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Art Technology Group Inc. (ARTG)

Q1 2009 Earnings Call

April 30, 2009; 10:00 am ET

Executives

Bob Burke - President & Chief Executive Officer

Julie Bradley - Chief Finance Officer

Kim Maxwell - Investor Relations

Analysts

Shyam Patil - Raymond James

Michael Huang - ThinkPanmure

Jeff Van Rhee - Craig-Hallum

Nathan Schneiderman - Roth Capital Partners

Brad Mook - MKM Partners

Mark Capell - Unidentified Company

Mike Latimore - Northland Securities

Derrick Wood - Pacific Growth Equities

Operator

Welcome everyone to the Art Technology Q1 2009 earnings conference call. (Operator Instructions)

Ms. Kim Maxwell, you may begin your conference.

Kim Maxwell

Great, thank you. Good morning, everyone and thank you for joining ATG’s investors conference call to discuss our first quarter 2009 financial results. Speaking today will be Bob Burke, ATG’s President and CEO; and Julie Bradley, ATG’s Chief Financial Officer.

This call will discuss information about ATG’s future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in our annual and quarterly reports on file with the Securities and Exchange Commission.

Our SEC filings can be accessed free of charge from the investor section of our website at www.atg.com. In addition, any forward-looking statements represent our views only as of today, April 30, 2009. These statements should not be relied upon as representing our views as of any subsequent date.

While we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. During this call, we will refer to non-GAAP financial measures, a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure is available in our financial results press release, which was issued this morning. A copy of this release can be accessed in the investor section of our website.

Now, let me turn the call over to Bob.

Bob Burke

Thanks, Kim and good morning, everyone. Thanks for joining us. I’m going to start off today’s call with a recap of our Q1 results and highlights from the quarter. Then I’ll hand the call over to Julie for the financial discussion and outlook.

ATG had a solid first quarter, with revenue increasing 15% and product license bookings growing 8% year-over-year. This performance is indicative of the continued investment in eCommerce by our customers and prospects, in spite of a difficult economy. I’ll talk a little more about what we are seeing in the market before handing the call over to Julie, but first I’d like to share some details about a few of our first quarter wins.

In Q1, eight new companies chose ATG’s eCommerce solutions, including the new and existing customers were DirecTV, New Look, Tesco, Thomas Cook, Upromise, and Women’s Apparel Group.

Tesco, the third largest retailer in the world selected the ATG platform and will integrate its cross channel shopping experience, including the web context center and in-store systems. Tesco made the decision to move off their homegrown solution and leverage ATG’s scalable platform and advance personalization in order to meet their long-term growth goals. Our Recommendation product was also a key driver in their decision to select ATG, further setting us apart from the competition.

In another competitive win, New Look a fashion retailer based in the UK that operates more than 900 stores selected the ATG platform. They launched their first homegrown eCommerce site in December of 2007, and following the success of its initial entry into the eCommerce business, New Look quickly realized they needed a more scalable platform to create a consistent cross channel shopping experience and achieve their long-term revenue goals.

Thomas Cook made another significant investment this past quarter. After a successful launch of thomascook.com, they have plans to launch several other brands in order to expand their global reach.

Now, turning to our eCommerce Optimization Services business; as discussed on our last call, we have a strategy in place to ramp new business growth within larger customers while selectively churning selected smaller accounts. This past quarter our net customer account in the eStara business increased by 16. However, with the exception of two customers, both related to the automotive industry, the accounts we churned were consist with our focus on larger accounts with higher potential recurring value.

A new win this past quarter was Art Hassuna [Ph], Italy’s leading online directory and Yellow Pages Company. Click to Call was implemented in just two days and is already seeing significant call volumes. We continued to see global expansion and adoption of our services within our existing base, including American Express, Harris Bank and TD Canada.

Harris Bank, a long time Click-to-Call customer, replaced a competitive chat offering with ATG during the first quarter. Within weeks of the implementation, they experienced reduction in abandonment due to our enhanced features and they also have found our analytics are reporting to be more complete, supporting improved ROI with ATG.

We are also seeing a new growth opportunity with the rise of the iPhone as a mobile application platform. Leading edge retailers are offering or considering offering an iPhone app to facilitate mobile shopping. Additionally, a number of our leading directory-based media customers are implementing iPhone apps.

A good example is Dominion Enterprises, which recently launched its Homes.com iPhone app for searching local real estate. Our Optimization Services, such as call tracking can help media companies monetize these free iPhone apps by tracking leads, improving ROI to local advertisers.

With our strong position in the local media market, we see the iPhone as yet another growth driver for Optimization Services. Before I turn the call over to Julie, I’d like to comment on what we are seeing in the market. Our first quarter license bookings growth clearly demonstrates an investment to eCommerce continue despite a difficult economy.

