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RightNow Technologies, Inc. (NASDAQ:RNOW)

Q1 2009 Earnings Call

April 29, 2009 4:30 pm ET

Executives

Greg Gianforte - Chief Executive Officer

Jeff Davison - Chief Financial Officer

Todd Friedman - Investor Relations

Analysts

Nandanam Bhadiyan - Deutsche Bank

Brent Thill - Citi

Terry Tillman - Raymond James

Jeff Houston - William Blair

Nathan Schneiderman - Roth Capital Partners

Sasa Zorovic - Janney Montgomery.

Keith Weiss - Morgan Stanley

Philip Dionisio - FBR Capital Markets

Gore Topaz - Thomas Weisel

Brian Schwartz - Piper Jaffray

Derrick Wood - Wedbush Morgan Securities

Harish Parwane - Jefferies

Pat Walravens - JMP Securities

Operator

Good afternoon. My name is Kevin and I will be your conference coordinator. Today's call is being recorded. At this time I would like to welcome everyone to the RightNow Technologies Inc. first quarter 2009 earnings results conference call. (Operator Instructions).

Mr. Todd Friedman will begin the call.

Todd Friedman

Thanks Kevin. Good afternoon everyone and thank you all for joining us on RightNow's first quarter 2009 conference call.

Joining me on the call today is CEO and Founder, Greg Gianforte, and Chief Financial Officer, Jeff Davison. Before turning the call over to the Company, I will read our Safe Harbor statement.

During the course of this call we may make projections or forward-looking statements regarding future conditions or events, which may drive our future business, current new products and services and their performance, the size and strength of our market, and our future financial performance and outlook for the Company. These forward-looking statements may include but are not limited to, statements about revenue growth and profitability, our future strategic plans and perceived growth opportunities, market acceptance of our products, and other statements relating to our operating results. These forward-looking statements speak only as have today and are based upon the information currently available to us. This information will likely change over time.

By discussing our current perception of our market and the future performance of the Company and our products with you today, we are not undertaking obligation to provide updates in the future. We caution that such statements are just projections and actual event or results may differ materially from what we discuss today.

Please refer to the documents we file with the SEC, specifically our most recent annual report on Form 10-K, and quarterly reports on Form 10-K. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

As a reminder, we are providing a supplemental data sheet, as well as an updated investor presentation, on the Investor Relations section of our website that contains historical information for easy reference. During the course of this call we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliation of GAAP, which can be found in our Company's earnings release, which is posted on the Investor Relations portion of our website.

With that, I will turn the call over to Greg.

Greg Gianforte

Good afternoon everyone. In the first quarter we reported revenue of $36 million, within our guidance, and a significant over-performance in EPS, as we continue to manage expenses. We reported non-GAAP EPS of $0.09 in the first quarter. We also generated approximately $5 million in cash from operations. In the first quarter we believe we experienced an impact from the economy. Customers adjusted their buying patterns, primarily by requiring greater levels of scrutiny to initiate and close projects, predominantly in the new business area. We also saw from customers reduce their solution needs at renewal time as their requirements have changed and frankly we continue to see some small organizations go out of business.

It is noteworthy that we believe we are off to a good start in Q2. But we don't see this environment changing significantly in 2009, and are lowering our revenue outlook to incorporate longer sales cycle and some increased churn. However, we are also raising our earnings outlook to reflect our continued, successful expense management.

Jeff will share more of the financial details about the quarter, and guidance later in the call. But first I will give you the benefit of some of our early insight about Q2, and then I will provide some more color on the first quarter.

While it is early, we believe Q2 is shaping up well. The pipeline is about the same size as it was heading into Q4, with a good mix of opportunities across deal sizes, verticals, and geographies. Significantly, there are more transactions in the pipeline for call-center engagements than ever before, reflecting success of our Land and Expand strategy to go from our e-service beachheads as well as our ability to land on the agent desktop.

Looking at the quarter a little more closely, I mentioned greater scrutiny around initiating and closing deals. I view this both as a challenge and a validation. From a sales perspective, you always want deals to close as quickly as possible. Operationally, we need to continue to refine and adjust our expectations and processes to better anticipate these customer requirements. But from a strategic perspective I think this challenge actually reflects the growing role that RightNow is playing for many of the world's largest corporations. When we engage not only with a project sponsor, but also with the CFO, CIO and CEO, we have the opportunity to ensure the project has the highest levels of support and validation, and provides an open door to engage with the customer on their ongoing strategic and tactical needs.

