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Vocus (NASDAQ:VOCS)

Q1 2013 Earnings Call

April 23, 2013 4:30 pm ET

Executives

Stephen A. Vintz - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Secretary and Treasurer

Richard Rudman - Co-Founder, Chairman, Chief Executive Officer and President

Analysts

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

David M. Hilal - FBR Capital Markets & Co., Research Division

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Operator

Welcome to the Vocus First Quarter 2013 Earnings Conference Call. The date of this call is April 23, 2013. This call is the property of Vocus Inc., and any recording, reproduction or transmission of this conference call without the expressed prior written consent of Vocus Inc. is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of Vocus website.

I will now turn the call over to Steve Vintz, Vocus' Chief Financial Officer. Please go ahead.

Stephen A. Vintz

Good afternoon. We are very pleased that you could join us today to discuss Vocus' results for the first quarter 2013.

Now I'll cover the Safe Harbor Statement, then turn the call over to Rick Rudman, Chairman, President and Chief Executive Officer.

During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. We want to remind you that these forward-looking statements are based on information available to us today, as of today's date, and are subject to risk and uncertainty. We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future. We encourage you to review our filings with the Securities and Exchange Commission, which are available at www.sec.gov, for additional information on risk factors that could cause actual results to differ materially from our current expectations.

We also intend to discuss some non-GAAP measures. A reconciliation of GAAP and non-GAAP results is also available in the press release we issued today, which is on our website at www.vocus.com.

Our non-GAAP results and guidance does not include stock-based compensation, amortization of intangible assets, acquisition-related expenses, adjustments in deferred revenue and contingent consideration for earn-outs related to acquisitions, as well as the treasury stock effect of outstanding equity securities and stock-based comp on our diluted share count.

I will now turn the call over to Rick Rudman. Rick?

Richard Rudman

Thanks, Steve, and thanks for joining us today on our Q1 earnings call. Q1 was highlighted by continued success in accelerating demand for the Vocus Marketing Suite, coupled with lower-than-expected bookings for some of our standalone products. While we're moderating our overall outlook for the year, the success for staying with our Marketing Suite gives us additional confidence in our strategy to transition Vocus from a standalone PR software company to a leading provider of integrated digital marketing solutions. I'll start by providing an update on the Vocus Marketing Suite, and then cover some of the challenges that we saw in Q1 and conclude with a broader outlook of our strategic initiatives and outlook for the remainder of 2013.

In terms of the Marketing Suite, we couldn't be more pleased with the market demand and sales success we're seeing. In Q1, we added over 1,300 new Marketing Suite customers, bringing our total number of Marketing Suite customers to over 4,000.

We sold close to $6 million in Marketing Suite subscriptions in the quarter, representing over 230% growth on a year-over-year basis. To put this into context, in 2012, we sold approximately $12 million in Marketing Suite subscriptions, up from approximately $2 million in the prior year.

At the beginning of the year, we were expecting to double bookings for the Marketing Suite in 2013. Looking forward, based on Q1 performance, strong macro demand for digital marketing and our expanded direct sales capacity, we now see our goal to double Marketing Suite subscriptions as too conservative. With this in mind, we're expanding our marketing efforts behind the success of our Marketing Suite and now expect to triple the business in 2013, with bookings in the mid-$30 million range.

As we look out at the digital marketing landscape, we believe this represents one of the most successful stories in the marketing cloud space, supported by one of the fastest-growing and most complete integrated marketing suites available today. No other solution today brings together the essential components of digital marketing, including social search email and PR, together on an integrated platform that delivers rapid and measurable ROI across all of these channels.

Our overachievement with the Vocus Marketing Suite in Q1 was offset by lower-than-expected bookings in standalone point products, including PR and our low-end email and news release products.

In the standalone PR market, the industry continues to evolve with PR departments competing for budget dollars that are now being funneled into social media and other new direct-to-consumer marketing channels. We had expected to see standalone PR subscriptions grow in the low single-digits this year, however, in Q1, we saw a low single-digit decline instead. Given this, we're moderating our outlook for standalone PR subscription for the remainder of 2013.

On a long-term basis, we believe we can essentially maintain level bookings for standalone PR subscriptions.