The key drivers fueling our growth remain unchanged and they are the brooks, bricks and mortar channel is under pressure with eCommerce, a source of growth for companies along with helping to improve operating margins and lowering capital expenditures and as evidenced by many of our wins this quarter, the replatforming trend continues as companies replace their homegrown sites with a more robust and sophisticated package solution.

Third party data supports what we are seeing in the market. In a survey that was just released earlier this month by Forrester Research, 72% of companies said the economic downturn had not led to a change in their eBusiness technology investment plans and more than half of business to consumer companies said they plan to increase their budgets for eBusiness technology.

This analyst noted that companies continue to be bullish on eCommerce technology investments, because they recognize the power of the online channel. Forrester estimates that online retail sales will grow 11% in 2009, as they continue to far outpace growth in total retail sales and then grow at an even faster rate in 2010.

Given the growth drivers in our business, we remain optimistic about our prospects as we go into the second quarter. Our pipeline continues to be robust and is the largest in the company’s history. While few are immune to the weakened economy, ATG is very well positioned and we fully expect that the underlying market trends will continue in our favor.

Now let me turn the call over to Julie.

Julie Bradley

As Bob highlighted, we are pleased with our financial results. First quarter revenue grew 15% year-over-year to $41.9 million and came in at the high end of our guidance range of $39 million to $42 million. Geographically, Q1 international revenue accounted for approximately 34% of total revenue, up from 32% in the year-ago quarter.

Product license bookings, defined as the sale of perpetual licenses grew 8% to $12.3 million and came in at the high end of our guidance. This past quarter 38% of $4.7 million of our product license bookings were deferred, and will be recognized ratably.

For the first quarter, license average sales price or ASP was $823,000, compared to $769,000 in the fourth quarter and $370,000 in the first quarter of 2008. The primary reason for this past quarter’s higher ASP was due to the fact that we had five seven-figure license deals booked. However, no customers were in excess of 10% of quarterly revenue.

For the full year, we expect ASPs to be in the $500,000 range, consistent with 2008. Recurring services revenue, which includes support and maintenance and OnDemand recurring services, grew 11% year-over-year to $23.1 million this past quarter, and within our previously stated guidance range. In Q1, our support and maintenance business increased 7% year-over-year to $11.4 million. Renewal rates in our support and maintenance business remain in excess of 90%.

This past quarter, our OnDemand recurring services revenue, which includes ATG Commerce OnDemand and our eCommerce Optimization Services, grew 14% year-over-year to $11.7 million. Recurring services gross margin decreased to 61% for the first quarter compared to 64% in the fourth quarter. This sequential decrease is due to an increase in headcount, as well as investments we are making in our Optimization Services infrastructure.

These investments are intended to strengthen the product offering for our enterprise class customers, so that we can continue to scale this business over the medium to long-term. Professional and educational services revenue for the quarter was $5.9 million, slightly below our guidance range of $6 million to $7 million, reflecting the continued engagement by our partners in customer implementations.

The professional and educational services gross margin was 10% for the first quarter, at the top end of our guidance range of 5% to 10%. GAAP gross margin was 65% for the first quarter, up from 59% year-over-year. GAAP net income was $3 million or $0.02 per diluted share and above our guidance range of breakeven to $1 million.

Non-GAAP net income grew a 195% year-over-year to $5.9 million or $0.05 per diluted share and came in well ahead of our guidance of $3 million to $4 million. Operating expenses for the first quarter were $24.2 million, coming in at the low end of our guidance range of $24 million to $26 million. Our cost savings program, internally known as Project Prudence continues to yield good results, especially in travel and discretionary spend.

Our headcount increased this past quarter to 524 employees, up from 502 employees at December 31. The increase in headcount was primarily in sales and service delivery functions. Capital expenditures or CapEx for the first quarter was $1.3 million or 3% of revenue.

Looking at the balance sheet; our balance of cash, cash equivalents and marketable securities at March 31 increased 11% to $67.9 million from $61.4 million on December 31. The percentage of our accounts receivables that are less than 60 days old, at March 31 was 91% and above our target range of 85% to 90%. Day sales outstanding or DSOs, were 66 days, down from 86 days in the year-ago quarter including net change in deferred revenue, modified DSOs were 69 days down from 83 days in the year-ago quarter.

First quarter cash flow from operations remains strong. Cash flow from operations was $8.1 million and above our guidance range of $5 million to $7 million. Now I’d like to spend a few minutes talking about our outlook and financial guidance. As discussed last quarter, it is our preference to provide full year guidance. However, we plan to issue quarterly guidance until the macroeconomic environment supports a longer term view.

The following is our guidance for the second quarter of 2009. The expected revenue and gross margins by revenue type are as follows. Product license bookings are expected to be in the range of equal-to or up 8% from Q2, 2008. We are forecasting that approximately 40% to 50% of our product license bookings will be deferred and recognized ratably and approximately $4 million to $5 million will be recognized from previously deferred license revenue.

