback. Most importantly, this year's Summit gave us the opportunity to launch our online marketing suite and demo its multiple product integrations, features and functionality.

We are happy to say that, both the American Summit in Salt Lake City in February and this week's Omniture Summit in London were well-attended with 2,000, and 1,000 marketing professionals and attendants, respectively.

We were able to communicate the many changes in the last year, which occurred from the product perspective as well as launched tuned products. This event is critically important for the coming year as it helps solidify our message with customers and build our future sales pipeline. It's most effective lead generation method that we utilize each year.

What was noticeably different about this year's audience was that they were far more executive level attendees. In fact this year, we actually created a separate executive track meetings and programs. And despite overall individual attendance being down from last year's levels due to the economy, our Summit in Salt Lake City, we still had roughly the same number of companies represented in our summits.

Feedback from our summits and online marketing suite has been overwhelming the positive, but customers understand the benefits of the single-integrated platform for measuring and optimizing, both ad spend and their on-site conversion process.

Also I want to take just a minute to update you on the WPP relationship, we announced earlier this year. We have trained a few hundred of their employees already and are well on track to training at least the 500 employees committed to in the deal.

As anticipated, we have also seen continued operation on a technology front, which is a very positive development. This week, we announced our forthcoming Genesis integration with 24/7 Open AdStream product, which is one of several Genesis integrations that will come from the Omniture WPP relationship, and we are seeing positive effects in our pipeline and look forward to that continued impact from this and similar relationships.

The net effect of our Q1 investments to the sales team and our customer base from a customer satisfaction and pipeline perspective has been very positive. We strongly believe this positions Omniture as a strategic, long-term partner to our customers.

However as I mentioned earlier, our financial results were mixed this quarter. Despite the results of the investments into our summit in Salt Lake City and to educating ourselves unit sales kickoff and the progress of our product suite it does not excuse us from our responsibility to our shareholders and employees to properly manage expectations and execute on a financial objectives we set for the company. Therefore as a result of not delivering on a profitability targets and the continuing uncertainty, we are seeing in the marketplace, we decided to take the following actions.

First, we began the process of consolidating our sales channels to increase efficiency. Second, we will begin to streamline our corporate structure to adapt to suite versus standalone product structure. Third, we were even more aggressively analyzing current marketing and other expenditures to provide more leverage in the business.

Fourth, we are accelerating our investments in internal systems to improve our financial planning process and are taking a more cautious approach to more effectively deal with unknowns in these very uncertain times to ensure that we achieve our profitability metrics.

In closing, we are very focused on delivering. We continue to believe that we have a significant opportunity for growth going forward and have the right strategy to take advantage of opportunity in these tough economic times.

I'd now like to turn the call over to Mike Herring, our CFO for more detailed discussion of our financial results. Please go ahead, Mike.

Mike Herring

Thank you, Josh. As Josh stated at the beginning of the call, the first quarter of 2009 showed mixed results for Omniture. We are proud that revenue continues to grow in several areas of expense in the quarter were greater than we expected when gave guidance.

Specifically, commission expense due to 2008 sales activity, AR reserves, and ForEx losses resulting in profitability below our expectations. While our customer base continues to invest in our product and services, the environment continue to be difficult and results reflect these challenges.

Total revenues for the first quarter of 2009 were $87.2 million on a GAAP basis and $87.8 million on the non-GAAP basis. Both results at the top of the revenue guidance ranges we provided during last quarter's conference call.

Revenue growth was 38% year-over-year on a GAAP basis and 26% year-over-year on a non-GAAP basis. While growth rates are slower than our historical rates, we still believe they are respectable in the current environment. We have seen the state of the economy affect our customer base worldwide.

And although we seeing some customer attrition at the lower end as smaller customers lose resources to manage the data and sales cycles being challenging, we are also pleased to see our core customer base staying committed to the Omniture Suite as a platform for running their business.

Bookings in the quarter were essentially flat year-over-year with an increase in percentage of sales in 2009 coming from additional products being sold into our customer base. That adoption continues to make progress with our platform customers now having an average of 1.39 products per customer.

Product revenues for the quarter totaled $77 million on a GAAP basis. Non-GAAP product revenues were $77.6 million, and represent increases of 2% over the fourth quarter and 22% over the same quarter last year.

Product revenue continues to grow through new bookings despite an offset from the increased reserves against revenues due to macroeconomic effects on the portion of our customer base.

Professional services revenue totaled $10.2 million in the first quarter, up 18% over the prior quarter and 68% compared to Q1 last year. The first quarter is the seasonally high quarter for the professional services revenue due to the concentrated venues for training, revenue at our summits and increased projects related to customer initiatives for 2009.

We expect professional services revenue to continue to be strong, but not continue to grow at the same pace. On the international front, our business abroad is performing well. And despite the strengthening of the US dollar, international revenues totaled $24.3 million or 28% of total revenues for the first quarter.

This is an increase of 3% over the fourth quarter and 42% compared to the first quarter last year. On a non-GAAP basis, gross margin for the quarter improved to 66.2% an increase of nearly 95 basis points from the prior quarter.

Product gross margins improved approximately 50 basis points as we completed the data center migrations and saw the benefit of the lack of the duplicative data center expense, but we do not expect significant growth margin improvements through the balance of 2009.

We believe that gross margins can reach the 70% range over the long-term. However, we need to scale in to that improvement and it will be harder with the general economic pressure on our customers and prospect to keep cost down.

