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Executives

Magid M. Abraham – President & CEO

Kenneth Tarpey – CFO

Analysts

Youssef Squali - Jefferies & Co.

Troy Mastin - William Blair & Company

Jeetil Patel - Deutsche Bank Securities

Heath Terry - Friedman, Billings, Ramsey & Co.

Sandeep Aggarwal - Collins Stewart

Jason Helfstein - Oppenheimer & Co.

Megan Freeman – William Blair and Co.

John Blacklege – Credit Suisse

Analyst Rob on behalf of William Morrison - Thinkpanmure

James Cakmak - Sidoti & Co.

Analyst Clark on behalf of Mark May - Needham & Company

ComScore, Inc. (SCOR) F1Q09 Earnings Call April 30, 2009 5:00 PM ET

Operator

Good day and welcome to the first quarter 2009 comScore, Incorporated earnings conference call. (Operator instructions)

I will now turn the call over to your host for today, Mr. Ken Tarpey, Chief Financial Officer. You may begin, sir.

Ken Tarpey

Thank you and good afternoon and welcome to comScore’s earning call for the first quarter of 2009. I’m Ken Tarpey, the Chief Financial Officer of comScore. On the call with me today is Magid Abraham, comScore’s President, CEO, and co-founder.

Before we begin, please allow me to read the following statement to inform you of certain Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. During the course of today's call, as well as during any question and answer periods that may follow, representatives of the company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding future events or financial performance of the company that involve risks and uncertainties, including without limitation, the expected strength of comScore's business, expectations regarding the growth of its customer base and customer renewal rates, expectations regarding new markets, expectations regarding cost control measures, expectations regarding investment in new product and technologies, assumptions related to the state of the economy and the global market environment, assumptions and expectations of respected tax rates and net operating carry-forwards, and forecasts of future financial performance, including related growth rates and assumptions for the second quarter and the full year of 2009.

Such statements are only predictions based on management's current expectations. Actual events or results could differ materially from those predictions due to a number of risks and uncertainties, including those enumerated in the documents comScore files from time to time with the SEC.

Those documents specifically include, but are not limited to, comScore's Form 8-K filed earlier today relating to the subject matter of this earnings call, comScore's Form 10-K for the period ending December 31, 2008. These filings may contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

We caution you not to place undue reliance on any forward-looking statements included in these presentations which speak only as of today. We do not undertake any obligation to publicly update any forward-looking statements to reflect new information after today's call or to reflect the occurrence of unanticipated events.

I will now turn the call over to Magid.

Magid Abraham

Thank you, Ken, and welcome aboard, and thanks for those of you who dialed on our webcast and joining us for our first quarter 2009 earnings conference call.

As we announced last week, Ken Tarpey has joined us as CFO to succeed John Green, who is taking on new responsibilities at comScore as Executive Vice President and head of Human Capital.

We are very excited to have Ken join us on this call and at comScore. Ken’s extensive experience at a number of quality, public, and private companies, perhaps best exemplified by his CFO of the Year Award from the Northern Virginia Technology Counsel, in addition to his depth and breadth of knowledge will be an asset for comScore as we move forward and I hope you will enjoy working with him.

Turning to our first quarter results, we are pleased to have or exceeded our financial expectations for the quarter, particularly with the continuing soft economy.

Revenue in the first quarter was at the upper end of our guided range at $30.6 million which was up 16% from the Q108. With continued diligent cost management, comScore delivered bottom line results that were above our expectation.

GAAP net income was $277,000 or $0.01 a share compared to a guidance of $0.01 to $0.02. The Q109 results were impacted by a higher than expected tax rate of over 80%.

Adjusted net income was $4.2 million or $0.14 per share compared to a guidance of $0.09 to $0.10 per share and adjusted EBITDA came in at $5.4 million, well above the guidance of $3.8 to $4.3 million and adjusted EBITDA margin of 18%.

Within revenue, subscription was $26.5 million or 87% of total revenue. Subscription revenue was up 23% from Q108.

While price pressure has incrementally increased and upselling has been more moderate as the economic environment continues to squeeze budgets, we continue to deliver strong renewal rates in the first quarter that remain above the 90% on a dollar basis.

Project revenue of $4.1 million was down 16% from Q108 with anticipated softness because of pressure on our customers’ budget.

Looking at revenue in a little bit more detail, international business represented 15% of the revenue in the first quarter, up from Q408. We believe this international growth reflects the impact potential of newer geographies of Latin America, Europe, and Asia that we continue to pursue.