Recurring services revenue is expected to be in the range of $23 million to $24 million, with GAAP gross margins in the low 60s. Professional and educational services revenue is expected to be in the range of $6 million to $7 million, with GAAP gross margins in the range of 5% to 10%. Total revenue is expected to be in the range of $42 million to $45 million, and total GAAP gross margins to be in the mid-60s.

We expect operating expenses will be approximately $25 million to $27 million. GAAP net income is expected to be $1 million to $3 million. Stock-based compensation in accordance with FAS 123R will be approximately $2.2 million and amortization of acquired intangibles will be approximately $925,000. Allocation of these items will be consistent with historical trends.

Non-GAAP net income is expected to be in the range of $4 million to $6 million or $0.03 to $0.05 per diluted share. Cash flow from operations is expected to be in the range of $5 million to $7 million. ATG expects revenue and bookings growth for the full year and is committed to expanding profitability in 2009. As Bob mentioned, we have strong trends in our business which will fuel our growth over the long-term.

I would like to remind everyone that this guidance is based on our projection as of today, April 30, 2009. We do not undertake any obligation to update these estimates after today’s call.

With that, Bob and I would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Shyam Patil.

Shyam Patil - Raymond James

Congrats on the strong quarter again. First question is, in terms of the strength you guys are seeing, are there any trends by verticals or geographies that stick out to you; and then additionally, how do you view consumer electronics as an opportunity?

Bob Burke

Sure. Overall I think we see the trends are definitely strong. As I think we’ve talked about before, inside of each vertical there are different trends by sector. For example, the luxury goods retailers have been particularly hit during these economic times, but I think overall if you look in each one of our verticals, whether it’s TelCo, retail, media and entertainment or consumer products, we definitely see some areas of strength.

In terms of your specific question around consumer electronics, the whole consumer products area we think is a good opportunity for ATG. So Shyam just to answer, I think follow-up on your question, yes we do see an opportunity there. Remember back in the fourth quarter in fact, we had a sale of Lexmark. We also enjoy people like Epson and Phillips as customers. The other consumer products obviously, are things like apparel, consumables that we also see as good opportunities.

Shyam Patil - Raymond James

Okay and then just one final question. When you look at your pipeline, you mentioned that it’s at record levels. Could you talk a little bit about the mix of seven figure opportunities you see within your pipeline and how that’s changed over the past quarter or so and if it’s weighted toward any particular vertical or geography, at least in terms of large near term opportunities?

Bob Burke

I think the good thing about the pipeline is, it is spread across verticals. It does have a good mix of seven figure and smaller deals. We enjoyed quite a few seven figure deals this last quarter. I’m not sure that as a percentage of the overall revenue we’ll always see exactly that same percentage, but we certainly do enjoy a nice balance of seven-figure deals in the pipeline for the remainder of the year.

Internationally, I think we continue to do well. It was 34% this last year in terms of overall revenues and I think we’re going to continue to see some pretty solid opportunities in international; not just in retail, but also continue to have wins in TelCo.

Shyam Patil - Raymond James

Great, thank you, and congrats again.

Bob Burke

Thank you.

Julie Bradley

Thanks.

Operator

Your next question is from the line of Michael Huang.

Michael Huang - ThinkPanmure

Hi, good morning. A couple of questions for you guys. First of all, given the nice win over at Tesco, could you actually talk about how a win with a company like Tesco might be opening doors elsewhere or impacting pipeline?

Bob Burke

Sure. Well, Tesco as some of you may know is definitely looked at as one of the leading retailers. As I mentioned on the call, they are number three behind Wal-Mart and Carrefour. So people definitely think of them as a trend setter, not just in their traditional area of grocery, but obviously as they move into being more of a general merchandiser as well. So that definitely got a lot of attention, particularly internationally, in terms of the opportunity, so that’s something that I think that we’re going to continue to reap the benefits from.

Michael Huang - ThinkPanmure

Okay, and then in terms of the environment that we’re in, I was wondering, have you guys done anything to update your sales messaging or your go-to-market strategy to navigate what likely is a tougher selling environment than what we saw last year?

Bob Burke

Well I think some of the updates are to try to target and get more out of larger customers, particularly in Optimization Services; it’s also a lot more efficient for us. I think some of the messaging that’s involved in the eCommerce area is not just to tout our good multi-channel capabilities, but also the capabilities we have around cross channel.

Then finally, I think more than ever, people are interested in the ROI story. That’s one reason I think that Optimization Services will continue to have good traction, because that’s obviously a very strong ROI story and very immediate.

Michael Huang - ThinkPanmure

Okay, and then last question for you, I’m not sure if you touched on this, but I didn’t hear it; did you talk about how your OnDemand ATG offering is doing and can you give us an update on either wins in that area or pipeline activity?