Gross margins in professional services for the quarter were 59%, up significantly from 53% in Q4 and 52% in Q1 of last year. Q1 is traditionally a heavily services revenue quarter with summit and new customer projects heading in to 2009 for our best practices team.

The higher margin reflects high utilization, something we expect to see generally continue as our customers look to outsource projects that they once would have used internal resources to accomplish. We expect this margin to decrease to prior levels in the second quarter.

GAAP operating expenses were $58.2 million, up 12% from the same period a year ago. And on a non-GAAP basis, operating expenses were $48.9 million, up 17% from the same period a year ago and represented 56% of total revenue.

Non-GAAP sales and marketing expenses in the first quarter were 36% of revenues, slightly down from 37% in Q1 of last year, and up from the 33% in the fourth quarter as a result of seasonal Q1 sales and marketing events like sales kick off in our Salt Lake Summit. Sales and marketing expenses were higher than we expected in the first quarter due to sales commissions expenses related to 2008 activity above our original projections.

Going forward, we expect sales and marketing expenses to decline as a percentage of revenues and for the second quarter absolute dollar expenses to decrease without the events and commission's events unique to the first quarter.

R&D and G&A expenses as a percent of total revenue remained essentially flat at 9% and 12% of total revenues, respectively. And we expect these percentages to remain fairly constant to 2009, or increase slightly.

Leverage in our G&A expense will be difficult to attain as increases in bad debt expenses and investments in systems infrastructure are expected to continue to increase through the year.

In the first quarter, higher than expected increases in our allowance accounts driven by customer activity at the end of the quarter contributed to expenses over our exceeding internal investments.

Non-GAAP operating margin for the first quarter was 11%, and below our internal expectations because of the increase allowances and higher than expected commissions expense related to 2008 sales activity. This operating margin performance was 64 basis points higher than same quarter year ago, but 113 basis points lower than Q4.

GAAP net loss was $8 million, or $0.11 per fully diluted share. Non-GAAP net profit was $8 million, or $0.10 per full diluted share, a penny below the low end of our guidance range. Adjusted EBITA for the quarter was $16.4 million and below our guidance range of $17 million to $18 million.

In addition to the previously mentioned, higher than excess expected expenses in sales and marketing and G&A, our lower than expected net profitability also reflects continued ForEx losses as we revalue cash and receivables held in foreign currencies. In fact these ForEx losses cost us a penny of EPS in the quarter.

Although, we have implemented a foreign currency hedging program, we have not been successful in eliminating these budgets completely, particularly against the British pound in the Europe.

Despite the challenges we faced in the first quarter, we added more than 200 new customers during the quarter and we now have a total of nearly 5,200 customers. Nominal retention continues to be strong and essentially unchanged in the fourth quarter coming in at 93% for our platform customers and 98% for our enterprise business.

Now turning to the balance sheet. Total cash and investments at the end of the quarter totaled $125 million. This is a $30 million increase from the $95 million at the end of last year and reflects, both WPP $25 million equity investment in January 2009 and positive operating cash generation.

At beginning of the April, we also redeemed $5 million in the auction rate securities we held at the beginning of the year reducing our total ARF exposure 16.5 million.

Accounts receivable was $111 million resulting in a DSO of 113 days, which is a three day improvement from 116 days in Q4. Adjusted DSO or DSO after removing the deferred revenue embedded in the AR balance was 55 days.

Deferred revenue increased to $117 million, up $5 million from the fourth quarter. Although less than half of our billings represent annual advance payments, the rest being monthly or quarterly. We continue to bill them correct at a rate we believe to be healthy.

And even though a small portion of our revenue will become more volatile, we believe we are entering the quarter with 85% visibility into our Q2 revenue expectations. Cash flow metrics were consistent with first quarter trends with cash flow from operations at $13 million for the quarter.

CapEx for the quarter totaled $5.6 million and adjusted free cash flow was $7.4 million. Total investments in data center equipment in the quarter were $11.5 million, slightly above our expectation of $10 million. We made some additional investments in the quarter related to the capacity in order to provide for extra reference regarding its risk related to data agency.

We began 2009 with the more cautious approach to investment in terms of headcount and finish the quarter with approximately 1,200 employees, a slight increase from the end of 2008.

Total QBSRs at the end of March were 154, down 2 from Q4 levels. Q1 is the first quarter since our IPO in which we saw a sequential decrease in QBSR headcount. The decrease reflects our consolidation of our sales team around the marketing suite sales strategy.

Now moving on to the guidance, 2009 continues to be a challenging year to forecast. As I mentioned in the last earnings call, the economy is adversely affecting our customer base and the macro problems do have ripple effect on our company, but we are still delivering top-line growth.

That said, we expected to be tough year to drive high top-line growth rates. And in the absence of this growth, a tough year to drive accelerating profitability, we are still making new investments, we believe are strategically important.

We decided for the time being, we are going to focus on our customer base and product suite in place and defer some strategic investments and favor a predictable profitability metric until the environment improves and becomes more stable.

Therefore, as Josh said, we are taking steps internally to reduce cost and focus on the core business and look for operating expenses to contract in the phase of modest revenue growth in the second quarter. Specifically, we believe revenues will be in the range of $87.6 million to $88.6 million on a GAAP basis and $88 million to $89 million on a non-GAAP basis.