From an industry perspective, the telecom verticals, Pharma Insurance, EPG, were all strong for us in the first quarter. We are optimistic that some of the ad effectiveness work that we are doing may be a leading indicator of recovery in the use of online advertising for branding purposes.

Looking at business trends, we saw in the quarter our customers are tightening their spending and are looking for ways to cut costs while remaining productive. We believe comScore solutions continue to help customers achieve those goals.

Our pipeline remains active with over 110 gross customer ads in the first quarter consistent with our recent experience. As we saw in the second half of 2008 and we expect to continue to see in 2009, attrition of our smaller customers remain higher than historical levels and than attrition among larger customers. This resulted in net customer additions of 15 in the first quarter, below what we have seen in recent quarters, but as noted earlier our overall renewal rate remain about 90% due to the ongoing activity of large customers. We ended the first quarter with 1,180 customers.

Strong customer ads in the first quarter were an indication of continued healthy new business activity despite the challenging funding environment for new companies. Revenue from existing customers made up 88% of total revenues, slightly higher than the 84-86% range we saw in 2008. The stable mix reflects the consistency with which we have been able to add new customers on a quarterly basis as well as the higher retention rate we have seen among medium and large size customers.

Overall our top ten customers in the first quarter produced 30% of our revenue, which is consistent with the past two quarters. We had one customer that made up more than 10% of revenue, which is also consistent with the prior four quarters.

Our ability to continue to drive historical levels of renewal and new customer activity in this economy is especially significant in light of the current macro economic conditions. We believe our subscription revenue model with healthy growth customer additions and existing customer renewal rates demonstrates that customers continue to drive significant value from their investment in comScore technology and services.

In the value we provide to customers in weak as well as strong economies strengthens our optimism about comScore’s future. From a product perspective, our step-up effort showed traction and those efforts are continuing.

Turning to operations, we were particularly effective in managing costs in the first quarter, continuing our heightened attentiveness for expenses that started in the second half of 2008. This attentiveness drove better than anticipated profitability metrics in the first quarter. Our careful cost management will continue in this environment, but we remain committed to investing in our long-term growth at the same time. To that end, we will be reallocating some of our expenses so we can make significant investments in new product development while still driving healthy adjusted EBITDA margins for the year.

While it is early to announce new products, our new developments represent an important progression of our [flag] metric products. We have taken a number of cost reduction steps that in and by themselves generated positive impact of $9.8 million on EBITDA in 2009, which help us target our investments to key strategic priorities.

With our visibility for future revenue, we will continue to manage our overall business toward our profit goal. We affirm our commitment to achieving 2009 EBITDA margins of 20 to 23%, all while making critical investments for the long term.

In summary, we achieved year-over-year revenue growth operating in a recession impacted market. We recognize the realities of a weak economy that have virtually every company looking for ways to reduce costs.

This is particularly true for advertisers and publishers. It has resulted in more attrition among our smaller customers in somewhat longer sales cycles and modest increase in pricing pressure; however the weak economy is also an opportunity for comScore. Technology helps our customers monitor, track, and measure their online investments so that they can achieve the highest possible ROI and maximize their online spend. Because of this, our renewal rates have stayed within historical ranges about 90% and we continue to penetrate new geographies and attract new customers.

On top of that, we expect to continue to deliver new technologies to help our customers further maximize their online investment. We will continue to manage to the bottom line while investing in our future so that when the upturn comes we are in an even more powerful position to capture opportunities as an even stronger internet audience measurement leader.

Now let me turn the call back to Ken for pecific comments on our financial performance and our outlook for the rest of 2009.

Ken Tarpey

Thank you Magid and thank you for the great opportunity with Score. Revenue in the first quarter was $30.6 million, up 16% year-over-year and down 3% sequentially. Within total revenue, subscription revenue in the first quarter was $26.5 million and leveled sequentially. Subscription revenue represented 87% of total revenue.

Project revenue was $4.1 million and as expected was down year-over-year and sequentially reflecting tighter overall project budgets at clients.

With renewals at above 90%, we saw year-over-year growth both from new and existing customers. Revenue from existing customers was up 21% year-over-year in the first quarter to $26.8 million and represented 88% of total revenue, slightly higher than our experience during 2008.

Revenue from new customers was $3.8 million in the first quarter , down 12% from last year, a similar decrease percentage from Q408.

