SuccessFactors, Inc. Q1 2009 Earnings Call Transcript

SuccessFactors, Inc. (SFSF)

Q1 2009 Earnings Call

April 30, 2009 5:00 pm ET

Executives

Lars Dalgaard – Founder, President, Chief Executive Officer

Bruce Felt – Chief Financial Officer

Analysts

Brendan Barnicle – Pacific Crest

[Brent for Sarah Fryer – Goldman Sachs]

Thomas Ernst – Deutsche Bank

[Sasha Zurivich – Janney Montgomery]

Terry Tillman – Raymond James

Adam Holt – Morgan Stanley

Michael Nemeroff – Wedbush

Karl Kierstead – Kaufman Brothers

Richard Baldry – Canaccord Adams

Michael Huang – Thinkequity

Presentation

Operator

Welcome to SuccessFactors first quarter fiscal 2009 financial results conference call. (Operator Instructions) I will now turn the call over to Bruce Felt, Chief Financial Officer of SuccessFactors.

Bruce Felt

Good afternoon and welcome to SuccessFactors first quarter fiscal 2009 financial results conference call for the quarter ended March 31, 2009. The primary purpose of today's call is to discuss our Q1 2009 performance. However, some of our discussion may contain forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demands or opportunities or other forward-looking topics.

These statements are subject to risks, uncertainties and assumptions. Accordingly actual results could differ materially. For a listing of the risks that could cause this, please see our Form 10-K filed with the SEC as well as the factors identified in today's press release.

Unless otherwise stated, all references to spending include stock based compensation which are non-GAAP measures and reconciliations from non-GAAP to GAAP can be found in our press release. Today's call is available via web cast and a replay will be available shortly following the conclusion of the call through Friday, May 15.

To access the press release, supplemental financial information or the webcast replay, please consult our investor relations website at www.successfactors.com/investor.

Following our prepared remarks, we'll have a Q&A session. I'll now introduce Lars Dalgaard, SuccessFactors' Founder, President and Chief Executive Officer.

Lars Dalgaard

Thank you for joining us. This marks the sixth consecutive quarter where we beat our guidance. In the midst of extremely difficult economic environment brought on by the global credit crisis, and recessionary forces, SuccessFactors is please to post year over year revenue growth of 50%.

Particularly, we want to highlight outstanding growth in both Europe and alliances. Europe, because the investment we've been making for three years to be the strongest company in our industry in Europe is reaching critical mass. The management and front line are really bringing it. Congratulations.

Alliances, because of one of our expanding focus on our IBM practice and one of our long time partners.

At the same time, SuccessFactors again demonstrated prudent and solid expense management by lowering spending from Q4. Gross margins increased another 6% from 71% to 77% in the quarter and up 16 full percentage points in less than a year. They're now among the absolute highest in the industry.

When we went public six quarters ago, gross margins were 53%. We have now improved them by 24 full points. Operating margins increased another full point from minus 10% in Q4 '08 to minus 9% in the quarter and improved 100 full percentage points since going public.

I'd like to thank the managers and operations teams for our success and our professional services for implementing a proprietary systems and tools to enable this consistent gross margin expansion.

Our customers have been able to experience faster, higher quality implementations with an immediate impact on their business. Careful expense management contributes to the highest cash flow from operating activity since we started our growth investments over five years ago with operating cash flow at $2.7 million. That's four times more than we generated in Q4.

SuccessFactors plans to become non-GAAP profitable by the first quarter of 2010. During the quarter, we and our top two global strategy consulting firms completed an extensive review of our value proposition by interviewing 48 CEO's, CFO's and COO's and 500 global business leaders in total.

The most important finding is that when SuccessFactors products and transformational services are used in the SuccessFactors way, strategically, we contribute five times the value than if we are simply implemented for automation. So when SuccessFactors deployed to focus and engage the entire company on executing the strategy for growth, realignment and cost management while helping companies put the right resources in the right place, we have five times the impact.