At this revenue level and with the cost controls we are putting in place, we anticipate non-GAAP operating margin for the quarter to be 11% and GAAP net loss in the range of $0.9 to $0.10 per diluted share and non-GAAP net income in the range of $0.11 to $0.12 per diluted share, we except EBITDA in the range of $17 million to $18 million.

For the full year, we would stay in from giving specific guidance this time, but our outlook for revenue growth remains in the range given in the first quarter of 15% to 20% for the year. We believe it is important to point out that we are not seeing broad improvement in the economic environment, and we expect more challenges to come for the foreseeable future. That without macro improvement, achieving 20% growth will be a challenge.

In terms of our operating margin expectations, despite the cost challenges in the first quarter, the seasonal nature of the events that drove those expenses, give us confidence that we can achieve operating margins for the fourth quarter up to 200 basis points higher as compared to the fourth quarter of 2008.

And with that at this point I would like to turn the call back over to the operator for questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steve Ashley of Robert W. Baird. Please proceed.

Steve Ashley - Robert W. Baird

Hi Josh, you outlined a number of initiatives to try to reign in cost, but also it sounds like to change the organizational structure, you talked about consolidating the sales channels, you also talked about changing the organizational structure around a suite, product offering, I wonder if you could just give us more color on what exactly is taking place there, and if that is or could be disruptive to the business? Thanks.

Josh James

Sure. So from a sales perspective, we have got a lot of different sales teams that we have acquired over the last 12, 18 months and we have been sorting out those kind of consolidate that those different sales teams and figure out what makes more sense in terms of the way that we approach our customers, and we changed the model this year in order to interact with our customers with more of a quarter back approach whether is one executive that is responsible for that relationship.

And it limited some of the needs that we had for some of the overlaid headcount and basically going through and finding efficiency instead of having dedicated teams, they require a certain minimum number of headcount for coverage.

We think that we found some efficiencies that we can squeeze out so it shouldn't affect the way that we are actual are able to interact with our customers and cover our customers.

I think that actually is going to also improve the relationship for the customers, because, we are getting some commentary from the customers right now that there is too many sales people on an account, there is too many interactions that they have to have, there is too many people, need to keep track of.

And so we are shifting more towards this quarter back approach where one account executive is responsible for that relationship. And then on the product suite versus [manageable] product lines what that's going to do is it's going able to find some efficiencies in the way that we develop and market those products.

They are all independent products and independent systems, we obviously need to have more resources then when you start consolidating those from the back-end from a marketing perspective the way we interact with customers in terms of generating leads and in the way that we market those products, there won’t be as much marketing towards some of the specific products that are maybe smaller. They will more included in the suite, so I think that's going to provide some air cover for some of the those small products.

Steve Ashley - Robert W. Baird

Great. And then, Mike you talk about increase in bad debt allowance. I wonder if you can give us maybe some quantification of what kind of size that is and where you are seeing that within your customer base? Thanks.

Mike Herring

Sure, so I mentioned that retention rates were still among our enterprise customers at 98% in Q1. That’s not where we are seeing the majority of the active. The customer activity that’s driving increases in allowances in bad debt, it tends to be in smaller customers, customers that are more subject to the economic fluctuations, so that’s where we're seeing it.

We have a pretty healthy expectation for allowances going into the quarter based upon where we are already seeing at Q4 and the reality is as the quarter went on, we actually saw the activity increase among that customer group. and the amount of the expense above our expectations was at several hundred thousand dollars in terms of our what our allowance required us to record in bad debt expense.

Steve Ashley - Robert W. Baird

Thank you.

Operator

Your next question comes from the line of Tom Ernst of Deutsche Bank. Please proceed.

Tom Ernst - Deutsche Bank Securities

Good morning, gentlemen. Thanks for taking my question.

Josh James

Hi, Tom.

Tom Ernst - Deutsche Bank Securities

Perhaps some follow-up to that last question. Can you remind us how much of revenue is associated with the enterprise category, you said the renewal rates are same, similar to 98%?

Mike Herring

Yeah, It's in the high 70s. Between 76% and 79% of revenue comes from that enterprise group.

Tom Ernst - Deutsche Bank Securities

Okay, so the bad debt reserve is against the other then, the 22-ish percent or so. I am a little surprised.

Mike Herring

It's applied to our overall AR balance, but what drove the increase was, conversations with customers at the lower end, where payment becomes less certain. And so therefore we increased things like the AR reserve and that's the bad debt associated with those customer.

Tom Ernst - Deutsche Bank Securities

We are able to get a sense for what's driving that, is it entirely weakness in their business or you finding any sort of competitive pressure?

Mike Herring

In the customers that we have talked to specifically, it's the latter. I mentioned briefly that these customers are struggling to have the resources to actually take advantage of the technology.

Tom Ernst - Deutsche Bank Securities

Former, Mike?

Mike Herring

What?

Tom Ernst - Deutsche Bank Securities

I just want to clarify, Mike it's I think you meant the former it's more specific to their businesses.

Mike Herring

Yes, that’s correct. I meant to say that. I am sorry, so it's not that we are seeing competitive pressure and people are migrating. It's more that they are losing resources in order to take advantage of that technology, and they are arbitrarily cutting cost across their organization. And that's affecting investments in tools like ours.