As I said last quarter, our Land and Expand strategy has been allowing customers to experience the benefit of RightNow solutions in a low-risk, high-reword approach, and then incrementally increasing their investment over time. I believe our selling methodology provides a unique advantage and eases the decision-making process, especially in today's economy.

We continue to see success with our pilot program, which allows us to quickly prove value. One example is a global footwear company that operates more than 1,100 retail stores, and an e-commerce site that distributes many well-known brands.

The key to converting this pilot last quarter was reaching the minimum 14% reduction in both customer calls and e-mails, which we did in just 60 days. We are replacing an on-premise vendor at this account to provide a single system to support all interaction channels.

Companies want and need to find ways to cut costs, but keep their existing customers. I personally visited more than 40 of our customers' prospects and partners in Q1. What I am hearing is that most of the initiatives are still moving forward. As those projects progress, one thing is understood by everyone these days, SaaS has changed the face of CRM, and is here to stay.

It has been interesting to hear the different competitive messages that have emerged recently. Whether it is Oracle, focused on virtualization to hide the native problems with their 10-year-old architecture, or Salesforce trying to redefine basic things like what it means to have multi-tenancy. I believe that competitively we are better positioned today than at any other time in the Company's history.

Let me give you a sense of some of the things we can do that make us unique in SaaS-CRM.

First, you cannot undervalue the importance of delivering a complete solution from a single vendor. We offer the most comprehensive, end-to-end, multichannel solution, covering both the e-service channels and the traditional phone capabilities, including knowledge management, chat, voice, IVR and the agent desktop, as reflected in the fact that we have the highest combined ranking across Gartner's most recent Magic Quadrant for e-service and customer support and service.

Secondly, we are the only CRM vendor to offer proactive, multichannel enterprise feedback. This uniquely enables our customers to capture the voice of the customer across all channels of interaction, and the ability to take action immediately.

Thirdly, we offer the only Smart Client agent desktop architecture. When agent productivity is measured in seconds, a Web browser application just doesn't satisfy the speed and latency requirements in large contact centers. Our Smart Client solution does.

Fourthly, because over 60% of our revenue comes from enterprises over $1 billion in sales and government organizations, we have solved hosting and delivery challenges others SaaS vendors have not even started to think about yet. For example, we offer on-demand upgrades, so customers advance their solution when they are ready, not at a vendor's whim. On-demand upgrades allow our customers more flexibility to comply with their Sarbanes-Oxley requirements and system lockdown policies.

We are the only major SaaS firm to offer a production European data center to meet strict European data security requirements. We are the first and only SaaS CRM firm to have a secure government hosting offerings that meet the requirements of both Department of Defense and civilian agencies. Finally, we were one of the first SaaS CRM firms to offer Service Level Credits that guarantee performance of our solutions.

Let me give you a little more color on two of these items, government hosting and Service Level Credits, because I think that they are a powerful illustration of how we are providing capabilities unavailable from anyone else.

The Department of Defense and civilian agencies have strict standards for the deployment of enterprise applications, and we are the first vendor to meet these with a SaaS delivery model. We certainly had an advantage here, because we have more than 50 existing deployments within the Department of Defense today and every Cabinet-level agency in the US federal government is a RightNow customer.

But we also had an advantage of offering the only SaaS CRM solution that could adapt to the government's strict security needs. I am proud to say we already have three Commands within the Department of Defense that have made a decision to move forward with our new secure hosting service.

On a broader scale, we believe the new administration is focused on improving efficiency throughout the government and they certainly seem willing to spend money to make it happen, which we view as an opportunity for our already strong government business.

Consequently, the Department of Defense and civilian offerings are a tremendous validation of our solution for non-government, highly regulated industries, like financial services and telecommunications.

Also, recently we announced a unique guarantee for our premium support customers, offering pro-rated refunds if we fail to meet a 99.9% uptime commitment. This is unheard of service-level for a full-service enterprise level contact center CRM vendor. We believe that our customers need to have complete confidence in their solution provider. By putting our money where our mouth is, they know we're willing to stand side-by-side with them to achieve their customer experience goals.

One other thing that we do that consistently moves the bar higher and higher is our quarterly release methodology. This sets the standard for enterprise-level SaaS CRM. For example, in the February '09 release, we included new functionality to help companies with product registrations and to facilitate cross sell-upsell. This quarterly release methodology enables us to deliver meaningful, incremental innovation to our customers on a regular basis and makes it that much harder for the competitors to catch up.

As more people recognize the value of SaaS, then also realize the large market opportunity that lies within the contact center, we expect more vendors to try and enter this space and the noise level to ratchet up. This is already happening, as we have seen more announcements from competitors over the past few months. While we take all competitors seriously, it is the combination of our unique solution and delivery capabilities, customer proof points, and intense focus on the needs of our target market that gives me confidence that we will continue to extend our leadership for consumer-centric CRM.