Let me give you some examples of strategic uses of our product that came out of our findings that gives that impact. One, a mid sized manufacturing company set their successful completion of key strategic initiatives increased from 75% to 95%.

Two, a mid sized chemical company said before SuccessFactors it took two month to communicate strategy globally. Now, it happens immediately with SuccessFactors.

Three, a large food company said before SuccessFactors, only 50% of individual goals were aligned to the CEO's. Today, that number is 70% to 80%.

Four, a large hotel chain told us guest satisfaction has improved from fifth in the industry to second in the industry once they cast their individual goals to meet their objecting using SuccessFactors goal application.

Five, a U.S. subsidiary of a global oil company said they saw a 5% improvement in real performance from people being more focused on the tasks that actually matter to the company overall.

And six, a small credit union saw employee engagement going from 50th percentile to 90th percentile. This is why we believe the category we created is a $16 million market opportunity.

The expensive and proprietary findings and customer dialogues have been used to propel an already compelling value proposition strengthening and energizing the company's traction and gaining market share.

SuccessFactors cannot quantify our ROI stronger to our customers and used to improve our development efforts, product strategy and strategic implementations. Applying these proprietary findings, we closed three deals greater than $500,000 toward the end of Q1, better than we did in our historically seasonally strong Q4.

These customers did make decisions to go with SuccessFactors in Q1. Here's some recognizable brands; United Nations, [Fisgars] in northern Europe, Bloomington Hospital, SPC Telecommunication in Italy and Bruce Scope Steel.

Additionally, our pipeline increased significantly going into Q2 as we continue to apply these findings from our proprietary global industry study, with the top two global strategic consulting firms.

We will continue to build out our capabilities to deliver significant tangible hard dollar returns to our customers. We've used this economic challenge to strengthen the company and allows us to gain market share and put ourselves in the best possible position for growth.

And we need the right people. We've taken advantage of the economy by hiring significant talent that wasn't available to us before. One, former Yahoo executive Dimitry Krakovsky joins SuccessFactors as our new Vice President of Product Management. Dimitry's exceptional track record in leading the most important products in one of the most successful loved web applications ever built is going to drive unbelievable and fantastic innovation at SuccessFactors with consumer and enterprise web experience from Yahoo to Intuit.

All the small business products web 2.0, 3.0 and Cloud expertise; he's the perfect fit for SuccessFactors. Dimitry will work with the team to evolve our product strategy and road map to create great, easy to use, on demand products.

Second, form SAP APAC senior vice president and People Soft APAC Murray Sergeant joined SuccessFactors as head of SuccessFactors Asia Pacific sales. Prior to joining SAP, Sargent oversaw both People Soft and SAP's expanding presence in Asia Pacific since 1998.

With 160% component growth since early 2006, SuccessFactors grew its customer base over 85% year over year in Asia Pacific and now there's more than 550 customers and more than 270,000 users with log in nearly 100% to 4.4 million in the last 12 months along in Asia Pacific.

Third, from our press release issued yesterday, former E-bay senior technology Tom Fisher comes on board as SuccessFactors V.P. of Cloud computing. SuccessFactors has one of the worlds largest known enterprise Cloud deployments of 300,000 users, one of the world's largest retailers and a massive and growing 4.7 million plus user base with 8 customers with greater than 50,000 user, more than 30 customers with greater than 25,000 users and more than 100 customers with more than 10,000 users.

SuccessFactors business applications only like e-mail that hits every desk top, arms and ignites every employee. We've established ourselves as one of the worlds most widely deployed on demand business applications in the enterprise cloud.

Unlike most SAS providers which have focused their offerings on specific business functions such as CRM, HR and finance, SuccessFactors is used by nearly every employee only like email that hits every desktop.