Our international business, we had considerable untapped opportunities was healthy with international business representing 15% of revenue in the first quarter.

Turning to the gross margins, they were 67.2% in the first quarter, down from 73.4% a year ago, but very consistent with the 67.5% from last quarter.

Our total operating expenses were up 21% year-over-year, but increased only 3% sequentially. During Q109, the company implemented a comprehensive, cost containment program expecting to generate close to $10 million in 2009 EBITDA savings.

Our effective tax rate in the first quarter was 80.9%, considerably higher than anticipated, while our cash tax rate was a negative 5%. The difference arises from the treatment of stock compensation charges under statement FAZ123R.

For GAAP accounting, we used fair value with the time of the stock grant, whereas for cash tax we use a fair value with the time of vesting. With considerable restrictive stock shares vesting in Q109 at a fair value below the value at the time of the grants, this resulted in an effective rate for GAAP that is well above our cash tax rate. This book tax stock compensation difference will continue to occur throughout 2009 based on our current stock price. We cannot predict the stock compensation effect because of future stock price impacts. This makes our effective tax rate for Q2 in the year difficult to predict, but we would expect our cash tax rate to be similarly smaller because of our historical net operating losses.

GAAP net income was $277,000 or $0.01 per share in Q109, based on a diluted share count of 30.5 million shares. We would expect Q2 fully diluted share count to be approximately 30.8 million.

In the first quarter, stock base compensation expense was $2.3 million and amortization on acquired intangibles was $320,000.

Non-GAAP net income for Q109, which excludes stock base compensation and amortization of intangibles was $4.2 million or $0.14 per share.

On the same non-GAAP basis, adjusted was $5.4 million in the first quarter compared to $5.6 million a year ago and was well above our expected range largely due to diligent expense management.

Adjusted EBITDA margin was 18% down from 21% a year ago with the majority of that difference resulting from the impact of M-metrics performance.

Cash flow from operations for Q109 was $2.2 million. The free cash flow in the first quarter was a net outflow of $630,000 primarily because of capital expenditures of $2.9 million, an increase in receivables of $2 million, and a reduction in accrued expenses and payables of $3.1 million.

While receivables increased as customer payments occurred at a slower rate than prior quarters, there were no significant collection issues in the quarter and collection activity has increased in Q2 today.

As of March 31, 2009, cash, cash equivalents, and short-term investments totaled $70.1 million and we held also $2.9 million in long-term investments with no consequential change in the recorded value of the long-term investments since December 31, 2008.

Turning now to our guidance for the second quarter in 2009, it is clear that the economy continues to face headwinds and we also believe comScore is well positioned to help our customers make the most of their online investments in this environment.

Additionally, our primary subscription base revenue model provided relatively high level of stability and visibility. That said, reduced project revenues and revenues from net new customer ads may impact near term revenue growth prospects.

Despite these forces, with strong renewals and existing customers and ongoing new customer activity, we expect revenue to grow in the low double digits in 2009. As we mentioned earlier, we are watching our expenses carefully and are managing to a full year adjusted EBITDA for 2009 in line with our 2008 performance of 20 to 23%, depending on the quarter you’re looking at.

For the second quarter of 2009, we anticipate revenues in the range of $30.8 million to $31.3 million.

We are anticipated second quarter GAAP net income before income taxes of $1 million to $1.4 million and we anticipate adjusted EBITDA for the second quarter of 2009 to be $5.5 million to $6.1 million represented an adjusted EBITDA margin of 19% at the midpoint of our revenue guidance.

A reconciliation of GAAP net income to non-GAAP net income and adjusted EBITDA guidance for the second quarter is included in tables accompanying our press release.

With that, operator, we are now open the lines and take questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

In terms of your net ads for the quarter, can you speak to the trend you’re seeing there, in particular what are the top reasons customers are leaving? Is it only pricing when they do leave? Where are they going? Historically, I think you’ve talked about smaller customers accounting for only about 6% of total revenues. Where does that stand right now?

Secondarily, in terms of your guidance, what’s baked in there in terms of net ads for the year?

Magid Abraham

In terms of the small customer turn, it really comes from a variety of different places. Primarily companies that are in tough shape as far as monetization is concerned or having funding difficulties or in the mobile space.

There is really no change in the mix of competitive losses. We still rarely lose to competition and we think we still win a lot more than we lose.

I think a much tougher Q1 was a much tougher environment than Q4 in people are lot more cautious in re-upping subscriptions when they are in a total survival mode.