Tom Ernst - Deutsche Bank Securities

Okay, good. And just one other minor question as well. You mentioned earlier in the call, the up-sell is going well and you have 1.39 products per customer. I am curious, are you finding an up-sell opportunity, both in the small customers as well as the large customer, or is that primarily enterprise?

Mike Herring

That's primarily enterprise. We are definitely seeing a shift in sales, and we have seen this for some quarters toward selling additional products into our customer base and that trend is being driven our enterprise group.

It's not that it doesn’t exist in the mid-market group, but the early adopters are more sophisticated organization. They have the resources to focus on optimization and drive improvement through optimization intend to be large organization, and certainly dominate by enterprise customers.

Tom Ernst - Deutsche Bank Securities

Perfect. And one follow-up then I will let others ask the question. You've talked in the past about how the attached rate, or the attached pricing for some of those products has been something on the order of $0.25 in the dollar for things like D-2 and SearchCenter.

And we have heard of anecdotes of being significantly more, and I am wondering, what are some of the bigger customers doing that are taking the additional modules more significantly, and there is a comment to get well above what's your initial experience was.

Josh James

I will jump in, Mike. A lot of that depends on which products, so there are some products that are in $0.25 range like SearchCenter, like Discover OnDemand. But Discover OnDemand, we certainly will see that where it goes up to $0.50, $0.75.

Discover OnPremise in many cases where that will be 100%. And in some cases it will be even be higher. Test&Target will range anywhere from $0.25 to I guess $0.50, $0.35. It depends on how broadly they are using it.

Some of these newer products like Test&Target for instance, they are not using it site. That's an area where there is opportunity for growth still. So they might maybe limp in to relationship with $0.25 on a dollar relative to the SiteCatalyst contract. But definitely has upside.

So if you hear about upside out there, it can definitely be related to Test&Target or related to our Discover OnPremise product then everyone saw on the Discover OnDemand product.

Tom Ernst - Deutsche Bank Securities

Okay, thanks again.

Josh James

Thank you.

Operator

Your next question comes from the line of Michael Huang of ThinkEquity. Please proceed.

Michael Huang - ThinkEquity

Thanks very much. Just a couple of questions for you. The first, in terms of bookings drought, which is flat in Q1, Josh, it was the main lever around the consolidation there. Was that weaker new customer adds, or was the pricing on renewals, or maybe a combination of both.

And how do you expect that growth rate trend through the year, which is at the highest level, and so is that consistent with what you are thinking going into the quarter?

Josh James

Well, Michael, yeah. It’s definitely more related to the customer add, new customer prospects at 200 is definitely a decrease from last year. And certainly from Q4 as well, and that wasn’t unexpected. But with bookings flat and new customers declining year-over-year, they just meant that the booking shifted from existing or from new customer concentration in 2008 to more of an existing customer additional product penetration focus in 2009.

Michael Huang - ThinkEquity

Okay and then just with respect to how that could trend for the year, I know you don't provide bookings guidance, but could that and growth rate get worse over next couple of quarters?

Josh James

That a really good question. The things are really hard to predict as I mentioned on the call. Coming out of the summits this week EMEA and we Salt Lake in February, they are great pipeline building events, there is lots are interested in additional products.

So I believe that we will still see reasonably strong bookings and additional products into that customer base, just based upon the conversations we had there and what the effect on our pipeline coming out of those events.

That said from a new customer prospects standpoint. I mentioned that sales cycles are challenging I mean that in the context of with new prospects and not only our budgets are tighter, but more approvals are required. Sales yields are generally more difficult to close in particular with in a brand-new logo, so I do think that kind of year-over-year comparison is going to continue through this year.

Michael Huang - ThinkEquity

Okay, and final question for me. So I know there are a number of new products that you are releasing through the year, including Recommendations, Dashboard and Survey and search.

Did you actually see any contributions from these products, one from a booking prospective, and which out of those product do you think could represent there is a fast update with respect to existing customer?

Josh James

From our bookings perspective, there will be some certainly some action. The one that's probably most clever will be the Recommendations. That’s the first product in our history that, when we have launched it coming out of beta, we had a case study and that was a step how they were able to increase their average revenue per customer by 10% by using Recommendations.

So it’s a pretty stable technology that’s built on taking some technologies that we already had from the backend from SiteCatalyst and testing and targeting and then building a new interface and some new functionality that sits on top of that.

And so because of that stable technology during the beta process, and because we developed it with customers who we are using a testing and targeting product, and just want a little bit more functionality, and so over the course of a few quarters we were able to deliver that product.

But deliver it with case studies, so that certainly got a lot of attention at our customer summits and I think is, we are certainly seeing that in the pipeline. But with any new product as we mentioned before, we don’t really try to push it to hard with the sales team until we have had three, four quarters of experience with it of selling it, installing it, letting people get the initial uptick in their business and then getting ready for the next level of maturity and complexity using the products.

And once we get that information and that feedback comes close, that's when we really understand what it is that we have, and how successful we think it can be. And it's not good for us to get in situation where you sell it to too many customers and you find out there is actually one more piece of functionality that you needed before you really lock the doors on delivering that products to marketplace.

So that's what we that we launch our products, and of those products, certainly the one that has the most that’s been driven the most by our customers is that Recommendations' component.

The CMO Dashboard is something that's also very interesting that's been driven a lot by our partners, and lot by our really large customers, you go in their office and they have got several different slide decks that you are using that are created a different departments inside their marketing organization, and that's what services that what services CMO Dashboard.