We have 248 customer go lives in the quarter including the Mandarin Oriental Hotel Group who added on Succession after having deployed performance management in late 2007 and a large pet supply retailer who's CEO set using SuccessFactors, is one of the single biggest improvements that we as a company have implemented to achieve our critical objectives of increasing social engagement, a pay for performance culture and driving superior performance across the company.

It's a very big project and a very big win for the company that took a great team at concerted effort across the company to implement these important improvements. It's that type of impact we have for the business of our organizations that we partner with.

To close, SuccessFactors is in a position of strength. This is a solid quarter considering the economy.

Bruce Felt

First quarter revenue was $35.2 million a year over year increase of 50% and 7% sequential growth. Revenue was driven in part by net new customer's ads of 120 and 350 total transactions during the quarter. We had strong new business in Alliances and Latin America. International comprised approximately 30% of new business in Q1.

On spending, our total spend for Q1 '09 was $38.5 million down 10% year over year as we continue to manage all costs and up 6% sequentially primarily related to the offset last quarter of $2.7 in legal settlements. Without the settlement, our gross spending declined $1.5 million or 4%.

Gross margins expanded from 71% Q4 to $77% in Q1 which is up 24 full points from 52% in just over a year. This is striking considering our unique gross margin structure relative to most on demand software companies in that we recognize all of the professional services revenue component of our deals over the life of the contracts while we incur all the professional services costs up front.

Because we already exceeded our annual target in Q1 alone for gross margins we anticipate staying at this level for the remainder of the year.

Operating expense increased 15% sequentially to $30.3 million, again primarily related to the one time offset last quarter of $2.7 million. We did not have any increase in gross spending. Operating efficiencies and cost controls resulted in expense declining 6% year over year even though revenue grew 50%.

Non-GAAP operating margin improved 1% sequentially and more than 68 full percentage points in the last four quarters from minus 77% in Q1 '08 to minus 9% in Q1 '09.

We ended Q1 at head count at 600 and are continuing to increase our development capabilities by building out our facilities in low cost geographies, namely China and India.

Earnings per share for Q1 '09 EPS, our non-GAAP net loss per share was $0.06 which excludes stock based compensation of $2.4 million, flat quarter over quarter from a non-GAAP net loss per share of $0.06 in Q4 '08, an improvement of 82% year over year from a non-GAAP net loss per share of $0.34 in Q1 '08.

We're using 56.3 million weighted average shares outstanding during the quarter.

Next, cash flow and the balance sheet. Last quarter SuccessFactors achieved cash flow profitability. Cash flow generated from operations was a positive $2.7 million improving further from Q4 '08's generation of $700,000 and compared to the prior year Q1 of a $4 million use of cash.

As we said last quarter, our cash flow pattern this year is anticipated to be the highest in Q1 because of the combination of our lower expense run rate in Q1 and the collection of our seasonally high year end receivables.

Cash flow during the subsequent quarters is expected to be much more modest as new business is expected to follow seasonal patterns and spending is expected to be slightly higher. Expect positive but very modest cash flow for each quarter in 2009.

SuccessFactors has a capital efficient new customer acquisition model resulting in CapEx of only $73,000 in Q1. If you compare us to any other SAS company, you'll find we have one of the most capital efficient models.

On the balance sheet, total cash, cash equivalents and marketable securities continue to grow, at the end of the quarter at $105 million up 3% sequentially from $102.4 million. One of our primary themes during this downturn is that we continue to have a very strong balance sheet.

Accounts receivable decreased from $44.4 million at the end of Q4 of '08 to $35.4 million at the end of Q1 '09. Our adjusted DSO's increased by 11 days to 96 days from 85 days in Q4 '08, high but still within our historical bands. Three customers account for six of those days.

As of this call, we had substantial collections in our account receivable balance is lower than it was at Q4 '08.

On our outlook, we're initiating guidance for the second quarter fiscal 2008. We expect revenue for Q2 '09 to be in the range of $35.5 million to $35.75 million which equates to approximately 39% year over year revenue growth. Excluding the impact of stock based compensation expense we now expect Q2 '09 non-GAAP net loss per share to be in the range of $0.05 to $0.07. The estimate assumes the weighted average share count for the quarter of approximately 56.7 million shares.