Bob Burke

Yes, that’s one area we didn’t mention it in the call and I appreciate the question, because we did see some good wins this last quarter. I think we had four new wins in the first quarter and we think that there is some good traction in that business. I think as we’ve talked before, we’ve also been in the process of making the move to our new data center that’s run by AT&T and I’m happy to report that we are almost through that.

So we basically have all, but one customer moved over and we expect that in the next week or two that that customer is going to be over. So, I think a lot of the distractions that we’ve had in the business, getting all of those kinds of mission critical customers moved over is hopefully behind us.

Michael Huang - ThinkPanmure

Great and just to clarify on that, sorry for the follow-up, but with respect to the wins on ATG OnDemand, were those companies that would have previously gone to ATG OnPremise or were these guys well suited just for OnDemand?

Bob Burke

Actually, it was a nice blend. We had one customer that was a pure SAP. So that’s a customer that we might not have been able to enjoy if we didn’t have OnDemand. The other customers were hybrid, where they also enjoyed license solutions, as well as wanting to have ATG host them.

Michael Huang - ThinkPanmure

All right. Thanks very much, guys.

Operator

Your next question is from the line of Jeff Van Rhee.

Jeff Van Rhee - Craig-Hallum

Thanks, good morning, guys. Looks really good here; just a couple of questions, if I could. First Bob, if you could start with the eStara side. Understandably, you’ve got the strategy to turn out the lower ASP or lower end clients. Can you talk to the gross add customers; the gross add numbers, and what trend you’ve seen there and what the story tells there; and also on a sequential basis, how do you think about eStara? Are we set up for sequential growth here?

Bob Burke

Yes, so the answer to that question first, I think Q1 is definitely the low point for this year. I think there’s a little bit of seasonal pressure, although we didn’t have the uptick in Q4 as much. We did have a little bit. So, I think that we are set up for growth for the rest of the year.

We’ve been giving this net number out. We haven’t given a gross new number. That’s a metric that we may in fact focus on going forward, because of the churn that we’re trying to do. So we’re not going to give that this time, but it’s something that we’re thinking about in the future.

I will give a little bit of color though, in terms the kind of the deal sizing that we’re getting into. Just to give you a couple of points, the monthly recurring revenue of the deals that we booked in Q1 were significantly up over even what we had booked in Q4; and if you look at what we had done in Q1 a year ago, they were up 80%. So, I think the good news is we have the account teams focused on larger customers and also getting more out of our base.

Jeff Van Rhee - Craig-Hallum

Okay, and then on the professional services side, at the higher end of the range this quarter, nearly 10% and the guidance if I heard it right was a GAAP gross margin of 5% to 10%, can you give me a sense there, there’s obviously a lot of room for that to go much higher as you get to that inflection point where your partners are trained and capable. Can you just give us a broader sense of where we are in that process and when we might start to see that steady sequential build back up to that significantly higher level you’ve talked about previously?

Julie Bradley

Sure, I’ll take that one. I think on a quarter-by-quarter basis, there’s typically a mix of the type of deals that we’re doing and in combination with some of our partners, but the organization, we believe is set up to not only achieve positive gross margins, but to also expand that over time, and I would look for continued improvement on that, throughout the balance of the year.

Jeff Van Rhee - Craig-Hallum

Okay, all right, great. Then I guess just last, kind of an open-ended one for you Bob; in terms of the pipeline and some pretty solid bookings guidance here, can you just expand on some of the things people are very interested in, your coverage to that forward estimate, what you’ve seen on cycles? Have you seen stability in sales cycles and any other incremental color about what’s in that pipe to give some thoughts on the overall forward business?

Bob Burke

Sure. So first of all, we continue to enjoy over 3X coverage for the remainder of this year, so that’s a very positive thing. I think in terms of customers, in terms of their buying habits and the sales cycles, certainly there is some sales cycles that we’re seeing get slowed down a bit or stalled or people are deferring decisions.

On the other hand it’s I think, accelerating some customers. So, at least two of the deals that come to mind this last quarter that were large, seven figure deals, actually were done in a shorter time than people would typically expect for them.

So, I think it’s having a mixed impact on people. I think some people look at this as an area where they can accelerate the business and it’s really an area where I think people look at it and say, “Well gee, other investments in physical stores or whatever may not be the best or wisest use of monies at this time,” so they are actually accelerating their efforts in eCommerce.

Jeff Van Rhee - Craig-Hallum

Great, thanks.

Operator

Your next question is from the line of Nathan Schneiderman.

Nathan Schneiderman - Roth Capital Partners

Hi, thanks very much. Thanks for taking my questions. Bob, I was hoping just to follow up with another question on pipeline, just to make sure we’re all clear about what you’re talking about. You did say it was the largest in your history. I assume you mean just overall and not just going into Q2 rather than past Q2s?