Looking at our low-end email and press release point products, we generated lower bookings in Q1 as we began evolving our market strategy to deemphasize these low endpoint products in favor of adding incremental support to our integrated Marketing Suite.

Today, many of our standalone email and news release products are sold to micro businesses that spend approximately $500 per year, making them an unlikely fit for our integrated Marketing Suite, which is designed for marketing professionals and increasingly for marketing departments in the mid-market.

In addition, we believe that selling an integrated Marketing Suite to marketing professionals and marketing departments is orders of magnitude more attractive than selling low-end point products to micro businesses.

Growth, profitability and renewal rates are all enhanced by strategically targeting the sales of integrated Marketing Suites. Our focus of marketing resources is driving growth of our integrated Marketing Suite, which is a more strategic and higher-margin business, though it will put pressure short-term on bookings and revenue from low endpoint products.

Over the next few quarters, however, we believe our marketing strategy will drive accelerated bookings of the Marketing Suite, while also supporting our new packaging and pricing and our expansion further upmarket. We believe our focus on selling integrated Marketing Suite subscriptions and further moving into the mid-market will ultimately create the best success for Vocus and the best long-term value for shareholders.

In summarizing the quarter, we're seeing better-than-expected success with the Marketing Suite, which we now expect to triple from $12 million in 2012, to the mid-$30 millions in 2013, though coupled with lower bookings from standalone PR subscriptions and the other low endpoint products.

While on a combined basis, we're moderating our overall bookings targets for the year, we're excited about the rapid growth of the Marketing Suite, which represents the best and largest opportunity for us going forward.

In addition, we expect to see bookings accelerate going forward as the Marketing Suite becomes larger component of our overall business.

I'd like to spend a few minutes now covering a major new initiative for our integrated Marketing Suite that is rolling out on May 1.

In December, we released the latest version of the Vocus Marketing Suite with integrated e-mail marketing and advanced social marketing, including our unique Buying Signals technology.

Customer acceptance of the Marketing Suite has continued to exceed our expectations, with increasing interest from marketing professionals and marketing departments in the mid-market. Customer feedback has highlighted for us the unique ability of the Marketing Suite to attract, engage and retain customers and the tremendous return on investment our solution delivers, versus alternative marketing channels and technology solutions.

There's no better way to illustrate this than through the experience of Pedersen Worldwide, one of our customers using the Vocus Marketing Suite. Pedersen Worldwide was established in 2007, headquartered in Sandy, Utah, a suburb of Salt Lake City. It's the parent company for Del Sol, a retail brand specializing in color-changing clothing and accessories and its sister brand, Cariloha, a retail brand centered on bamboo-based products. Pedersen Worldwide has an international footprint overseeing the operations in more than 140 freestanding retail stores in 26 countries and growing. Before Vocus, they described their marketing as misaligned and piecemeal. They knew that to increase sales and engagement for their clothing lines, they needed to move away from separate vendors, each providing different marketing point products, and bring everything together in one integrated solution so they could execute and analyze everything in one place and test different campaigns side-by-side.

They turn to the Vocus Marketing Suite. First working on their email subscriber list, which totaled nearly 100,000 recipients between the 2 brands. They were able to tighten up their email campaign subscriber list, look at who opened the campaigns, track that email and clean their list to get better results.

From there, they revamped their social media outreach adding contests and promotions to each brand's Facebook page, using our customizable Facebook campaign apps. Alongside their email and social media marketing, they then began increasing their brand's visibility by publishing online news releases for their 2 brands.

The results speak for themselves. And -- since implementing Vocus, their online retail sales have increased by 300%. They are now found on the first page of Google search and they're able to implement big company digital marketing with a marketing staff of only 5 people.

This is a great example of the type of customer we're attracting with the Vocus Marketing Suite, and also a window into the world of the modern integrated digital marketing department. However, as we look at the value we're delivering, we see a mismatch between our high ROI, our low selling prices and the more expensive alternatives in the marketplace. We believe there is significant opportunity to reposition our product offerings for better alignment in these areas. On May 1, we have new packaging and pricing going into effect that positions our marketing solution 50% to 150% higher than our current price points, reflecting the value that customers like Pedersen and others are receiving. We believe this new positioning makes sense based on customer feedback, enhanced capabilities in our May release, and competitive alternatives in the market.