For the full year 2009, we maintain our prior guidance of $145 million to $146 million representing annual growth of 30%. Non-GAAP net loss per share excluding stock based compensation expense is now expected to be in the range of $0.18 to $0.22 better than our prior guidance going into Q1 of $0.23 to $0.27. This estimate assumes a weighted average share count for the year of approximately 57 million shares.

Now let me turn it back to Lars.

Lars Dalgaard

As we close in upon $5 million users, we're the strongest brand and a broad suite that resonates with executives to get the whole organization to execute. It's obvious how big this opportunity is and we're capitalizing on it.

We improved our cash flow from operations four times while continuing to strengthen ourselves in the markets, arming and inciting our customer's end users. We will use our new proprietary findings and we will make customers buy more products and create more value for them and we feel strong and ready for the rest of the year.

Now we'll open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brendan Barnicle – Pacific Crest.

Brendan Barnicle – Pacific Crest

On new customer ads, about 120 this quarter, that's lower than what you've had in the last couple of quarters, is that just purely the macro or is there a change in the type of customers you're signing up there that's leading to fewer than we would expect to see, and fewer in the subsequent quarters?

Bruce Felt

First of all, Q1 is the lowest quarter in new business. It's always been the lowest quarter in new customer ads. The other thing is we did see an increase in the overall deal size this quarter and that in its own right generally means that we got more per customer. That's an overall driver.

Of course it is more difficult in this environment to get net new customers, there's no doubt about that. But we're pleased with the number that we go. We're pleased with the outcome from what we got and as Lars mentioned, we've very pleased with the momentum that we see coming out of this quarter.

Brendan Barnicle – Pacific Crest

I caught the three deals that were over $500,000 revenue, could you give us another stat on ASP's?

Bruce Felt

We'll just say that from last quarter, they were up and we're certainly happy to see that because as we noted last quarter, the statistic that we thought we had to work on the most was simply getting our average deal size up. This quarter we were able to get more users per customer and that translated overall to higher overall deal size.

Brendan Barnicle – Pacific Crest

Great job on the gross margins. You said they would be at that level for the remainder of the year so should we not model any improvement, just keep them at these levels for the remainder of the year?

Bruce Felt

Because we had such a dramatic increase in just one quarter, we were able to hit our target, we think that's just a great number to continue to have through the rest of the year, so yes.

Brendan Barnicle – Pacific Crest

And a similar question over on the CapEx side where you did well there also. Should we be modeling that as a run rate or will we see come changes as we go through the second half of the year?

Bruce Felt

We'd like to provide some opportunity to invest more in equipment and possibly facilities, particularly as you can tell we're expanding geographically and we may find for instance either Latin America or Asia Pacific, we'd like to put a data center. So we'd like room to do that, but as you can tell, it's not an expense for us.

And you saw it as a data center last year and nobody noticed because the CapEx was so small to do it. It's just a super efficient way of deploying seats even though we have the most seats in the SAS industry.

Operator

Your next question comes from [Brent for Sarah Fryer – Goldman Sachs]

[Brent for Sarah Fryer – Goldman Sachs]

On the gross margins, was there some improvement because of reduced professional service mix and if we were to see booking accelerate in the back part of the year could we see a reduction in gross margin?

Bruce Felt

As you might recall the way our model works is the greatest expense in cost of sales is professional services so you're on the right track there but it's really not a mix question. It's not a business for us. We're in the business in professional services group of getting our customers up and running quickly and one thing that we have done is we've gotten better and better at doing that, classroom type implementation rather than one to one with consultants.

Administrative tools that help us do it quicker, more self serve, easier and more intuitive UI, user interface. So that's really contributed to our ability to get our customers up and running with less resources. So that's the real driver. It's not so much a mix. In fact, generally speaking professional services as a percent of our new business has been very constant ever since we went public, so not mix, just our ability to be more effective and efficient in how we get customers up and running.