I mentioned customer proof points. One thing that makes us most proud is when our customers are rewarded for their efforts. We have helped more companies earn Gartner's CRM Excellence Awards over the past three years than any other vendor; not Oracle, not SAP, not Salesforce.com. This year the honor was bestowed upon TheTrainLine, which used RightNow to transform its organization to become customer-centric.

TheTrainline is the leading independent retailer of train tickets in Great Britain. By listening to, and acting on direct customer feedback, TheTrainline was able to make significant changes right across their business, all with the aim of improving the customer experience and providing their customers with effortless customer care. They experienced significant improvements in customer satisfaction levels, as well as positively impacted customer registration growth and customer repeat spending.

We were thrilled to congratulate TheTrainline as they joined other RightNow customers, such as Electronic Arts, Overstock, Marktplaats, a division in eBay, and Nikon as other Gartner award winners. We also congratulate CBS Interactive for their recognition as a CRM Magazine Service Elite Award winner. CBS Interactive is a true example of how we helped an organization start with one pin point, and then grow the solution with them as they grow their own operations.

We started with CBS Sports, and over the course of a number of years here, the relationship has grown, and they are now the eighth most visited destination on the Web; both through their own organic growth with acquisitions of companies such as CNet.

In the CRM Magazine article describing the award, CBS Interactive said that their contact center cost per transaction used to range from $1.64 to more than $6. But with the help of RightNow, they have brought those costs down to $0.06 per transaction. One application of our solution, that some of you have may have taken the advantage of, was during this year's March Madness.

CBS Sports streamed every game during the tournament. But as you can imagine, not every consumer's computer instantly showed the game, as people had to deal with new versions of software, minimum PC requirements, bandwidth issues and so on. In a live event you can't wait to call the call center and hope that a human will help you solve your problem. They used RightNow to create live alerts and troubleshooting solutions to create the best possible customer experience.

The success that we have had there, they now plan to roll RightNow out to all 32 of their Web properties with multichannel, multilingual support and we couldn't be more proud of our success.

All told, in the quarter we added 26 new customers, and did new and expansion business with organizations, including Activision, drugstore.com, Lean Logistics, Logitech, Sony Computer Entertainment and Tommy Bahama.

The number of new customers is not like what we would like to see. Aside from the affect of the economic conditions, this is also being impacted by our stronger focus on target accounts. While we've said before that we focus on quality target accounts, not quantity, we are nonetheless working diligently on increasing our new accounts to grow our expansion opportunities.

There are a couple of examples of the success in landing in new accounts during the quarter. We landed in Sirius XM Radio's contact center with thousands of seats for agent knowledge base replacing a Primus system. This was a competitive win against Siebel and salesforce.com.

Another win this quarter was a Fortune 500 manufacturing company that operates in a highly regulated industry. They selected RightNow to power their integrated, multi-channel customer service operation. One of the primary reasons RightNow was selected by this customer was our ability to help them manage their complex compliance processes, which involve a number of local, state and federal regulations that have to be complied with before they can even talk to a customer.

So their ability to complete some of the most basic customer service tasks requires a solution that taps into numerous disparate data sources and other external applications. RightNow was selected to help them manage these complex regulations in their contact center with process integration and our agent scripting capability. In addition, this implementation will include the open [methods] connector for Genesys, a Desktop Add-In that we announced last quarter for computer telephony integrations.

So overall, while I am happy with the foundation of our business and our margins, we are not happy with the bookings result in the first quarter. We will continue to manage expenses tightly to drive margin expansion, but we also plan to continue investing to drive increased bookings and capture market opportunities as they arise.

I told you last quarter about our two primary objectives for 2009. One, take care of our customers. And two, grow profitability. Everything we do will serve these two objectives.

Before I turn the call over to Jeff, let me just say that we will be covering a lot of these topics in greater depth at our Analysts Day in New York on June 10th. So if you do not receive an e-mail about the event, please reach out to Todd or Stacie at Blueshirt, and we will be sure to get you the details.

With that I will turn it over to Jeff.

Jeff Davison

Thanks, Greg. As Greg mentioned, the quarter had its challenges, but it also had its highlights, particularly related to expense management and delivering upside to the bottom line.

Revenue in the first quarter was $36 million, at the low end of guidance. We again saw an impact on revenue due to foreign exchange rate decline in the amount of $350,000 in the quarter. Recurring revenue was $26 million compared to $26.5 million last quarter and $24.4 million in the first quarter last year. The recurring revenue decline from last quarter is primarily related to lower revenue from current quarter bookings and foreign currency exchange rate declines.