And when you think about the fact that we are the largest technology company focused on CMOs and marketers and there is no one that really delivers this type of functionality to the CMOs. That's really been long-term opportunity, and it also elevates the relationship that we have with our customers.

And it's something that our customers are asking us to do, and it's something that our partners are really going to drive for us, so we think there is a quite a bit of opportunity with that also.

And then the last product that we launched Digital Plus is in response to some feedback that we get pretty frequently from customers, which is I understand what my data is, but I'm not quite sure that I actually am tracking all of my pages. And if there a way you can go out and go, having the web and surf the web and find out if in fact all of my pages are tagged.

So that when I'm doing these optimizations moves and I'm trying to understand the impact of the advertising I'm doing, I want to understand. If I'm not tracking everything then I don't have a true picture of what’s going on and the actually Digital Plus product will help you.

So it’s not going to be a big business for us. It’s just a necessary business and it strengthens the SiteCatalyst relationship that we have with them. It doesn’t belong as a separate product and separate sales team, separate marketing et, cetera, it really is something that our account managers and implication team and sales people in conjunction with other sales will be able to throw into that mix more from the suite perspective.

Michael Huang - ThinkEquity

Thanks very much.

Operator

Your next question comes from the line of Imran Khan of J.P. Morgan. Please proceed.

Imran Khan - J.P. Morgan

Yes, hi. Thank you for taking for my questions. Two questions. First, as there are limited number of new deals available, what kind of competitive pricing pressure you are seeing the marketplace, can you talk a little bit about that.

And secondly, Mike the weakness the you are seeing in the business, is it broad base or are you seeing any specific verticals that's holding up better, any insight on that will be helpful. Thank you.

Josh James

Yes, from a competitive standpoint the biggest competitor we have announced is the macroeconomic environment. The other competitors that we have are more of a nuisance right now than anything it's not something that really affects the relationship that we have with our customer. And most of the conservations around with our customers right now are just about the internal conflict that they have in their organizations, because they are having to cut people.

And when they are sometimes getting rid of people in their organization there are folks that are deriving value out of our products and there is less people that are getting value of our product because there is less people there is less people to act on the data. That’s a difficult conversation to have and we will certainly understand where the customers are coming from.

Or when the CFO in their organization comes and says we are cutting 5%, we are cutting 10% out of everything and as those conversations are also you understand where they are coming from because you know what they have been chattered with. And then the second part of the question was?

Mike Herring

Was around verticals.

Imran Khan - J.P. Morgan

Vertical exposure like what kind of trends you are seeing, are you seeing the broad based weakness or some of the verticals that are holding up, can you give us some insight on the verticals?

Josh James

Sure, acknowledge up to that one, Mike?

Mike Herring

Sure, to be honest with the weakness that makes our life more difficult is pretty broad based. When we talk about pricing pressure in deal negotiations, the factor that's driving that pricing pressure isn't a competitor. It’s the broader economy and trying for a piece of a budget that’s been cutback as Josh mentioned.

In terms of specific verticals that I think is a consistent across all verticals. Though I would say that in terms of looking at additional products, we are seeing a lot of interest specifically from retailers who are still selling products and are still very interested in optimization, again companies that are focused on lead gen and conversion, like travel companies and such that are really looking to connect things like re SearchCenter into testing and targeting and optimize that conversion that way, that's where we are seeing lot of focus in terms of buying additional products from us.

Imran Khan - J.P. Morgan

Great, thank you.

Operator

Your next question comes from line of Mark Murphy of Piper Jaffray. Please proceed.

Mark Murphy - Piper Jaffray

Thank you. Mike, can you give us more color on why the sales commissions from 2008 were at a higher level than expected has something change relating to the accrual rate or what was it that impacted their predictability of that?

Mike Herring

It’s good question. So at the time we gave guidance for the quarter, I mean we underestimate the amount of commission expense it was going to hit in Q1 related to those deals.

And the reason we underestimated that amount is by the time we gave guidance, we hadn't quite reconciled and closed our sales comp plan for the year. We are still processing through pretty significant number of transactions not just new deals closed, but and then into existing contracts and such.

And so by the time we had calculated that, the expense required to recognize significantly higher. We think there were several factors in the sales plan that drove that. For most of them being factors in a sales comp coming around repayments, which was a big focus last year and through the end of the year, which increased, both the level and the timing of the commission payments and thus the expense.

And just to remind you, the way we expense commissions, we expense them as revenues recognized unless the prepayment is done. If there is an annual prepayment, if that’s the case, we not only pay a higher level of commission, but we pay it upon collection of the payment, and that a combination of factors in processing through our sales led us to underestimated what the actual expense they would hit in Q1 would be.

Mark Murphy - Piper Jaffray

Okay, then Mike just as a follow-up. That's a good segway into my second question when looking at the balance sheet from billing perspective, it looks like you are up 7% year-over-year, or about 12% if you look at using the short-term deferred revenue line.

And so I am just wondering can you walk us through the impact of the mix of customers that were paying annually in advance and just to the extent that that may have accelerated the deferred revenue build up last year, is that creating adverse optics currently or is that not necessarily the case?

Mike Herring

Are you comparing Q1 of last year to Q1 of this year?

Mark Murphy - Piper Jaffray

Yes.