In addition to the enhancements we launched in our December release, our new packaging includes added capabilities such as mobile marketing, advanced news monitoring, financial visibility news releases and consulting services. Later this spring, we'll also be introducing APIs that will provide the ability to integrate our Marketing Suite into our customers' existing CRM and e-commerce platform.

In conjunction with our May release and consistent with our strategy to push further upmarket, we're discontinuing the sale of our small business addition, which is our low-end press release point product. This further underscores our commitment to serving marketing professionals and marketing departments with an integrated digital marketing cloud.

In summary, this is an exciting time at Vocus, and we remain confident in our ability to emerge as the leader in the marketing cloud space. While we are moderating our overall expectation somewhat, we are also accelerating our expectations for the integrated Marketing Suite, which is emerging as one of the fastest growing and most successful marketing cloud available today.

In addition, we're excited about our new packaging, pricing and marketing initiatives, which will help us push further up market.

I'll now turn the call over to Steve, who will provide us with some additional information on the business. Steve?

Stephen A. Vintz

Thank you, Rick. I'd like to start today by covering some detail on the income statement.

Non-GAAP revenue for the quarter was $46.3 million, which represents a 30% increase year-over-year and a 2% decrease over the prior quarter.

Our Q2 revenue includes approximately 150,000 of headwinds related to exchange rates. Please note that non-GAAP revenue excludes the effects of the write-down in deferred revenue of approximately 400 -- excuse me, $44,000 for the quarter related to the iContact acquisition, which closed in February of last year. All references to revenue herein are on a non-GAAP basis, which we believe more appropriately reflect the economic realities of our business and the revenue that otherwise would've been recognized from acquired companies on a standalone basis.

Total active annual subscription customers increased by 828 this quarter compared to 1,196 last year. To get some context to our net adds for the quarter, it's worth noting, the vast majority of our net new customers came from the Marketing Suite, which is consistent with the growth trends we're seeing in our business.

In terms of bookings, our Q1 calculated billings, defined as the change in deferred revenue plus revenue, was $45 million, which represents 23% growth year-over-year. While calculated billings were softer than anticipated for the quarter, it does include approximately $800,000 in FX headwinds related to a stronger U.S. dollar versus what was contemplated in our guidance.

Aside from exchange rate, we'd likely to have seen another $3 million in billings for the quarter. Standalone PR subscriptions were soft by approximately $2.2 million, and our low-end iContact and PRWeb point products came in approximately at $700,000 light as we began shifting marketing resources in Q1 away from these low endpoint products to the Vocus Marketing Suite.

We expect these trends will continue through the remainder of 2013, and I will discuss this in greater detail when I review our updated outlook for the year, which incorporates these new dynamics.

We ended the quarter with 17,321 active annual subscription customers compared to 13,103 at the end of Q1 2012, and 16,494 at the end of Q4 2012.

On the cost side, our non-GAAP gross margin for the quarter was 82% or flat compared to the same period last year, and down from 84% last quarter.

Our gross margin for the year is in line with expectations and reflects the seasonal increase in payroll taxes for the first quarter. Non-GAAP operating expenses for the quarter were $35.5 million, a 25% increase over the prior year and flat from the prior quarter.

As a percent of Q1 revenue, sales and marketing costs were 56%, R&D was 5%, and G&A was 16%. Sales and marketing expenses were $25.9 million this quarter, compared to $19 million last year and $26.2 million last quarter.

The decrease in sales and marketing costs over the prior quarter was primarily related to lower sales commissions and incentive compensation attributed to lower sequential billings in the quarter. As a reminder, the fourth quarter is seasonally our strongest quarter as it represents 30% of our total calculated billings for year. It's also worth noting that Q1 sales and marketing costs include approximately $0.5 million dollars of higher-than-expected marketing expense for our North Social Facebook applications business which is operated standalone from Vocus the last 2 years due to an earn-out that expired this past February.

Since North Social revenue was better than expected in Q1, we recorded a $3.5 million charge in the quarter related to the additional contingent consideration earned. Consistent with past practice, charges related to fair value adjustments from contingent consideration are excluded from our non-GAAP results.