Bob Burke

It is in absolute terms the largest ever.

Nathan Schneiderman - Roth Capital Partners

And then, is there anything you can share with us to help us understand that as maybe comparing that 3X coverage ratio to what you had last quarter or last year, the aggregate size? How much is that up relative to the prior quarter or prior year? Anything you can say to kind of make it a little more granular?

Bob Burke

Sure. As you know, we’ve continued to focus on making sure that we have a three times coverage number, so that’s really what we’re focused on. That’s one of the kind of pieces of color that we have given on pipeline.

I’ll tell you, the one thing about the pipeline is that, it’s not only larger than it has ever been before; I think the quality has continued to improve, and it’s not just in the commerce area. It’s also in the whole Optimization Services area where the usage of sales force system is much more in that early stage of maturity than it has been for our commerce suite business.

So I think that in terms of looking at kind of pipeline coverage as we go forward, we would expect to hopefully keep at that 3X level going forward and continue to get better visibility and improvement in the Optimization Services area.

Nathan Schneiderman - Roth Capital Partners

Okay, and then Julie, I was hoping you could help us understand the quarter’s linearity a little better, maybe if you could speak to perhaps the percent of bookings month one, month two, month three and the AR was down quite a bit sequentially. Did that reflect a more front end loaded quarter or just anything you could share with us to help us with linearity?

Julie Bradley

Sure, we don’t give out the statistics about linearity by month, but your connection to accounts receivable being down sequentially is a good one. We saw the same pattern in Q4. That suggests that we were booking more deals earlier in the quarter and with our normal payment terms, collecting them before the end of the quarter, which helped to drive AR down and also improve DSOs.

Nathan Schneiderman - Roth Capital Partners

On the issue of collections and customer payments, to what extent are you seeing customers shift to more periodic payments, perhaps as a way of husbanding cash and do you feel that that’s causing more of your business, maybe in a temporary fashion to shift toward ratable as opposed to up front?

Julie Bradley

Well, we always get customers that are trying to lengthen out their payments and I think that pressure’s always been in the system, but I would say that we are seeing more of it. We negotiate hard to stay within our normal payment terms, but on an exception basis, we do allow for longer term payments, assuming that they have solid credit and so forth and so that pressure is out there, but we need to continue to balance that with our own cash projections.

Nathan Schneiderman - Roth Capital Partners

What can you share with us about success in booking deals thus far in April?

Bob Burke

Well, we normally don’t give that at this point, but we still see continuing positive trends in the business, so I think both in Optimization Services and in the commerce area, we see a lot of demand.

Nathan Schneiderman - Roth Capital Partners

And final question for you and then I’ll drop off. Bob, you referenced the new opportunity related to iPhone applications, but I was a little unclear as to which particular products you promote to address that opportunity and to what extent is it boosting your revenue at this point? Thanks very much.

Bob Burke

Sure. Yes, the iPhone and I think other devices that are like it, do represent an opportunity I think in two ways. The one that I called out with homes.com is a more direct revenue opportunity and that’s why we focused on it.

Basically, what it is, is a GPS aware application and as a user, you can set the radius to look for homes in a particular area and then you can focus on criteria like price range, etc. When you actually then select a particular house and make a call to a realtor, our call tracking actually is employed and basically the call tracking reports the selection and the lead is reported. So, we actually generate revenue directly using call tracking.

I think the other broader one that is not a direct revenue producer, but certainly one that could increase overall usage and thus indirectly revenues, is the iPhone application for actually going through more readily people’s catalogs on eCommerce sites and that’s another one that we’re seeing. Certainly, some of you may have seen the Amazon Applet that’s in the iPhone store that you can download. I think we’re at the tip of the iceberg with that.

Operator

Your next question is from the line of Brad Mook.

Brad Mook - MKM Partners

Hi, guys. So a couple of questions; first off, just on the competitive front and being aware of the competitive pyramid and how you guys sit at the high end, has the economic environment changed the companies that would be considered within your sales cycles at all. I’m just wondering if the cost for your products, which isn’t low would be a factor and companies might be struggling to figure out whether to make that jump to the high end or not.

Bob Burke

Yes, I think one of the things we have done in the last couple of years is make our products more consumable and adoptable by people that are more in the midrange of the market. I think we’re continuing to do that, not only because we want to be able to broaden our market coverage over time, but obviously even bigger companies have smaller entities or subsidiaries that we also would like to be able to provide solutions for.

So, I think you’ll continue to see us move a little bit more broadly in terms of the market coverage. Having said that, at the very low end, that’s probably not something at least in the next few years that ATG will be directly addressing.

Brad Mook - MKM Partners

Okay. Then with respect to the online optimization, you mentioned the clearer ROI and the pretty immediate payback. Frankly, I’m surprised; I understand the net customer change, but I’m a little bit surprised that there isn’t better uptake on that, given how companies are really trying to drive results through their online channel; any comment?