Professional service revenue was $10 million for the quarter, an increase of approximately $400,000 from Q4. The mix of revenue across geographies for the quarter was 75% Americas, 18% EMEA, and 7% Asia-Pac.

Bookings for the quarter were approximately $24 million. We expected Q1 to be down sequentially from Q4, however, this was below our expectation. Net deferred revenue of $96 million at the end of the quarter increased from $94 million a year ago and decreased compared to $104 million at the end of Q4.

For Q1, the average first year contract value was $74,000, which is down from last quarter and Q1 '08. We had one deal over $1 million, 59 deals between $100,000 and $1 million, and 443 deals less than $100,000.

On interactions, our solutions enabled 606 million customer interactions this quarter compared to 583 million last quarter and 463 million a year ago. Strong verticals in the quarter included retail CPG, entertainment media, high-tech, public sector and telecommunication.

I'd highlight that travel is the vertical where we're seeing most impacted by the macro environment, while we have seen some positive movement in the public sector and entertainment media vertical.

On expenses, note my comments are before stock-based compensation. Gross margin was 67%, consistent with Q4 and a 400 basis point improvement over Q1'08.

We delivered a 31% professional services gross margin compared to 26% last quarter. We had strong professional services gross margin in Q1 as a result of work completed on high-margin projects, combined with our focused expense management. The increase over Q4 is due primarily to realignment of a pre-sales function from the professional services organization to sales. The cost of this group now reside in sales and marketing expense.

Total operating expenses were $21.8 million this quarter, a decline of about 5% from Q4, and represented 60% of revenue compared to 63% of revenue last quarter. This improvement is a result of the reduction in headcount during Q4, combined with focused spending control in quarter and foreign exchange rate declines.

We're very pleased to report an operating profit of $2.5 million or 7% of revenue, which is the second highest level of operating profit in our history. We've continued to expand our operating margin each quarter, with this being our ninth consecutive quarter of operating margin improvement.

On the bottom line, we recorded a GAAP profit of $1.3 million or $0.04 per share. Excluding stock-based compensation, our non-GAAP net income was $2.8 million or $0.09 per share, well ahead of our guidance.

Headcount at the end of the quarter was 742, up 1% from 737 at the end of Q4, and up 3% from the first quarter of 2008.

Next on the balance sheet and cash flow statement. The cash generated from operations was $4.9 million for the quarter. DSOs were 79 days for the quarter, consistent with the fourth quarter. Similar to last quarter, approximately 25% of our business included extended or periodic payment terms. We ended the quarter with total cash and investments of approximately $93 million. We used approximately $1.8 million in the quarter to repurchase 231,000 shares of our common stock. This completed the share repurchase under our $15 million buyback program.

In total under the buyback program, we repurchased approximately 2.1 million shares at an average price of $7.14. Average weighted diluted shares at the end of the quarter were 32.2 million.

Now turning to guidance. For the second quarter we expect revenue to be approximately $36 million, marked by an increase in recurring revenue, offset by a decline in professional services revenue.

We expect non-GAAP earnings per share to be in the range of $0.03 to $0.05 and GAAP loss per share to be in the range of $0.04 to $0.02. For the year, we're adjusting our revenue guidance downwards and raising earnings guidance to reflect results from Q1. We expect revenue for the year to be in the range of $147 million to $151 million, consisting of 6% to 10% growth in recurring revenue and professional services revenue consistent with 2008.

We now expect full-year non-GAAP earnings per share of approximately $0.20 to $0.25, and GAAP earnings per share of negative $0.02 to a positive $0.03. We expect stock-based compensation to be approximately $2 million for Q2 and $7 million for the year. We expect capital expenditures to be approximately $6 million for 2009. We're forecasting 32 million basic and 33 million fully diluted shares outstanding for the first quarter.

With that, I'll turn the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Tom Ernst with Deutsche Bank.

Nandanam Bhadiyan - Deutsche Bank

This is [Nandanam Bhadiyan] on behalf of Tom. You have lowered your revenue guidance, but you have raised your earnings guidance. Where do you expect to get the leverage for the rest of the year in terms of improvements in margins?

Jeff Davison

Hi, Nandanam It's a good question. The reduction of the revenue guidance obviously flows through to the earnings, and we have a natural reduction in earnings per share for that. However, given the over-performance in earnings in Q1 and the expense control that we expect to see through the rest of the year, we're able to raise guidance for earnings for the year. So it is a net of the reduction in revenue, but a positive in the expense control through the rest of the year.