Brent for Sarah Fryer – Goldman Sachs]

Over the past quarter you mentioned competing against SAP in a few deals. I was wondering if you could comment on how competition there is evolving and what are the key items the customers are focusing on when comparing the two offerings.

Lars Dalgaard

We're continuing to take SAP's ass and we just do that consistently in Germany proper and that obviously involves the whole team in Europe to continue to do that.

Operator

Your next question comes from Thomas Ernst – Deutsche Bank.

Thomas Ernst – Deutsche Bank

Can you comment on how renewals are progressing both from a unit perspective and what you're seeing in terms of effective pricing that you're able to do.

Bruce Felt

Our customer unit retention rate continues to exceed 90%. Our dollar renewal rate continues to exceed 100%. We will tell you going into this quarter we're obviously concerned with this economic environment that we would face a dramatic change in the renewal patterns, and maybe because we were so worried about it, fortunately we didn't see that come true.

Part of that is because we have focused all of our sales resources on the current customer base. That helps. We have a team that is dedicated to at risk customers. That means somebody that's not using the product the way they should, we automatically put them on an at risk list. We try to engage more generally for the customer service and professional services side.

So we'll say that yes it's been a tough environment. We expected the worst. We were actually able to do okay and continue to keep our historically strong statistics still strong.

Lars Dalgaard

And we will remind you that the entire management team is engaged in weekly or bi-weekly meetings reviewing all renewals, reviewing what type of quality experience the customers have had with the business processes they've executed on and that's working really well for us.

Thomas Ernst – Deutsche Bank

That certainly sounds encouraging. Have you had any shift in either the case or the dollars units?

Bruce Felt

They've continued to stay in our historically strong numbers. We're just happy with that result.

Operator

Your next question comes from [Sasha Zurivich – Janney Montgomery]

[Sasha Zurivich – Janney Montgomery]

[Inaudible] in the quarter, have you had a typical March quarter linearity or it is more back end loaded nature to it? If you could comment on that.

Bruce Felt

The linearity has been generally the same throughout the quarter. The only noteworthy point is I think we did finish the quarter in a strong fashion compared to Q4, it was certainly stronger. We did have some bigger deals come in and we did see the pipeline really actually fill compared to last quarter. So we were quite happy about how it did finish out and it wasn't anything significantly more loaded in the back end than any other quarter.

[Sasha Zurivich – Janney Montgomery]

So it really wouldn't be to the extent that you would say well maybe we're kind, the worst is now behind us.

Bruce Felt

That would be unrealistic. I think you'd be considered immature in what's going on in the market. It's a super tough market. We were just happy to see that towards the end some very nice deals close and there's a better sentiment. People know what the difference is and the proprietary studies we've done, the impact tools that we've put out there, the way reps are able to talk to the senior level in the organizations and the success that we've had that we discussed on the call allowed us also to build the pipeline.

[Sasha Zurivich – Janney Montgomery]

In the past you really haven't done much in terms of acquisitions and if the current market continues to be somewhat difficult for others do you think if you continue to perform relatively well, that you would consider there might be a right time to acquire or you wouldn't stray from your focus on organic growth strategy.

Bruce Felt

We got that question in the last earnings call and we have it pretty much every time and we've said that obviously bad companies aren't attractive, they cost less. But good companies are extremely attractive when they cost less and there is more time to think about it. But we've been consistent that we would want to buy brand new technology that can set us apart and can give our customers a breakthrough experience. That would be analytics or any of those types of spaces.

Could it be an interesting geography? Absolutely. Could it be a consolidation play? We're not sure. We think that makes a lot of sense. We struggle with that. We want to be the people who create new innovative tools to run your business better incite and arm your employees to really do something better productively, kick butt, and that's the type of business we want to do, just not roll everybody else out.