Mike Herring

Yeah, so just to remind that the increase in deferred revenue in Q1 of last year was impacted pretty dramatically by acquisition of Visual Sciences in the quarter. And so there is relatively significant portion of that increase that is inorganic, so not related to bookings in the quarter.

So that makes it difficult to compare year-over-year, even though the bookings were, but as we talked about flat year-over-year from a change in sort of in deferred revenue adding lunch revenue that it's difficult to compare those numbers.

So, what we saw through last year, we talked about it, in last few quarters is a focus internally Omniture in having customers paying in advance. And in summary the cumulative effect as we have been collecting or we driven deferred revenue relatively significantly through the year over $100 million on the balance sheet, in a higher percentage relative to forward the next quarter's revenue.

And as that’s come up, we have had higher commissions expense building each quarter. We just hadn’t fully calculated the right amount that was going to be due under that commissions coming out of 2008 activity going into 2009, and so we underestimated the impact that we ended up recording in 2009 related to that activity.

Mark Murphy - Piper Jaffray

Okay. and than just one last one, Josh on Test&Target, any estimate that how deeply penetrated that is in the install base and just what level of ASP uplift are you experiencing with that product?

Josh James

Yeah, so that's I think in conjunction what I said earlier, the uplift that we typically see with that is anywhere between 45%, 50% of the SiteCatalyst deal, but that’s the product that has an opportunity to grow overtime, because what happens typically customers will start using that product and they maybe using it just to help optimize their landing pages for their search keyword buy.

And then as they see success with that they may go and try to optimize the front page then they go and try to optimize their conversion process. They may take that and we are now with integration with email vendors, so they go and try to optimize the emails that they get sent out.

And we have some customers that are now taking their emails, and they send hundreds of thousands of emails, or millions of emails and those who have last would let's say a million emails, and of the first 10,000 are open when those emails are open of course pulls down images and so as it pulls that images you can try 4, 5, 6 different inner agent of that emails when the first 10,000 opens.

And then after that first 10,000 opened, you know which one of those combinations is going work most effectively based on that little sample size. And the other 990,000 emails are already sitting in inbox just waiting to be open.

And then as they are opened, you are able to optimize towards that most effective recipe in terms delivering the content. So it's not SiteCatalyst is more you buys for whole site and then as your traffic increase, you are paying more, whereas Test&Target seems like people are buying portions of it and another stronger on the larger, larger portion of their site. Next question please?

Operator

Your next question comes from the line of Bryan McGrath of Credit Suisse. Please proceed.

Bryan McGrath - Credit Suisse

Hey, guys. Thanks for taking my question, Mike a couple questions for you, I think we call out your Omniture Summit for the reasons for the higher expenses in Q1. Can you talk about profitability of summit, or whether you run on breakeven basis and how you compare the shares to prior years?

Mike Herring

Sure, so the summit was a major reason why sales marketing expenses are significant in the first quarter, they weren’t necessarily. A reason why expenses were higher than we expected, actually summit came in a little bit below what we expected, slightly below at the time we gave guidance.

So that's not one of the reasons why sales and marketing since were above expectations, but it's one of the major reason why it's high in the quarter, so I just wanted to clarify that Bryan.

It is a cost of the company that's relatively significant, we do charge for attendance at the summit and it's not an inexpensive event to operate and we do charge a decent amount for our customers to come. And one of that big decisions we went through this year was how far we want to push it to make it breakeven versus, make sure that we hold a high-quality even that meets what customers have come to expect from it.

And as a lot of other companies decided to not hold their customer events this year, because attendance was generally lower etcetera. We saw the same trends and knew that it was going to be relatively high expense back to the company, but because of the reason as Josh mentioned in the main part of our comments this morning, we thought it was important to make it.

It is definitely a significant expense impact to the company over $1 million dollars in the quarter to hold that event considering the amount of content that gets produced, the quality of the event for a couple of thousand people and the impact it has on your not just customer stat, but also in building our pipeline using that a marketing expense that’s well worth the effort.

Bryan McGrath - Credit Suisse

Okay, that make sense. And just another follow-up on the sales comp. Since some part of the upside was driven by activity in 2008, should we anticipate a pretty decent drop down in Q2 in conjunction with some of the other expense items that hit Q1 that looks like aren't going to be repeat in Q2, shouldn’t we expect a higher operating margins target given the revenue level that you guided to?

Mike Herring

We are taking a cautious approach to you know profitability expectations. There are definitely expenses that don’t repeat going from Q1 to Q2 and one of those is that the extra commissions expense above are expectations in Q1, so that's why we are confident that we can meet these kind of address older setting for ourselves

That said some of the other things that impacted it like the impact on allowances for example are still pretty uncertain and could better, but it also could get worse in the quarter depending on what happens.

And even though we are a couple of weeks in to the quarter, there are still a lot of uncertainty and lack of visibility in to those kind of expenses. And the impact they may have on the top-line and on reserve expenses that we end up posting in to our income statement.

So based on that kind of uncertainty, that’s the kind of thing that’s driving our expense expectations and thus our operating margin projection for the quarter.

Bryan McGrath - Credit Suisse

Okay, thanks for taking my question.

Mike Herring

Sure, Bryan. Thanks.

Operator

You next question comes from the line of Brent Thill of Citi. Please proceed.

Brent Thill - Citi

Thanks. Mike, just to clarify last call you mentioned that 200 basis points of op margin for the year, is that now effectively off the table?