Nandanam Bhadiyan - Deutsche Bank

Then just a quick observation on the balance sheet. On the deferred revenue, both the current deferred and the long-term deferred have dropped by $4.5 million to $5 million. I know you said the pipeline was strong, but where do you expect to have those numbers? What kind of profile should we model for the year?

Jeff Davison

The reduction in the deferred, both current and non-current, are a direct reflection of the bookings from Q1 and the revenue that we realized. Keep in mind, the 25% is still off balance sheet or not recorded on the balance sheet. That factor stayed about the same.

So when we look at the revenue for the rest of the year, we still have, as we've talked before, the majority of it comes off the balance sheet. And then we do expect to fill the gap with what we perform in professional services and then bookings that will come during the year.

We expect bookings growth and we pull in revenue each quarter from current quarter bookings. So those things combined help me to look at the model and provide the guidance that we are providing today.

Operator

We will go next to Brent Thill with Citi.

Brent Thill - Citi

Greg, as you move through the quarter, did you see any changes in customer buying behavior? There is a number of technology companies that have pointed to signs of some stabilization, obviously not great growth, but did you see anything that changed your view in terms of what you're saying on the buying patterns through the quarter?

Greg Gianforte

Good question, Brent. I did get out with a lot of clients, and I'd say we had such a strong Q4 in terms of bookings, and what I saw in Q1 is companies are really becoming more deliberate about their purchasing. And that's really, I think, a direct effect of the economy and so how does that manifest itself? Well, deals tended to have to go higher in the organization. We needed a few extra signatures to get them done. So in that regard, in the market we are in, I'd say Q1 we had a little more headwind than we did in Q4.

Brent Thill - Citi

Jeff, just on the professional services gross margin, they were obviously strong. How should we think about that modeling going forward? Is that 31% level a good level to go of with?

Jeff Davison

The 31% I think is a little high. We made this change with the pre-sales function I mentioned. I think when you consider that and where we should normalize, it should be between 25, 27% on a go forward basis. I think we're about four points high this quarter.

Operator

We will go next to Terry Tillman with Raymond James.

Terry Tillman - Raymond James

Jeff, I appreciate the bookings numbers you gave, 24 million, but I guess I just don't have it in front of me. What was that, was that growth year-over-year or was that down year-over-year, because I don't have the bookings for 1Q '08?

Jeff Davison

Sure, a good question, Terry. The bookings of Q1 '08 was $37 million. So it is down this year from '08. However, we expected bookings to be down this year. And that is primarily due to renewals. So a couple of points I want to point out on bookings. It is the metric we look at, and it is a metric we are giving you, but bookings will vary quarter to quarter based on a couple of significant factors.

First of those being renewals and the component of renewals in the bookings. So renewals, that level depend based on both timing of when it is due as well as the impact of early renewals. Those will obviously affect the bookings level.

The other thing affecting bookings is going to be contract terms. So if we have longer contract terms that will impact bookings by driving it higher. To just talk about the comparison to Q1 '08, I mentioned that we expected this quarter to be down for bookings, and it was. Part of the reason for that is, first, you would look at the foreign currency and Q1 this year compared to Q1 last year, there is a significant change in foreign currency. That impacts the bookings.

The second point I would make is Q1 of '08, we had a higher level of renewals and those were really related to the model change from '07 when we saw the contract terms shortened. So we had a bunch of renewals coming due last year in Q1 '08. All that being said, we were disappointed with the bookings level. It was short of our plan, as Greg had mentioned. We were about 75% to 80% of our plan on bookings for the quarter.

Terry Tillman - Raymond James

Thanks for all the detail, and then, Greg, it is interesting you say that your optimism in print about 2Q and what you have to work with. That is fine and good, but are you seeing stuff actually closing? How is the book of business in? I know it is just April, but are you actually seeing some good closings and some bookings early on or is it just there is hope and there is a good pipeline for the rest of the quarter? Thank you.

Greg Gianforte

Sure. Terry. It's both of those. We have a good pipe, as strong as we had going into Q4. We have also seen good sales here in April. To give you an example, there was a deal we fully expect it to be a Q1 deal. We always have some deals fall over. Dealing with the CFO of this billion dollar plus company, he says he gets the deal done. At the 11th hour he says, no, I have got to talk to the CEO, who is on vacation. So that deal closed the first week of April.

So we are just seeing more scrutiny and more signatures on some of this stuff. So we are seeing both a strong pipeline and some early evidence that the deals will come in, albeit with a little more deliberate decision-making on the part of the customers.