That said, as far as the guidance, we are anticipating that we will continue seeing this level of net customer ads, we’re seeing customers I would say probably until the end of the year where we will start seeing some pick-ups, because clearly some of the customers that we have that type of customer will have a fuller shake-down. Now the percentage of revenue that came from new customers stood at about 6%. We have actually not calculated it, but I doubt that it has changed a whole lot. Maybe it’s 4-5% and you should also keep in mind that we do continue to add smaller customers, so it’s not like we are losing all these smaller customers and the only customers that we are keeping are large customers.

Youssef Squali - Jefferies & Co.

If I may add one last question. On the margin, can you walk us how you get from the 18% EBITDA margin to the 20-23%. Maybe you can help us understand where that improvement is. Is it basically throughout the whole P&L? More clarity on that, if you would.

Magid Abraham

There are two reasons for it. Number one, from a cost standpoint, we had talked after our earnings call in Q4 that the payroll tax as a percent of salaries have dropped from 20% in Q1 to about 14% in Q4. Comes from a differential of roughly 3% of total cost that is really coming from payroll taxes.

In addition, as we experience some new growth, some of that revenue growth would drop to the bottom line. And then finally, we are not looking at additional headcount growth. Our headcount was down at the end of Q1 to Q4 and will be managed pretty tightly going forward.

Operator

Your next question comes from Heath Terry - Friedman, Billings, Ramsey & Co.

Heath Terry - Friedman, Billings, Ramsey & Co.

You mentioned use of the turn in the mobile space. Can you give us a sense of when you expect to hit kind of a run rate in terms of M-Metrics subscribers as we go through this outsized level of turn within that specific vertical.

Then also could you give us an update on the MRC certification process?

Magid Abraham

On the M-Metrics customer base, I think that once we get over a year, a full cycle, in terms of their customer base we should start seeing some stabilization. I would expect in Q3 to start reaching a stable level and building from that level up.

As far as the MRC audit, it continues to progress really nicely. I think on the MRC website an update in terms of where the MRC thinks we are, but we are making diligent progress. Unlikely that the audit will be finished this year, just because of the extensive nature of the audit as we had mentioned before. So there’s really not new news, but we continue making progress.

Heath Terry - Friedman, Billings, Ramsey & Co.

As you’re making progress through this, are you seeing any major changes or even minor changes to the way that you’re either measuring or reporting the structure of the panel that you’re using that you can talk about?

Magid Abraham

Not really. We’re constantly making tweaks to the way we measure to improve it and learn from our experience in the marketplace. The MRC audit I would say is one source of those tweaks, but by no means a major source of those tweaks.

Operator

Your next question comes from Analyst for Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

You talked about pharmaceutical and CPG early on and just curious, what do you think if you look at the kind of sector opportunity in those two verticals, what do you think the percentage of penetration is of the marketers in that category?

Second, I think you talked about reallocation of expenses in the business as you look ahead. Is that coming from sales and marketing going to R&D?

Magid Abraham

As far as pharmaceuticals and CPG, I think we still are in the very early stages of work that we are doing with CPG companies. I can think of two very large CPG companies with whom we are doing a lot of work, but even that work is still in early stages.

We have seen a number of other large companies starting to dabble into this and that may be an optimistic sign that some of these large enterprises are beginning to take this seriously and one of the first steps in them taking it seriously or one of the signs is working with comScore on measuring its effectiveness.

So we are excited about that for a couple of reasons. Number one is that the work within the existing customers that we’ve had is growing. We are adding some large customers and so our penetration in the industry will increase.

Finally to the extent that it is a leading indicator of a recovery in advertising and that’s good for the industry overall.

As far as reallocation of expenses, we have done some reallocations from a variety of different places. Some of it driven by elimination of bonuses and tightening various kind of compensation expenses. Some of it driven by identifying pockets that have low return of investment for us in terms of headcounts. We have seen our sales headcount drop a little bit and we have seen our overall headcount drop a little bit.

We are also being very rigorous in terms of performance management of our people and one excellent way of reallocating expenses is to make sure that the lower performance people are people that are tracked very carefully and work out of the company when their performance would want that.

As far as where the investment is going, it is going in new product development and we have some major initiatives that we’re not going to be talking about on this call, but we are very, very excited about and I would say stay tuned for when the meal is fully baked it should be something very exciting for comScore and for the industry.