There's a big company out there that's expert at doing that and I don't think that's what you look for us to do. We are the innovators that can go out and bring great products to the market and growth with it and excite our customers. So if innovations can be bought that fit for that, we'll do that.

Operator

Your next question comes from Terry Tillman – Raymond James.

Terry Tillman – Raymond James

Any update on your success in selling additional products into the install base?

Bruce Felt

That continues to improve. It's been, we've had up sell around 35% over the last quarter. It's been continuing to stay in that area but has continued to grow a little bit. We think it's a healthy rate right now so we're pretty happy with that as a contributor to our overall business and certainly getting more product into our customer's hands is definitely positive and makes us stickier, makes us more strategic.

It provides more value obviously because it's an organically build, naturally integrated suite. So we expect it probably will continue to increase. Maybe not at the pace it has in the past but it's at a very good percentage right now we think. We've got some really excellent people that are now focused on the percent on that so that's both rewarding for our customers and for the company.

Terry Tillman – Raymond James

In terms of new products, you typically release one or two each year. What should we watch for next quarter?

Bruce Felt

Some of the things that we're building out that is getting a lot of success, we've built a lot of levels out and making our compensation product the best product in compensation and its pretty exciting to see us consistently win in the very big compensation deals and have no competition anymore there.

That's been a big innovation for us to really break out in aligning performance with compensation and do the very complex compensation plan for very large organizations that would have security levels and complexity and detail. So the sales force is very motivated around what's happened there, to become the absolute leader in the compensation.

There never was built a proper fully working scalable compensation before. There was a lot of individual compensation products that would be behind the firewall and break down, but never a SAS compensation product integrated with succession and performance and we've now finally delivered that. That really sells.

So that's been a big innovation. We put a lot of work into recruiting and that's been received very well, and then our collaboration and HRS light product, sort of face book for the enterprise is a very big theme for this year that data customers are very excited about and we're getting some really interesting collaboration opportunities through that.

And finally, analytics is something that we continue to invest in.

Terry Tillman – Raymond James

Can you give us any color on the trajectory of bookings for the rest of the year?

Bruce Felt

We have just not been providing that kind of guidance. We certainly give revenue guidance and earnings guidance and therefore spending guidance, but we've not been going further than that.

Operator

Your next question comes from Adam Holt – Morgan Stanley.

Adam Holt – Morgan Stanley

I think you just mentioned that up sell is about 35% of bookings. I was wondering if you could give us what renewals were as a percentage of total bookings in the quarter and then it sounds like some of the metrics around renewals are positive on the top line. Can you give us a sense for how margins are tracking there? Are they still north of 60% to 65% on the renewals?

Bruce Felt

The up sell percent is continuing to trend up and we don't break out the difference between new and renewals.

Adam Holt – Morgan Stanley

On the head count, obviously you went through a big change last quarter. Could you give us a sense for where you think you are in terms of stabilization internally, post a lot of changes and whether or not there's any work left to do on the right sizing from an operational perspective?

Bruce Felt

No work to be done. As you can see we picked up a slight bit here in the quarter on total employees. Where we've been able to really spend is very hungry people are extremely excited about working for the global mission we have of making companies execute more globally in both China and in Italy. Very, very interesting talent there that is just totally fired up about executing. And it's accelerating our road map.

So that's where you see some of the increase. And then, as we said, that growing confidence in a couple of other places. Surgically we'd like to invest in operable sales force where it makes sense and so we've done that and we've taken advantage of that.

For instance Europe just recently is doing very well for us so we've gone into many different segments in Europe that we couldn't. We hired the number one sales manager from [Myc-co] and that person is really, really doing well for us. In the enterprise business in Europe, we're just getting a tight team that's kicking butt and so we're firing people that aren't performing, but we're certainly hiring net net and getting a stronger team.

So surgically across the globe where it makes sense, we'll be investing, but obviously very, very carefully considering the circumstances and our commitment to being non-GAAP profitable in Q1 of 2010.