Jeff Davison

Just to add a little more color on that, one of the metrics we track internally is, as the quarter progresses, we track where we are on business that we're closing in comparison to historical trends, and those are trends of how we're progressing against the target or where we ended up historically, and where we sit today we are tracking ahead of our highest performance historically. So we feel good about where we are in the quarter.

Operator

We will go next to Laura Lederman with William Blair.

Jeff Houston - William Blair

This is Jeff Houston for Laura Lederman. The first question I wanted to talk a little bit about your thoughts for capital uses. Are you more likely to do more buybacks or save money for acquisitions?

Jeff Davison

We allocated the $15 million for the buyback last fall and we executed on it pretty quickly. We are sitting with $93 million, and right now, I don't really see that I'm going to go ask to spend more on the buybacks, just because of the current environment, I would hate to be raising money. With that being said, on the acquisition side, we're always looking at the opportunities that raise up.

Greg Gianforte

I would just add. I think that it is nice to have a little dry gunpowder. I think there's going to be some buys available. And at this point we're going to try to preserve that.

Jeff Houston - William Blair

What type of things would you acquire? Would it be more new products or a consolidation of the market?

Greg Gianforte

We look at a range of opportunities. We have an active investigation process. You are in the right area kind of what you are thinking about, but we are looking at both types.

Operator

We will go next to Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

I was just hoping you could go into the sequential decline in recurring revenue in a little more detail. I was a little surprised to see that, even given the weak bookings print, given that you had such a strong Q4, can you kind of walk us through what drove that decline? If there any particular issues on the sequential basis, like FX, can you detail those?

Jeff Davison

Yes, I will. We were down about $500,000 from Q4. And the first thing I'd point to is about $300,000 was related to foreign currency. So we did have an impact there. Secondly, every quarter there is a component of revenue that's coming from current quarter sales. And with our bookings being lower this quarter, the revenue coming from current quarter sales was actually lower.

So that piece was lower as well. There is a third point I would point out, and this is something about Q1, but Q1 when you actually compare it to Q4, it is two days shorter. We have a daily revenue model and that two days actually does make a difference.

Nathan Schneiderman - Roth Capital Partners

Then the guidance that recurring revenue would be up sequentially in Q2, can you discuss that in some detail, and why you're confident that scenario would play out given the weak bookings print in Q1?

Jeff Davison

Sure. Obviously, we have complete visibility into the deferred revenue flow. So I know what is out there and I know what is going to come in. Where I have to forecast and make more of a guess, if you want to look at it that way, is on the new business bookings and in quarter bookings. I'm able to look out with the deferred flow that we have and see revenue that is pulling in off of the Q1 bookings that we have as well as the strong Q4 bookings. Those combined provide me that base deferred revenue realization. I fine tune my assumptions based on the Q1 performance in current revenue and I'm comfortable with the guidance on the recurring revenue.

Greg Gianforte

The one point I would add, Nathan, is that we did have that very strong Q4. Not all the bookings that we sold in Q4 immediately show up in revenue recognition, even in Q1. If they were early renewals of contracts, or if there were some milestones associated with delivery in terms of implementation, they may not have impacted revenue in Q1. But as Jeff said, he has complete visibility as to when they hit the revenue line, and that's a factor as well.

Operator

We will go next to Sasa Zorovic with Janney Montgomery.

Sasa Zorovic - Janney Montgomery.

First, I would like to go back to the issue of your potentially stabilization within the quarter. So in terms when you look sort of, what was the linearity within the quarter specifically like when you compare it to prior first quarters?

Jeff Davison

When you end the quarter and you look at the bookings, the linearity is pretty similar to most quarters, but with the bookings being at the level it was that that kind of impacts revenue. But I'd say the linearity was pretty similar and what that means is most of our sales are in the third month of the quarter.

Sasa Zorovic - Janney Montgomery.

Then secondly, if you could tell us a little bit more specifically how you have done perfectly well here in expenses, and what do you really particularly attribute that to? And what are you sort of focused on for the remainder of the year, given the EPS guidance that you have given?

Jeff Davison

On the expenses, if you do any comparisons to last year, especially the first half of last year, the first thing I would look at is the foreign exchange. There was just a pretty significant impact from that.

Secondly, if you just go back in Q4, our headcount ended down from Q3, so we have actually reduced heads in Q4, and we have been very focused on our spending. Our headcount only, I think, came about five heads in Q1. Our plans for this year do include headcount growth and that is our biggest expense, and we'll manage that very carefully to the earnings growth to achieve the targets that we've set out.