Research and development expenses were approximately $2.4 million this quarter compared to $2.5 million last year, and $2.2 million last quarter. R&D expenses increased sequentially due to higher payroll taxes. Looking ahead, we expect R&D expense as a percent of revenue to be 5% for the remainder of the year. General and administrative expenses were $7.2 million this quarter compared to $6.9 million last year, and $7.2 million last quarter.

For the year, we expect G&A to be around 15% of revenue. In terms of profitability, Q1 non-GAAP operating income was $2.5 million, an increase compared to $854,000 in the first quarter of 2012, and a decrease compared to $4.4 million last quarter.

Operating margin was 5.5% this quarter, compared to 2.4% last year, and 9.2% last quarter. Non-GAAP net income was $2.1 million for the quarter, compared to $452,000 last year, and $3.9 million last quarter. Non-GAAP diluted earnings per share was $0.09 for the quarter, compared to $0.02 last year, and $0.16 per share last quarter.

Now, onto our balance sheet and cash flow. We closed the quarter with $41 million of cash, cash equivalents and investments, up $32.8 million at the end of Q4. Please note that we did not draw down on our $50 million revolving credit facility this quarter, which is available for future borrowings and which, added to our cash, cash equivalents and investments, gives us over $56 million of cash and liquidity resources.

In terms of sources of cash, we generate $8.5 in free cash flow this quarter, compared to $3.6 million last year, and $7.4 million last quarter. Accounts receivable decreased to $21.6 million, from $29.8 million at the end of last year, and DSOs for the quarter was 43 days.

Deferred revenue totaled $78.1 million at the end of the first quarter, which represents an increase of $10.1 million over last year.

Now let's turn our attention to the guidance for the second quarter and full year 2013. I'd like to start by discussing some of the dynamics that are affecting our top line and specifically our outlook for billings for the remainder of the year and the associated impact on our other financial metrics. The guidance we are providing today assumes calculated billings of approximately $210 million to $212 million for the full year, which represents 13% to 14% growth year-over-year. At the midpoint of the range, we're assuming $17 million of lower billings for the year.

The guidance that we initially provided on our February call contemplated single-digit growth for standalone PR subscriptions for the year. However, the market dynamics in Q1 are changing quicker than what we had anticipated as our PR subscription business actually declined in the low single-digits in the quarter.

If extrapolated out for the rest of the year on approximately $95 million of aggregate PR billings, this represents a 10 percentage point swing, or approximately $10 million shortfall in billings for the year. The remaining $7 million is a function of the marketing shift we started to make in the first quarter with regard to low-end email and press release point products that is expected to temper our outlook for the rest of the year.

Specifically, we are reallocating investment away from point products such as iContact email and PRWeb press releases, including our Small Business Edition, which we will no longer sell starting in Q2 in favor of driving more sales of our integrated Marketing Suite. While this is expected to pressure revenue on earnings short-term, we believe our focus on selling subscriptions for the Marketing Suite will help us win share in the mid-market and create the best returns for our shareholders long term.

Our guidance today not only reflects lower estimates for billings and revenues for the year but also expense savings from a realignment of our cost base in order to drive operating margins higher in this back half of the year. Accordingly, our guidance assumes an average operating margin of 4% in the second half of the year, and sequentially equivalent [ph] revenue growth in Q3 and Q4.

Our guidance assumes the following: For the second quarter of 2013, revenue is expected to be in the range of approximately $45.1 million to $45.5 million; non-GAAP EPS is expected to be a loss of $0.03 per share to a loss of $0.02 per share, assuming an estimated tax provision of $450,000; operating income and cash flow from operations is expected to be breakeven while free cash flow is expected to be in the range of negative $3 million to negative a $3.5 million, related to the billing of our new office space in Manila and the U.S.

Non-GAAP charges are expected to be $0.32 per share. GAAP EPS is expected to be in the range of a loss of $0.35 a share to a loss of $0.34 a share assuming an estimated weighted average 20.1 million basic and diluted shares outstanding.

For the full year 2013, revenue is expected to be in the range of $188 million to $189 million. Non-GAAP EPS is expected to be in the range of $0.15 a share to $0.18 a share, assuming an estimated weighted average 24.4 million diluted shares outstanding and an estimated tax provision of $1.7 million. Non-GAAP charges are expected to be $1.38 per share. GAAP EPS is expected to be in the range of a loss of $1.23 to $1.20, assuming an estimated weighted average 20.1 million basic and diluted shares outstanding. Free cash flow is expected to be in the range of $12 million to $13 million for 2013, which assumes CapEx of $6.5 million.