Heath Terry - Friedman, Billings, Ramsey & Co.

It seems like your business has responded rather late in terms of cycle, in terms of how your customers have responded by reducing cross-selling, cutting pricing a bit, or putting pressure on pricing. Why would you expect an uptake by yearend if you’re kind of a lagging indicator relative to the overall media spend out there online? I’m just curious why you think it would be this year, not early next year?

Magid Abraham

I think early in Q1, we saw a very, very, very tough environment out there. People did not know on what grounds they’re standing and we’re starting to see a little bit more rationality in terms of people are more confident about their plans and their spending. So we’re seeing some signs of improvement.

Clearly the economy has gotten a lot worse in Q1 than it was in Q4. At some point during the year, we would hope that particularly in the late end of the second half we would see some improvement in the market that will help us, but we also have a little seasonality in our business in a sense that Q4 is traditionally a strong quarter for us in terms of working with clients on their strategic issues for the following year and we have a stronger level of client interactions which give us an opportunity to upsell more.

While the comments about upselling and price pressure are certainly there, I would not read them across the board. We still have a number of clients where we are successfully upselling and raising prices and just adding more compelling solutions to where they’re buying from us.

Operator

Your next question comes from Sandeep Aggarwal - Collins Stewart.

Sandeep Aggarwal - Collins Stewart

In terms of guidance, I guess last quarter you mentioned a full year outlook of 12% to 15%. Now you’re saying 10% to 12%. In Q1, you came to exceed of your guidance and we’re seeing some signs of improvement. So I’m just trying to understand this outlook. Is it higher than expected attrition or are you adding new customers?

Magid Abraham

Well the biggest impact that we have seen in Q1 is project management, which was at $4.1 million and we have to go back two years to see a project revenue that low. In being cautious, we are projecting a continued softness in the project revenue for the year, which is roughly about $3 million and that’s the primary different.

I think that the continued attrition was something we have baked in. Generally speaking just a more conservative outlook driven in particular by lower discretionary spending.

Sandeep Aggarwal - Collins Stewart

On the new customers addition, can you give us some sense what kind of customers are these in terms of size and also what is the average subscription size for these customers versus the prior years?

Magid Abraham

All of these customers are international customers. We are being helped by Southeast Asia and Latin America have contributed a number of customers this quarter. So that’s helpful. Partly because of that and partly because of tough environment out there, the average contact value of a starting customer is lower than it used to be. This is something we have always expected that as we expand internationally into countries that have a smaller advertising market and therefore what the local players can afford is smaller than what they can afford in US or in Europe that we will see a smaller ASP and we’re starting to see that. Some pressure on ASP just from the tough economic environment and a number of product options that people buy when they get started.

Operator

Your next question comes from Jason Helfstein - Oppenheimer & Co.

Jason Helfstein - Oppenheimer & Co.

My question relates around the predictability of the business, because I think that’s stumping people and I think we’re all a bit frustrated with it. Existing customer growth in the quarter was strong, up 20%, and you’re saying that’s going to be consistent and if I look at the mix and I assume it was the same in Q208, that means that new customer revenue could be down 40-50%.

So I guess am I thinking about that right? Then, how much of the mobile plays into the reduced outlook? Then, are you putting mobile in new customer or existing customer?

Magid Abraham

Well, Jason, I’m not sure that that was agreed at a range of three percentage points in terms of revenue in this environment if that signals a lack of predictability. What we just told you is that projects were at $4.1 million compared to $5 million in the first quarter and we have always, you and every investor, I think would look at the projects as being more discretionary and less predictable and that’s not secret in our business. There’s nothing about the predictability of the rest of the business that has been effective here and the fact of the matter is that we have been able to hit the revenue number in Q1 and the fact that we are looking at a 3 percentage point on average lower revenue for the year on the weakness of project revenue, I’m not sure I would be willing to concede that that’s lower predictability in the revenue model.

Jason Helfstein - Oppenheimer & Co.

Can you comment on my calculation for new customer revenue falloff?

Magid Abraham

Maybe you need to share with me how the calculation went, because I’m not sure I follow it.

Jason Helfstein - Oppenheimer & Co.

We can do it offline. To comment on mobile though, is mobile in new customer revenue or existing customer?

Magid Abraham

Mobile, if mobile had existing relationships with comScore or M-Metrics at any given point, that’s an existing customer.

Operator

Your next question comes from the line of Megan Freeman – William Blair and Co.