Bob Burke

Yes, I think that we have enjoyed a strong position. There’s certainly been as I mentioned, some other headwinds like a little bit of currency exchange pressures from Europe, for example. I think we’ve also been in a process of refocusing the sales force, strengthening sales managements. I think Q1 was definitely a period of time to refocus the organization and get things more organized and targeted for various activities and I think we’re going to see the payback for that in future quarters.

Brad Mook - MKM Partners

Okay, and then on the support and maintenance line, what are you seeing there? I mean, a little bit of movement in that line quarter-to-quarter. I’m wondering if you’re seeing customers dropping off in maintenance and what the approach has been there.

Julie Bradley

Sure, I’ll take that one. So sequentially support maintenance did go down by about $200,000. We are still seeing or enjoying renewal rates in excess of 90%, but as we anticipated and it was built into our forecast, we did see about a 2% decrease in renewal rates related to some of our Legacy customers, in particular that were dropping support.

So we have some programs underway to try to transfer them over to JBoss, which is an app server that we also support and we think that will more than offset the attrition that we’ve had in support maintenance due to the Legacy companies dropping off.

Brad Mook - MKM Partners

Okay, how quick would that improvement be? Is that something that you expect in Q2?

Julie Bradley

I think it’s something we’ve seen throughout the entire year.

Brad Mook - MKM Partners

Okay. So, more of a gradual...

Julie Bradley

As they come up for renewal, they don’t all come up for renewal at once, so it’s working with them and trying to migrate them over to these other services. This is something that we’ve expected and it’s baked into our forecast. We have been seeing it; we’ve seen it historically I think in light of the economy, and we’re probably seeing it a little bit more.

Brad Mook - MKM Partners

Okay, but you’re not seeing it on the more current technologies?

Julie Bradley

No, we are not. We are very fortunate we’re not seeing it at all in our commerce business.

Brad Mook - MKM Partners

Okay, and Julie, you mentioned with the professional services education line being down a bit, you made a comment about it that I didn’t quite understand. Can you just kind of run through that or give a little more color in terms of what the dynamic was in Q1?

Julie Bradley

Sure. Well, it’s pretty much the same dynamic that’s been going on for the last year or so, where we’ve been investing a lot in our partner network and getting our partners to take the system integration work with our new customers and we continue to see that; that they are involved in a higher percentage of our deals and we are in some regards a support function to them, in addition to doing some ATG-only deals.

So I think as we’ve said before, we’re going to continue to see this mix in the services that are performed and net I think the fact that the partners are more involved, there’s a lot of additional benefits for us there in geographies, in board rooms that we may not be in. So the fact that we have a decline in our professional services line of business, we don’t view as an overall negative.

Brad Mook - MKM Partners

Okay, and as just a shortfall to your guidance then just reflects a little bit more of a mix into that partner channel?

Julie Bradley

That’s correct.

Bob Burke

Brad, this is Bob. The focus has been really for the last few quarters. First, a year or two ago, it was really getting the partner network ramped up. Then last few quarters, it’s really been trying to make sure that we’ve got it to be a little bit more efficiently delivered and up to our gross margins. So, I think that’s really been the intention for that business, not the size of volume per se.

Brad Mook - MKM Partners

Yes, okay, I’m aware of that. Then the last question is with the change in the approach to the user conference, not having one central national conference, can you just talk a little bit about kind of what you’ve put in place instead of that and what the cost implications are on timing and things like that?

Bob Burke

Sure, let me talk a little bit about what we’re doing and I’ll ask Julie to talk about the financial impact. So first of all, we definitely had a lot of interest in our annual customer event. We were frankly concerned, that not as many people could attend just because of their own travel pressures with their companies and we wanted to reach a broader audience wherever possible. So, the decision was made to replace it with several different things.

First, we launched an ATG community portal to make sure that people had ongoing contact with ATG for the long term. It’s something that we have wanted to do for a few years anyway, and I think that’s helped accelerate that.

The second thing is that we will be doing more regional events in the next couple of quarters and then finally, our plans are in the third quarter to actually have an online virtual event. We realize that it won’t replace the face to face contact that hopefully some of the regional events will do that, but it will I think allow people to have a very broad engagement with ATG and I think also the technology for some of these virtual conferences are getting to the point where they are becoming a very meaningful experience.

So it’s not just us, but its people like Cisco for example, that have also employed these techniques recently. So we’re going to spend a lot of energy and attention to it. The content, we expect to be great, but I think in terms of our overall customers and their expense restraints, I think that we’re basically looking to do more of it virtually where possible.