Adam Holt – Morgan Stanley

You called our Europe as an area of strength. You said you're doing quite well in a number of countries. That's a little bit different than what we've heard from a number of other vendors where it sounds like the environment from the demand perspective generically has actually gotten worse in Europe over the last three months.

What are your operating assumptions there as we look into the second quarter and the third quarter? Do you think you're going to continue to do well there given your share gains and incremental additions to your presence there or are you expecting some of the performance there to slow as the environment may catch up with you.

Bruce Felt

We have a European CEO so we don't treat them like second class citizens. Just kidding. It's exactly like we said in the prepared remarks. It's been a long, long investment and it's been a very hard one. There's no such thing and United States of Europe. I thought there was when I was 16. We're going there. 1992, but it's just not coming together.

Still in Europe you need to have localized product. You need to have localized material and you need to have localized experience in every single country. you need legal entities and you need outstanding people across the value chain from region to sales to strategic implementation to customer follow up to just the total package.

And that's taken a lot of years for us to get to a place where we feel like we are the leader in what we do in that market. It's consistently played up in the last 18 months, but just like you said, we've identified other people really having trouble in Europe. We are just doing vey well ion Europe and have been doing that for awhile.

And it's because of that big investment over such a long period of time. And it's been really hard work for a lot of people. We've created a philosophy in here that other geographies really should be treated like our main home geography of the U.S. and therefore you'll see our executives fell like its a very normal part of their workload to be consistently in Europe, and not just a couple of people like other organizations, but across the organization.

So we've had some of our best people in Europe for a long time to make sure that we didn't send the people that had no future there, but actually the best people to get it up to a level where they could execute and that's what's paying off for us.

Operator

Your next question comes from Michael Nemeroff – Wedbush.

Michael Nemeroff – Wedbush

Are you seeing any signs of stabilization? I know there's been a lot of talk out there and the results are very good relative to a lot of other companies especially side, are you seeing any of the signs of stabilization that people are referring to?

Lars Dalgaard

I want to be careful and I think Bruce does too not to get too excited. We really want to not disappoint any of our investors. We feel that we've built a brand of delivering and so we want to make sure that is how you experience this company always.

But it was excited to see our pipeline jump with the new initiatives we've put out there. That was something that was really you look at each other and wow, that's a difference. So that was exciting.

But then there was a disappointment in Q4 of not seeing those big deals and seeing the return of some big deals. That definitely was very exciting and there were some meaningful deals across the globe, not in one secular area.

So that was encouraging but I don't think we're out of this mess yet. I was just reading a German web site yesterday because of a deal we're in there and I was reading how some of those customers including SAP are just reporting absolute horrible results. And so that does filter through.

But we're beginning to see that we can do some different things in this market and so we're cautiously encouraged that the things might be at an end of what typically they decline, but not necessarily improve.

Michael Nemeroff – Wedbush

A couple of comments that you made I just want to clarify. Is the dollar renewal rate over 100% still and are there any metrics in terms of average module per customer that you've been tracking and trends that you can share with us?

Bruce Felt

Absolutely the dollar rate is as it has been over 100%. The average module has always been between two and three and continues to be between two and three on an initial sale.

Michael Nemeroff – Wedbush

And how has that been trending? Up, down or flat?

Bruce Felt

What's the sales head count and what's your expectations as you become non-GAAP profitable early next year, late this year for head count going into next year?

Bruce Felt

We haven't broken out the sales head count but I can say that we do have adequate capacity now that allows us to have growth with who we have now, and as Lars pointed out, we're still going to be strategically or surgically hiring in areas that we see high likelihood of early success.

Operator

Your next question comes from Karl Kierstead – Kaufman Brothers.

Karl Kierstead – Kaufman Brothers

Did you see any change in average billing terms that might have affected your bookings number in the March quarter?

Bruce Felt

We have not changed our terms at all. We continue to advance 30 to 45 day terms.