On a model perspective, you are seeing improvement in our sales and marketing line. The changes we made in that organization are really designed to engineer to improve productivity. That's both through the structure of the organization as well as the processes and the behavior inside the sales organization.

Operator

We will go next to Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley

I wanted to delve into the commentary on the pipeline a little bit. You noted that your Q2 pipeline, or heading into Q2 your pipeline was similar to that in Q4. I was wondering if you could give us a little bit more color, maybe compare Q2 versus what your pipeline was looking like going into Q1?

Then maybe walk us through some of the assumptions around close rates and conversion rates that you are expecting, and how that's changed since Q4, if your Q1 probably wasn't up to your expectations as far as that is concerned?

Jeff Davison

Sure. So Q4 pipeline was strong. We showed a strong result. The pipeline going into Q2 here is also strong; they are very similar in size. The pipeline, although we believe it was sufficient to get Q1 done, was lower than what we have now or we had at the beginning of Q4. We did a very good job of closing stuff out at the end of the year and although we believe we had sufficient pipeline, with the extra deliberation by clients, in the end we did not have enough pipeline in Q1 to meet our internal expectations.

That being said, we have adjusted our forecasting algorithms. The way we look at it, we have tightened them up based on our experience in Q1 and with that tighter scrutiny, we feel comfortable with the forecast that we are giving. Hopefully that helps to give you a little color.

Operator

The next question comes from David Hilal with FBR Capital Markets.

Philip Dionisio - FBR Capital Markets

This is Philip Dionisio for David. Could you talk about churn, what you saw in the quarter, and compared to the prior quarters? And also could you describe the discussions you are having at renewal with customers? You said something about renewals in the beginning. Are you seeing customers downsize their costs, actually because they have fewer employees, or do you see them cutting out some modules?

Jeff Davison

In terms of the churn, our customer retention on customer account is still around 90% annualized. In terms of renewals, where in the past we have reported that we've attained 100% renewal of the available renewal dollars, we did not do that in Q1. As Greg mentioned earlier in the call, we continue to see some small companies go out of business. But what we have seen is we have seen some companies purchase less at renewal time and that is primarily due to changes in their business, similar to you mentioned. They may have less seats they need to purchase or they may have just had their customer activity turn downwards.

Greg Gianforte

They tend not to be turning off modules. They just tend to be buying less capacity.

Jeff Davison

Buying less capacity. We specifically had a loss of a customer that was through a third-party outsourcer, who lost the business around some of their performance issues. That was about $100,000 a month for us. That was a specific occurrence. We don't see that as something that is a recurring type of item. But all of these things considered, I've modeled just a slightly higher churn rate in my model based on the current environment.

I guess to sum up and answer your question, I would say, we have seen a little slightly higher churn, but not a significant increase in churn.

Operator

The next question comes from Tom Roderick with Thomas Weisel.

Gore Topaz - Thomas Weisel

This is [Gore Topaz] on for Tom. I was hoping you could talk about the FX impact on deferred revenue. I think it was about $4 million negative last quarter. Was it similar this quarter as well? And what would bookings growth have looked like had you excluded out this negative impact?

Jeff Davison

The FX impact, comparing this balance sheet to last quarter's balance sheet, was not that big, just because rates didn't drop as far. It is when you compare it to last year that it is so significant. I may have to look for that number here to give it to you. I believe that number is approximately $2 million.

Gore Topaz - Thomas Weisel

Then on a go forward basis are you modeling any negative impact on the top line going forward for the rest of the year, is that impacting your guidance at all?

Jeff Davison

For exchange rate?

Gore Topaz - Thomas Weisel

Yes.

Jeff Davison

No, I model with the current rate. It is a tough crystal ball to guess what the exchange rates are going to be forward, so I just use current.

Gore Topaz - Thomas Weisel

But I guess, this guidance versus your last guidance is there any negative impact or new reduction associated with foreign currency?

Jeff Davison

There is a little bit. Yes, because the rates are down from last time.

Operator

The next question comes from Mark Murphy with Piper Jaffray.

Brian Schwartz - Piper Jaffray

This is [Brian Schwartz] in for Mark Murphy. Jeff, I wanted to ask you about the sales and marketing line item. It looks to me it is the lowest percentage of revenue here as far back as our model goes. And it is down about $2 million here year-over-year. I am just wondering if this is the right level to capture the market opportunity that you guys mentioned in the opening comments?

Greg Gianforte

I will jump in here before Jeff. I think one of the things that we have really been focused on, as we look at how much we are spending on sales and marketing, we concluded a while back that we had to become more efficient in the way we go to market. So I think what you have to factor into this sales and marketing expense as a percentage of total is that we are going to market in a more efficient manner to get higher productivity through, per head by, for example, using more inside sales resources that are lower-cost resources for those accounts that have appropriate opportunities for us, and using field-based resources where the sizable upside potential exists for us. So I will give you that color. I don't know if you want to add anything to that, Jeff.