Megan Freeman – William Blair and Co.

Could you provide a little more color on how gross client additions and client losses phased over the quarter and give us any color on April?

Magid Abraham

I think that things have progressively improved in the quarter and we see a little bit of improving as time goes on. That’s probably about the most I can say at this point.

Megan Freeman – William Blair and Co.

Then could you maybe provide an update as well on the competitive landscape, specifically on the pricing pressure piece? Is that coming from competitors or primarily from the macro economic environment?

Magid Abraham

Primarily from the macro economic environment. It is really driven by somebody that has a dictate of unique to you’re spending this much, you need to cut your budget by 20%. How are you going to figure it out, and it’s not really a situation where we are locked into bidding more against somebody and we lose because of lower pricing.

Megan Freeman – William Blair and Co.

In terms of the competitive landscape overall, are you seeing new entrants, are you seeing existing competitors under more pressure?

Magid Abraham

We think we continue to grow share. It’s impossible to know for some of the free players what their usage is, since there’s no revenue to measure them by, but I have yet to hear of a single client loss where the client said – I am not using comScore, because I am going to be using a free service provider. As we mentioned before, there are an occasional loss or two to Nielsen. That dynamic has not changed and we win more than we lose.

Megan Freeman – William Blair and Co.

The reallocation of expenses, is that already underway in Q1 or coming in Q2 and the rest of the year?

Magid Abraham

Some of it has been underway at the beginning of Q1. So we already started this in Q4. Some of it will kick in in Q2 and will be going towards the end of the year. It is nothing that’s really speculative though about these cost reductions and these are cost reductions that you’re not going to see restructuring charge or severance cost or whatever. This is really the net savings for the company from the combination of all these initiatives.

Megan Freeman – William Blair and Co.

Finally, can you quantify the impact of currency in the quarter?

Magid Abraham

We got negatively affected by 150,000, which was lower than the 250,000 we saw in Q4.

Megan Freeman – William Blair and Co.

Is that your visa vi your guidance or visa vi last year?

Magid Abraham

That’s visa vi last year. Our guidance was probably in line in terms of what our assumptions were with Q4. So we had a favorable variance of maybe 100,000.

Operator

Next question comes the line of John Blacklege – Credit Suisse.

John Blacklege – Credit Suisse

Just wondering how much of the $10 million the cost savings were realized in the first quarter and then how is going to break out over the course of the year?

Secondly, project revenues. Would you expect them to be down kind of similar like mid-teens, 20ish percent over the course of the year?

Then on the pricing side, for renewals, are you offering or are customers and clients getting kind of flat to down pricing and have customers who resign say in the back half of 2008, have they come and try to renegotiate given the macro trends right now?

Ken Tarpey

The question in terms of the cost savings. It’s an annualized amount and it started in this quarter and you saw it reflected in terms of the favorability obviously in the EBITDA relative to where the company saw it from a guidance standpoint.

Then that will continue to occur throughout the year as the company optimizes the operation while making necessary investments.

Magid Abraham

As far as renewals, we see some renewal situations where it’s very rare that on an apple-to-apple basis, we would lower our price. Our standard operating practice is to ask for a price increase and in many cases we would still be able to get a price increase.

In situations where clients have a tough budget situation, we will work with a client on reducing the deliverables so that their overall level of commitment is lower, but what they are getting is lower, and that preserves for us the ability to come back and increase the size of the commitment once the company comes back.

There was a second question that you had and I missed that.

John Blacklege – Credit Suisse

There was a question on the project revenues down 16% in the first quarter, is that something we can expect through the course of the year, down mid-teens?

Magid Abraham

Our assumption is that it is going to be in the range of $4 million on average for the quarter. That’s really the element. That’s sort of the most unpredictable in our business. So there may be a quarter where it will jump up closer to $5 million, but clearly we will see or at least we’re assuming that we will have a 15-20% drop in the project on average for the year.

John Blacklege – Credit Suisse

Just wondering how you guys define small, mid, and large size customers. Is it by ARPU or some other metric? And how are sales incentivized to get those clients, whether they be small, mid, or large size?

Magid Abraham

We define them on the basis of ARPU and there are different tiers of people below 25,000 and then people below 45,000.

In terms of any specific sales incentives, we historically have had a lot of success in bringing in a client and being able to over the course of two or three years double the revenue. So as a result, a new client is valuable to us and we pay 8% commissions on a new sale, which is higher than what we normally pay for a renewal on an existing customer.