Mike Herring

No. In fact what we talked about was in Q4, we think that there is an upper bound of 200 basis points in operating margin improving over Q4 of 2008, which would put us at around 14% operating margin in Q4. And we not only don't think that that's not off the table, but we are reiterating the fact that we think that's still achievable for Q4.

Brent Thill - Citi

Okay, and then you mentioned some steps that you are taking to get from the cost rewind, can you just drop in to what some of the specifics are, relative to that cost realignment?

Mike Herring

Sure. As Josh mentioned earlier, in moving to a suite model and a quarter back, like it's not a some of the straight quarter back model, but quarter back-like model in the sales area, we are able to streamline that sales organization, and then the supporting organizations below that.

And I think you saw a little bit of that in Q1, would actually the net reduction in the quarter when your sales reps associated or from the end of Q4 through the end of Q1. And then ripples down in to all the support organizations that drive sales.

There is a lot of other ways we can look to reduce cost. And really to reduce investments, I mentioned that we have always been aggressive in investing into new opportunities. One of the things that we are taking a hard look at is if we need to defer that stance, we are going to defer that stance going forward at least for the time being until things get more stable.

And those are the examples of things like that, or adding additional languages into the product suite, so they are localized in additional languages or during specific outside development that is adding additional product functionally or future functionality that might be cutting edge, but isn't probably critical to us achieving our goals for this year and we will defer those kind of investments for a couple of quarters until we have a better clarity as to when the economy can turn around.

Brent Thill - Citi

Thanks.

Mike Look

Yeah. Just as a reminder to everybody, we are trying to get through everybody's questions, and there is very long list and we have a really limited hard time constrains. So please limit your questions to one question so we could try to get to as many callers as possible. Thank you very much.

Operator

Your next question comes from line of Youssef Squali of Jefferies & Company. Please proceed.

Youssef Squali - Jefferies & Company

Thank you, and hi Josh, Mike and Mike. Just one question I guess on the customer account. Mike, I think you talked on the last quarter call about having more than 5,100 customers in Q4. I think, this time around you are seeing nearly 5,200.

So by our math turn into quarter was somewhere between 100 and 200. How much of that was voluntary versus involuntary? And then can you just talk about the flow of those churners into quarter i.e. was March worse than February, and so on so forth. Thanks.

Josh James

So I think there is pretty even mix between voluntary and involuntary churn at this point. And what's involuntary is actually more like, and some of that conversation that's driving the reserves in that the smaller customers who aren’t go pay their bills, or can't pay their bills that becomes an involuntary termination.

And they have dropped out of our customer accounts. Those are the kind of conversations that have definitely seen an uptick, and we, I think we have been seeing that now for about six months and I would say that March was as active on that front as month since we have seen that trend emerge.

Youssef Squali - Jefferies & Company

Thanks.

Operator

Your next question comes from the line of Marianne Wolk of Susquehanna.

Marianne Wolk - Susquehanna

Thanks. I just wanted to get little bit more clarity on the operating expense trends. Are you planning to reduce the QBSR count again in the second quarter, or to streamline the organization?

And then secondly, when we are trying to really get our hands around what's non-recurring in terms of the expenses. It sounds like there is $1 million of expense related to the summit that won't grow forward and maybe another what a couple of hundred thousand related to.

Josh James

So, first part of that question was around trend on QBSRs. As we kind of continue that streamlining process of our sales channels and such, I don’t expect that number to grow. I wouldn't expect it to drop a lot either and likely be relatively flat.

And then, in terms of expense, I think those estimates are reasonably fair in terms of expenses that occurred in Q1 that will not occur in Q2 and so we will be able to get some benefit from those one-time expenses now repeating.

Marianne Wolk - Susquehanna

Thank you.

Operator

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

Robert Breza - RBC Capital Markets

My question was just asked, thank you.

Operator

Your next question comes from the line of Patrick Walravens of JMP Securities. Please proceed.

Patrick Walravens - JMP Securities

Great, thank you. Mike can you tell us what you think CapEx will be in Q2 and we are going through this data center transition?

Mike Herring

We are through the data center transition. And in terms of CapEx for Q2, we expect that to be pretty consistent around $10 million for the quarter, and I know the next question is what kind of investment does that mean.

I think we are making a lot of investments right now around our infrastructure in order make sure that we are providing the kind of stability and support to our customers that they are expecting and keeping things as optimal as possible during relatively difficult times.

And I think even though our revenues guidance for the quarter isn't a very significant uptick and bookings were flat year-over-year. I think that’s probably about the level of CapEx we are going to see in the quarter.

Patrick Walravens - JMP Securities

Okay. Thanks.

Operator

Your next question comes from the line of Keith Weiss of Morgan Stanley. Please proceed.

Keith Weiss - Morgan Stanley

Actually wanted to follow up on that CapEx question. So the investments that you need to make, previously we would thought about CapEx as related to new spending and you are talk about the incremental change and subscription revenue annualized and percentage of that on new CapEx spend, is there a fundamentally different equation now, because it doesn't seem like that's holding anymore?

Mike Herring

I think there is definitely impacts to that equation that are outside of new business. So there is more investments we are making around infrastructure just to maintain existing customers levels and traffic.

And I don’t think this is long-term issue. It's more related to some of the products that have come out and some of the features and functionality and the level of support required to keep those features and functionality running in an optimal level.