Julie Bradley

Just from a financial impact, we will be spending money, of course on the virtual and regional insights. It will definitely be less than what we’ve spent in the past, probably in the neighborhood of 50% to 75% of our previous spend, and instead of all being concentrated in the second quarter, it will be between the second and the third quarter.

Brad Mook - MKM Partners

Okay, all right. That’s helpful. Thank you.

Operator

Your next question is from the line of Mark Capell [Ph].

Mark Capell - Unidentified Company

Good morning, and congratulations on the quarter. Nice job. First question, Julie could you provide the foreign exchange impact on revenue in the quarter?

Julie Bradley

Sure. To break it down from year-over-year and sequentially, and we can also look at it on product versus recurring services. So in total, year-over-year it’s about 8% impact and sequentially it would be about a 2%.

Mark Capell - Unidentified Company

That’s 8% negative, I assume?

Julie Bradley

Yes, yes 8% negative and then if you just looked at the recurring services, year-over-year, that would be about 3% and sequentially, not quite 1%.

Mark Capell - Unidentified Company

Okay, and with respect to direct sales reps, your quota carriers at the end of the quarter, could you just give us that information?

Bob Burke

Yes, the number is about 74 reps.

Mark Capell - Unidentified Company

I believe that’s up from 68 at the end of the year?

Bob Burke

Correct.

Mark Capell - Unidentified Company

Okay, and maybe just a little outlook on your plans for that number for the balance of the year.

Bob Burke

Yes, I think one of the things we tried to do with sales is make sure that we got as many people added as early as possible in the first quarter so that they could go to sales training and be more productive longer in the year.

So I don’t think you’ll see a dramatic add of any sort in terms of sales headcount for the remainder of the year. I think we’ll add one or two people here or there, but I think more of the increase this year in terms of headcount is going to be probably in the services and engineering area.

Mark Capell - Unidentified Company

Thank you. That’s all for me.

Operator

Your next question is from the line of Mike Latimore.

Mike Latimore - Northland Securities

Yes, good morning.

Bob Burke

Good morning.

Mike Latimore - Northland Securities

Just on the employee count, you said you would add some more in services and engineering I think. What kind of employee additions do you think you’ll see the rest of the year?

Bob Burke

Well, that’s I think two primary areas that we’re going to be adding. I think the areas to add that we’re adding is trying to beef up our services operations for example and Optimization Services, that’s certainly one. As Julie mentioned, that’s one of the things that has impacted also our margins slightly.

The other is really adding to our engineering area, also in Optimization Services, and also in our platform area to continue our efforts to make our OnDemand offering better and also to make our overall offerings easier to adopt and consume.

Julie Bradley

So on a full year basis, we’re not going to give annual headcount projections, but just contained to the second quarter, we think we’ll end the quarter with about 535 to 545 employees.

Mike Latimore - Northland Securities

Okay, great, thanks. Then Bob, you mentioned refocusing the sales force in the optimization area. I mean, what are some of the key maybe new strategies you’re looking at there?

Bob Burke

So, I think one thing is to make sure that we separated the sales force a little bit different from people that were basically hunters for new accounts and also making sure that we had people that were more focused on very large strategic accounts. So there’s been some of that alignment in that in the past, but I think what we’ve done is do that more fully.

In Europe, we’re also doing I think some interesting things in terms of focusing by vertical a bit more than we have in the past as well, especially given our focus on areas like TelCo.

Mike Latimore - Northland Securities

Right, okay. Then I know you’re turning out some of the less profitable accounts, I believe, in the optimization area. For the kind of the Legacy accounts that you’re not churning off, what kind of growth are you seeing in sort of Legacy base?

Bob Burke

We don’t give out stats in that, but I think one of the things that we see is that just from a little bit of color, I think as I mentioned some of the accounts we’re definitely seeing in terms of adopting other Optimization Services. So it’s not just volume with the existing services. It’s somebody that has Click-to-Call for example, in adding Chat or Win-Backs or some of our other offerings.

It’s things like for example, like the account that I mentioned with the iPhone apps, adding something that’s more of a mobile app, as well as just volumes coming in on their directory on their website. So I think what you’re going to see is a larger portfolio and more cross-selling within that portfolio so that somebody’s not just enjoying one service, for example, in optimization.

Mike Latimore - Northland Securities

Okay, got it, and I think you said that the bookings in that category in the first quarter were up over the fourth quarter in terms of monthly revenue run rate I believe something like that.

Bob Burke

Well, what I quoted was the monthly recurring revenue of the deals that we booked in Q1, so the MRR value was up significantly both over the fourth quarter and Q1 a year ago.

Mike Latimore - Northland Securities

Got it, and are the deal sizes, the pricing of the new customers you’re bringing in, are those deal sizes generally larger? There is a more upfront commitment; how are you kind of pricing things?