Jeff Davison

The only thing I would add, I would repeat that when you compare it to previous, the foreign exchange impacts compared to Q1 is $1 million on the sales and marketing line, and that is about half the difference.

Brian Schwartz - Piper Jaffray

Jeff, I just wanted to ask you on the cash flow tax rate, if you paid any cash taxes in the quarter, and maybe what you think the cash tax rate will be for the year?

Jeff Davison

We are only paying taxes in some state and foreign jurisdictions. So the actual cash taxes is very low, and that will be for some time given our NOLs.

Operator

The next question comes from Derrick Wood with Wedbush Morgan Securities.

Derrick Wood - Wedbush Morgan Securities

Greg, you called out chatter about competition in the market, but that he felt pretty good competitively with your strong technology set. I am just curious, are you actually seeing companies like Salesforce more often in RFPs, and if so, are they creating any kind of pricing pressure in the market?

Greg Gianforte

No, we're not seeing pricing pressure. We are seeing more noise, but the general environment has not changed. We are pleased that we've picked a very, very large market and honestly it surprised us that we haven't seen someone really focus on this call center market earlier. But we have seen more noise, we have seen no change in our competitive win rates.

Derrick Wood - Wedbush Morgan Securities

A couple of growth metrics that you guys provide, new customers and ASPs were down pretty significantly. Is there anything that really drove that or is that more just around budget pressures, the sales cycles, deal slippage, stuff like that?

Jeff Davison

As I said, the competitive win rates have not changed. We just closed fewer deals in Q1 and we attribute that mostly to the economy and Q1 just being a seasonally slower quarter for us.

Operator

The next question comes from Ross MacMillan with Jefferies.

Harish Parwane - Jefferies

This is [Harish Parwane] here for Ross MacMillan. I was wondering if you could talk a little bit about net billings growth for the year, and if you can give any direction on that?

Jeff Davison

On the net billings growth?

Harish Parwane - Jefferies

Yes.

Jeff Davison

We are projecting bookings growth for the year. That is what is behind the revenue guidance that we are giving. Again, whenever you guys model it, you have got to look at the consideration on renewals and components of renewals in the bookings. But for the year the forecast that we have internally is bookings growth for the year.

Harish Parwane - Jefferies

Is it possible to quantify that in terms of what you are looking for?

Jeff Davison

We have not given guidance on our bookings growth in the past, and we don't really intend to start giving that guidance.

Greg Gianforte

For the reasons that Jeff mentioned, the timing of renewals, these various things; bookings is going to fluctuate pretty dramatically quarter-to-quarter.

Operator

The next question comes from [Gregg MacDowell] with JMP Securities.

Pat Walravens - JMP Securities

It is actually Pat Walravens for [Gregg MacDowell]. I have two questions. One is you had a change in sales leadership. Was there any impact from that as you sort of get the (inaudible) Secondly, Greg, you spoke last quarter about this idea of running the pilots and then when you [pretend] to turn the pilot off, companies saw their call center costs going up and that helped convert deals. I am just wondering what happened with that dynamic this quarter?

Greg Gianforte

In my mind, if you look at the world, the weakness we saw in the quarter was in North America mostly, although that is coming off a very strong Q4. I have at this point complete confidence in the work that Marcus is doing. I think he's doing the right things. The proof is in the pudding and again, we're off to a good start in Q2. We did not see the result we wanted in Q1, but no concern about leadership there at this point.

In terms of pilots, we did see pilot conversion and it is a very powerful tool in this selling environment to be able to implement, show business results so a customer can make a decision based on actual impact in their contact center, rather than on a PowerPoint presentation, which may or may not prove out or not.

The pilots we got started by and large we got closed. I don't want to point to one deal, but I used this example earlier of this billion dollars plus company, that was a pilot. We had delivered results. The CFO still had to talk to the CEO and he was not in the office. Those are just logistical issues and you think you're talking to the right people, and you think you are at a high enough level, even if you were at the C level, it still may not be enough. That was an awakening for us in the quarter, but people are being very deliberate about making these purchase decisions, even if we have the business case wired.

Operator

That does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Gianforte for any additional or closing remarks.

Greg Gianforte

Thank you for your attention today and participation. And hopefully we will see you on June 10 in New York City for our Analysts Day. Thanks.

Operator

That does conclude today's call. We appreciate everyone's participation.

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