Keith Weiss - Morgan Stanley

So this level investment is more of one-time thing, or more like something that you have get through to get the newer products off this or is this to some of ongoing basis because it's a broader product portfolio this is a new level spend.

Mike Herring

I think it's actually more that your last comment. We have multiple products or processing and bunch of integrations between these products to make them work effectively and managing these data in real time to run those products and this means not just reporting on it, but providing the data and detailed level in a way that is actionable in real time, or very cost to real time takes a new level of CapEx.

Keith Weiss - Morgan Stanley

Excellent, thank you.

Operator

Your next question comes from the line of Richard Baldry of Canaccord Adams. Please proceed.

Richard Baldry - Canaccord Adams

Thanks. If you looked at transactions process to sort of a proxy for customer usage, we are hearing from some that January and February was pretty low, maybe also indicated by CPC costs, but we saw a pretty strong bounce into March,

Could you talk whether that trend was similar what you’ve seen early end of this quarter maybe that has a backdrop for you outlook for growth in the second half, thanks.

Mike Herring

Well, I don’t that saw January and February as low traffic quarters, months and then in margin increase, I mean the increase in traffic, we saw from quarter-over-quarter was relatively gradual and that maybe a function of the fact that we have pretty large diversity across our customer rates.

But I wouldn’t say that saw a big trend tick up in March, whether that was in search activity in actual site traffic. When we look at forecast, translating that to revenue, those kind of traffic patterns only marginally affect our revenue.

So we are forecasting revenue, it's mostly around looking at contract terms, and assumptions around how those contract terms lay out. Renewal rates, close rates in the pipeline etcetera. The portion that’s driven by the actual traffic levels is a low single-digit percentage of revenue. And although that does impact that forecast, it's not a significant driver.

Operator

Your next question comes from the line of Shyam Patil. Please proceed.

Shyam Patil - Raymond James

I was wondering if you could help us understand what 15% to 20% revenue growth assumes for bookings growth in the first half. It was flat year-over-year this quarter, is that to stay steady, or can it deteriorate and still get to the bottom end of that revenue growth range, thanks.

Mike Herring

Q2 is recently our second strongest bookings quarter, and not coincidently, because it follows the some activity in Q1 and in this quarter this year in April with London Summit this week.

So it does, where we end up in that 15% to 20% range is pretty directly dependant on what business is closed in the first half of the year. Once we are through the second quarter, the impact of any sales that we do in the back half of the year might move a grand total of 1% in one direction or the other.

That will effect that, it was definitely revenue that will impact, Q3 and Q4 that are sold in those periods, but the majority of that impact from new sales will come from this Q1 bookings period and how successful we are in Q2. So that range is essentially a range that reflects a potential weak Q2 up to seasonality normal Q2 bookings range

Shyam Patil - Raymond James

Great, thank you.

Mike Look

We have only unfortunately time for two more callers. Operator?

Operator

Your next question comes from line of David Hilal of FBR. Please proceed.

David Hilal - FBR

Great, thank you. I want to focus on the deferred rev. The sequential growth has been less and less for successive of quarter for the last year. And obviously that's understandable giving the market environment, but I want to understand what's your thoughts about it going forward.

It only was up less than $5 million this past quarter sequentially, could we have a quarter this where we actually eat into deferred, we actually see differed down on sequential basis?

Mike Herring

Could we? I think that's possible. If that occurs it would likely be in a quarter like the third quarter where it's the seasonally lowest bookings quarter or so. It's also the seasonally lowest renewals and that's billings' quarter, and so we would have the least annual repayments getting put into the deferred revenue on bucket with essentially the same amount of deferred revenue coming out in the quarter and recognize this revenue. So I think that's possible. We haven’t seen that before, but it could occur.

David Hilal - FBR

Okay. Thank you.

Operator

Your next question comes from the line of Dan Salmon of BMO Capital Markets. Please proceed.

Dan Salmon - BMO Capital Markets

Hi, guys. Thanks for taking my question. So one quick last one here and maybe little bit of twist on the bad debt expense question from earlier, but we have seen marketing vendors, particularly the agency seen payment terms pushed out on some of their largest customers say from 30 days to 60 days. I guess this is little separate from bad debt expense, but are you seeing that with some of your larger customers where you continue to work with them and have high retention. But maybe challenging working capital little bit?

Josh James

Actually, that’s a great question, it's something that a lot of people don’t focus on, is that when payment terms get extended, you actually do increase your bad debt expense. Not specific reserves necessarily, but your general reserve which you apply to AR balance based upon buckets of ageing.

And so if your AR is ageing, because pay terms will be extended or people are just slower in paying that does actually affect bad debt expense. And that’s something that we work really hard on.

The fact that in the DSO as Josh provided that builds in advance and growing faster right ability in advance we tend out a much higher DSO’s than most software companies. But that said, that's been relatively flat or consistent over the last five or six quarters and haven't gotten the worse in recent quarters.

But that is reality of today's market where you see, payment terms extended whether it's negotiated upfront or not or they just pay over a longer period of time and that means more investment into collection activities, more inclusion of the account management and the sales and those collections activities. And frankly larger impact into your allowances and that's bad debt expense.

Dan Salmon - BMO Capital Markets

Okay.

Mike Look

Thank you everyone. Thanks to those that are still on the call. Hopefully we will be able to get your questions in a next day or two, But I want thank everyone for your time today and look forward to seeing you obviously, and thank you very much.

Operator

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. Good day.

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