So at this time, I would like to turn the call over to the operator, so we can take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Terry Tillman with Raymond James.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

I just had a couple of questions, and I'll get back in the queue. The first question for Rick or Steve just relates to -- this has been fluid over a number of quarters in terms of, kind of, the evolution of the business. And last couple of quarters, you've been talking moving more into the mid-market. Is there a further shift to where we're talking at the higher end of the mid-market or maybe in the enterprise market? Because what I'm getting at is, if that's the case, how do you even fully reflect the required expenses and types of professional services staff you would need to have more of an enterprise-kind of class business and product set?

Richard Rudman

Sure. This is Rick. That's a great question. So I mean, for now, when we talk about pushing further upmarket, we're really still focused on what we would call the mid-market. So we're still -- we're not looking to do large enterprise deals that have lengthy customization and integration projects. We're just looking for movement here beyond selling marketing suites that have an average selling price of about $5,000, which is where we've been historically. Our new pricing and packaging that goes into effect May 1, is our first major move in that direction and we're going to have -- we now have additions that will sell for $12,000 and $30,000 a year. So for us, that will be more of a model that is based on some additional consulting work and services, which by the way, is already all factored into our model here. We've been hiring some of those consultants this year already. And that will really reposition us, again, more towards subscription in the $10,000 to $30,000 range, not all the way up to the high end of the enterprise market.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. And then -- and one question in terms of -- I mean, Steve, I appreciate the color in terms of the PR business and I think you quantified it at $95 million PR billings and it's now negative variance of about $10 million. So as I think, what you said is it's now going to be down single-digits, but I guess, I mean, I'm just worried, I mean, could that be a moving target here in terms of what gives you comfort that it could be down mid single-digits? Because the economy isn't great, I'm assuming this is more economically cyclical part of the business. What have you done to kind of make that model-proof in terms of down single-digit considering that we've already had this negative variance now? Why couldn't it have been worse than that, actually?

Richard Rudman

Well, look, we're looking at Q1, we're looking at what we saw there. And as Steve said, we're modeling those metrics now going forward. So we're not seeing things getting worse. We think that's -- we think, at this point, that's the right way to look at the business going forward. And we've made those adjustments. I mean, it's also possible we could end up being better than we expect. But at this point, we think it makes sense to take the metrics that we brought in, in Q1, and apply them on a go forward basis.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. And just my last question related to that. I know you're not giving out the [indiscernible] when you talked about the last quarter but given some of the fluidity and the kind of the moving away from some of these point solutions and the sluggishness of the PR business, if you have to think about your sales capacity and what you're thinking about where it might be at the end of the year, has it dramatically changed or modestly changed? Or has it actually not changed much and it's just more of a shift to things focused on the digital marketing suite?

Richard Rudman

We're going to -- our plan has always been to grow via direct sales. We are seeing a lot of success with the Vocus Marketing Suite, a lot of that is coming via the expanded direct sales capacity that we've been working on. As we move away from the low- end point products and put some pressure on bookings and revenue there and also with softness in the PR market, we just want to be careful not to under-invest in the Vocus Marketing Suite, which is now one of the fastest-growing solutions in the market. So at this point, I guess we would probably describe growth in our sales force as being maybe moderated, certainly not on the scale of what we saw last year or anything close to that but we are still making investments to grow the direct sales force because that's fueling the growth and success of the Marketing Suite, which is the big opportunity here.

Operator

Our next question comes from Tom Roderick with Stifel, Nicolaus.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So Rick, if I look at just the history here, you personally bought $1 million in stock just 1 month ahead of the quarter-end. I guess the question is what exactly did you see in the first 2 months of the quarter to give you the confidence to do this? It all seems a bit incongruous with the results and the guidance, so I'm guessing something pretty sharply fell off the cliff in the month of March. Is that what happened? Is it a renewal rate issue? Maybe just some more clarity there.