Bob Burke

Yes. So, the answer is yes. We definitely are looking for a larger upfront commitment from customers and I think we’re also getting more standardized in terms of the approach, in terms of how we quote and size and configure those deals as well. So, we’ve had a lot of efforts over the last couple of quarters in terms of implementing basically a sales configurator and accompanying processes to make sure that we’re more organized in our approach.

Mike Latimore - Northland Securities

Okay and just a last one, Julie in terms of your bookings guidance, did you say up to or equal to 8%, is that how you characterize it?

Julie Bradley

I was comparing it to Q2 2008, for the year-over-year that the range is equal to or up to 8% year-over-year growth.

Mike Latimore - Northland Securities

Okay, great. Thank you.

Operator

You have a question from the line of Derrick Wood.

Derrick Wood - Pacific Growth Equities

Okay, great. Thanks. Nice job on the quarter, guys.

Julie Bradley

Thanks.

Derrick Wood - Pacific Growth Equities

Julie, so G&A costs were down pretty big sequentially, are there any one-time movements here or did you just find a lot of efficiencies and should that carry through going forward?

Julie Bradley

We definitely find efficiencies. We’re always looking for them, but there is a one-time in G&A of about $400,000. We recently restructured our office lease in the UK and there was a one-time pickup from the lease in the restructuring process.

Derrick Wood - Pacific Growth Equities

So you won’t see that $400,000 benefit you’re saying, come next quarter?

Julie Bradley

No, we will not be seeing that benefit in the second quarter.

Derrick Wood - Pacific Growth Equities

Okay. On the optimization, can you give us some color as to how different sales cycles and ASPs are with that product relative to the commerce?

Bob Burke

Yes, so we don’t give an ASP metric currently around Optimization Services. Certainly the ASP is quite different, considering the different type of services. Obviously, one is a perpetual license basis. The other one is obviously a recurring number, so it’s an annualized number that we target, but I think as I mentioned earlier, that average sales price is going up definitely as we look to not only lock in people into longer-term commitments, but also we focus on the increase in MRR.

Derrick Wood - Pacific Growth Equities

Okay, yes. That does make a hard comparison, but I mean it’s definitely a shorter sales cycle?

Bob Burke

It usually is a shorter sales cycle; our sales cycle for the commerce deals are six to nine months. Traditionally, Optimization Services has certainly had a much quicker sales cycle and that continues to be the case. Although I would say that when you get into larger and larger accounts and you start talking about larger and larger deals, it starts getting closer at least on the bottom end to what you see with selling and commerce suites.

Derrick Wood - Pacific Growth Equities

Okay. Competitively, are you seeing any change in win rates against IBM?

Bob Burke

No, we’re not. So, we continue to do well there. We continue to do well in replacing people like Microsoft. So in terms of the overall competitive landscape, I would say it’s not changed.

Derrick Wood - Pacific Growth Equities

And any change in urgency to move off of Homegrown or that just seems like a continued driver for your business?

Bob Burke

It is a continued driver and I think what you’re seeing is that people come to a point and they realize they can not only not handle the volumes that are required, but also the things that they want to do cross channel or with more aggressive promotions or merchandising are just not things at their current platforms support or certainly their Homegrown solution.

Especially in these kinds of times when people are not able to keep all the staff or recruit the staff that they would like to have, which of course that’s what a homegrown solution requires, especially as it scales up, that certainly plays into our ROI story in terms of having a more packaged approach.

Derrick Wood - Pacific Growth Equities

Okay, last question around the pipeline; are you guys seeing any change in the pipeline with respect to geographies? Is there more coming from international regions or is that mix pretty consistent?

Bob Burke

The mix was slightly up in terms of overall revenues. We don’t break up pipeline by geography, but I do think that we are starting to see some of the benefits of our increased focused internationally, so I would expect by the way that that ratio continues to move a little bit more in the international direction, just because of the opportunity base there.

If you look at certain verticals, certainly between the rest of the world outside of North America, there’s a lot more opportunities for TelCo for example, than there are here. So, I would say that over time we would expect and have started to see that in terms of our pipeline shift more to the international markets.

Derrick Wood - Pacific Growth Equities

And sorry, is competition different out in Europe?

Bob Burke

It can be in certain geographies. IBM is still certainly the main competition, but as you get into some home territories, particularly like Germany, that’s really the only place where we would see people like SAP even having somebody considering them as an eCommerce solution.

Derrick Wood - Pacific Growth Equities

Great. Thanks for the color.

Julie Bradley

Great. Thank you.

Operator

There are no further questions. Do you have any closing remarks?

Bob Burke

I just want to say thanks for joining us this morning and accommodating our fire drill that we encountered this morning. Unfortunately, we can’t anticipate everything and we do look forward to seeing many of you on the road this quarter and we’ll look forward to talking to everyone else at our next earnings call after the end of Q2. Thanks again.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Art Technology Group Inc. Q1 2009 Earnings Call Transcript

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