Karl Kierstead – Kaufman Brothers

Were those in fact the average billing terms that you were able to realize or was there a fair amount of client push back that you had to give in to a little bit?

Bruce Felt

We didn't have to give in. There's nothing to give in to really. The only stat that we didn't like, we didn't like, even though it's within historical bands, the DSO's. A lot of collections that were supposed to happen right at the end of the quarter didn't happen, but they did happen right after the end of the quarter. So we don't have a risk so to speak, but we did have to experience that.

Karl Kierstead – Kaufman Brothers

I know you get asked this each quarter at least since last fall, but assuming some head count cuts in your client base, did that create a head wind on the bookings or revenue line?

Bruce Felt

Obviously some of our customers were cutting. From time to time we will experience fee decrease. We don't really experience module decrease and in those situations, we view it as just an opportunity to go sell them new product. It's a great opportunity for us to sell Success and Planning and Profit, Off Boarding and Compliance. So we go at it pretty aggressively.

But yes, some customers are facing that and we're seeing some of that but luckily only a third of our customers in the enterprise renew at any point in time and when they do, we do have pretty substantial dialogues on how we can continue to help them and we really try to sell more product to them at the same time and make up for any fee decreases.

Operator

Your next question comes from Richard Baldry – Canaccord Adams.

Richard Baldry – Canaccord Adams

Can you talk a little about the deferred revenue line. The first quarter we've actually seen it go down but the comment to payment terms hasn't changed. I'm a little surprised to see that when you're still net customer positive on adds. And then maybe the revenue line sequential guidance called for at the low end a little less than 1% growth at the high end something like 1.5% sequential growth. So with dollar renewals actually above 100% are you really looking at new customers netting it out even with churn or am I missing something on that assumption?

Bruce Felt

On your deferred revenue question, we tried to head this off at the pass back in Q1 of '08 where we had $3.4 million of large deals or $2.4 million from two transactions that we said just don't expect them to repeat themselves. We were right. They did not repeat themselves. So when you factor that in, we actually had growth.

On the revenue line, we're suggesting very moderate sequential increase. We're being just extremely conservative and cautionary just given the environment. We think that's just the right way to be. We obviously would love to do better but prudence, conservatism, caution, I think are just appropriately in order at this time.

Operator

Your next question comes from Michael Huang – Thinkequity.

Michael Huang – Thinkequity

With respect to your IBM relationship and other alliance partners, how many of the large deals that you did in the quarter were influenced by IBM or another partner and how do you expect that trend to continue through the year? Is IBM working around the entire suite or is it around more from a corp and session planning?

Bruce Felt

Europe was a success in Q1 but also alliances are very big gross growth success. And again it's been an area we've been investing in, in that case longer than Europe, and some of the old partners there that have just found out frankly, that this is a quote, "that their area has become a little bit marginalized and they need something strategic to juice up their story."

So out of the blue we got a bunch of requests at the end of last quarter and then going into Q1 where they would ask us can we partner with you in a much more comprehensive, sophisticated and integrated fashion, and of course we're excited about that.

On the IBM specifically, we've just been able to see that the investment we made in an IBM practice, and the way IBM has come with open arms, I guess they're not that experienced in SAS and they're very interested and really partnering very closely with us and invited us to extremely senior meetings in New York and just meeting all the right people globally beyond the people that are really smart about strategy there, and then meeting with all the country heads in all the geographies.

Personally I've met with the guys in China and Germany and the U.K., and a couple of other key countries, just a really strong classic IBM culture and wonderful to work with. So we just decided to make that a serious part of our investment and take some of our best people and apply them to that, and then the results are showing. So it's really exciting that that work is happening.

Operator

There are not further questions at this time. I will turn it back to management for closing remarks.

Lars Dalgaard

Thank you for your trust in us. We're not going to let you down. We are very excited about the opportunity in this market and we will not let you down. We're going to continue to execute for you. Thank you very much.

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