Operator

Your next question comes from William Morrison – Thinkpanmure.

Analyst Rob on behalf of William Morrison - Thinkpanmure

Good afternoon. This is actually Rob on the call for Bill. A couple of quick questions, housekeeping. The number of net subscribers during the quarter, is that roughly in line with the number of net gross customer additions?

Number two, deferred revenue in your press release, I just want to make sure we have the right historical number. Q108 as $42.8 million, we had that as the Q408 number.

Then lastly, you made a couple references to you had effective of this product. I’m just wondering if you could give us more detail on how that fits in with the existing product portfolio. Is the brand and campaign metrics products and whether or not you’re actively converting early project customers to, I mean can this become a driver subscription revenue going forward?

Magid Abraham

Let me answer the last question first and then I’ll turn it over to Ken to answer the deferred revenue question.

The advertising effectiveness products, we are starting to see some customers commit to them to become a regular occurrence. I’m not aware of a situation yet where we have classified that revenue as subscription revenue, but we will start seeing it in the future. I would say in the next six months we will start seeing some commitments that would be recurring enough and will give us that capitalization.

Ken Tarpey

The deferred number in the chart is the Q4 number. The year ago number was$36.8 or $37 million.

Operator

Your next question comes from James Cakmak - Sidoti & Co.

James Cakmak - Sidoti & Co.

You mentioned working with clients before and providing less deliverables to bring down their costs. How much of that 90% renewal base would you say is renegotiated downward? By how much would you say that they’re bringing down their services as far as total price? By 5% or 10%?

Secondly, how much of the business is up for renewal in the second quarter? Are there any multi-year contracts up?

Magid Abraham

Multi-year, the percent of revenue from multi-year contracts that we had in Q1 was 32%, which inched up from 30% in Q408.

The seasonality of renewals has always been the most queued toward the second half. I believe the numbers were like 57% in the second half and then the remainder in the first half. I think Q2 is usually stronger than Q1 as far as renewals.

When we talk about 90% renewal number, the 90% renewal number is done on a sort of constant dollar basis. Historically when we do the renewal number and we apply sort of the new dollars to it, that renewal number has always been more than 100%, it was certainly over 110%. We have not really calculated that. We can calculate it, but I don’t really have it available right now to give to you. In other words, if you take a set of customers we lose some of them, we keep some of them, but when you look at the dollars that we get from the people that we keep, it’s always been higher than the total dollars that we had and the people we lost.

James Cakmak - Sidoti & Co.

You had mentioned the investments you’re making, should we expect to see any spike in CapEx in the coming quarters or is that $2.8 in the first quarter a good run rate for the year?

Magid Abraham

I think the best actually a high run rate for the year, we would be thinking about CapEx being in the $2 million range.

Operator

Your next question comes from Analyst Clark for Mark May - Needham & Company.

Analyst for Mark May - Needham & Company

I was wondering if you could give some color on your ability to upsell to your existing customers and has the average product per existing customer still been growing and if it still is, has that growth rate slowed or increased with the new products you’ve been putting out there?

Also, if you could give some color one of the project revenue declines. Are they more driven by customers just not doing projects or whether it’s been show of average project size?

Also, what were your weakest verticals during the quarter?

Magid Abraham

In terms of project, I think lower project revenue is from client doing fewer projects. The projects that we do are at the same or better prices. So it’s not really a question of pricing.

As far as which are the weaker verticals, I would say the weaker verticals are the media and publisher verticals, which are clearly the most affected by the tough advertising environment.

We fortunately don’t have any exposure to auto and as you know we do have some exposure to Wall Street and to commercial banks and those are weak, but the exposure that we have to them in any given quarter is a couple hundred thousand dollars, so not really that significant.

Analyst for Mark May - Needham & Company

How about average products per customer, existing customer, is that still growing?

Magid Abraham

We have stopped tracking that metric, but if I had to say judgmentally I would say that that’s probably staying stable. Why we are still able to upsell quite nicely to a number of customers, some of the customers that are experiencing budget pressures, they are buying fewer items.

So net/net, I would think of that probably stable for Q1 and rest of 2009.

Operator

It appears at this time, there are no additional audio questions. I will now turn the call back to management for closing remarks.

Magid M. Abraham

Thank you very much for the questions. Ken and I will be available to field more questions and we look forward to speaking with you again.

Operator

This concludes today’s presentation. You may now disconnect. Good day.

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