Richard Rudman

Sure. Well, look, first of all, when I buy stock, I'm not privy to any material nonpublic information, but I'm a long investor. So I bought stock because I believe in the vision, the strategy and our ability to emerge as a market leader in the cloud marketing space, which is enormous. So there's plenty of emerging success stories out there of other companies that are building a lot of value there and we believe that we're one of them. To your point though, yes, I think it's fair to say that the softness that we saw and the beginnings of evolving our marketing strategy really occurred more so in March than in the prior couple of months.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then when you talked about the point solutions slowing but you're getting more enthusiastic about the Marketing Suite itself means to a certain degree, you've been bundling some point solutions as part of the Marketing Suite. How much of this suite success is cannibalizing those point products such that we should look at the whole thing holistically? Maybe just kind of walk us through the elements of bundling these offerings up into part of the suite and selling a broader subscription, and what that means for historical point purchases.

Richard Rudman

Sure. Some of it, yes, I mean, some of the success with the integrated Marketing Suite is coming, I guess, you could say at the expense of people moving away from the low endpoint products. Obviously, it's an upgrade for us. It's a better long-term customer for us. And then other success in the Vocus Marketing Suite is just simply based on the acceptance of the product in the marketplace and our shifting strategy to put more marketing dollars behind it. So some of the low endpoint products are making their way into the Marketing Suite but some of them are simply not going to be able to derive the benefits -- mainly the micro businesses and the small part-time businesses, not going to be able to derive all the benefits of the integrated Marketing Suite or really afford the price points and our vision for being a leading product for marketing professionals and marketing departments. So some of that, on the low-end, will make it over and others will just have to let the chips fall where they may on the lower end customers.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Steve, last one for me. Let me ask Terry's question in a different way, just with respect to the number of sales adds, that you guys don't give that metric anymore. You lowered your EPS guidance pretty materially for the year. Can you just give us a sense of how much of that is tied to the revenue? The revenue guides down, as opposed to continuing an aggressive phase of sales hiring throughout the year? Perhaps even more aggressive to hit these triple -- these targets that triple the Marketing Suite?

Stephen A. Vintz

Sure. Well, as Rick commented earlier, we couldn't be more pleased with the momentum we're seeing for the Marketing Suite. So if you consider our outlook for the quarter and the rest of the year, it does assume that we'll continue to hire behind the strong demand for the Marketing Suite. So you should expect to see expanded sales capacity in Q2, more hiring in Q2, as well as for the full year. Now it's not the pace in which we did that last year, but certainly we do expect to grow through expansion of our direct sales channels. However, with some of the softness that we saw on PR and the shift away from low endpoint products to the suite, we are realigning our cost base. So there are some cost savings in the quarter that we're factoring in. It doesn't really come into play until late in the quarter. But if we look at operating margins, we're targeting basically breakeven in Q2, an average of 4% the second half of the year with higher operating margins in Q4. But it's really a function of less revenue due to a more tempered outlook and then incremental costs associated with hiring offset by some savings.

Operator

Our next question comes from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Guys, I'm a little interested in trying to figure out the niche of the market you guys are going after. It's not the low-end and not the enterprise. Can you give me a little more sense of the profile? I mean, you gave the example of Pedersen, it's a company I haven't heard of before. But is that the profile or the type of customer that this product will address? And then secondly, who do you see competitively that's in that niche of the market?

Richard Rudman

Sure. Generally speaking, our target market, really, companies with more than 5 employees but less than 2,000. So -- and we would describe that as the mid-market. Once -- we see companies once they get above kind of 5 or 6 employees typically start to formalize marketing and hire somebody to handle that for them or allocate dollars, they have a professional marketing person, that'd be at the low end. And then more so, marketing departments -- Pedersen, for example, has a marketing department of 5 people, that would be in our sweet spot. I don't know their revenues, they are private. They do disclose revenue per score. And I estimated that they're probably ballpark $100 million plus in revenue. So that's really the ideal customer for us. Competitively, we would see solutions like HubSpot and Marketo being in the mix there in terms of going after those marketing departments.

Stephen A. Vintz

Brendan, I'd just like to add -- this is Steve. One of the reasons why we're so keenly interested in mid-market is not only is they're a favorable market dynamic and we have a great product to compete. But on the financial side, it offers -- the ASPs, we expect to be higher, the renewal rates we expect to be higher, margins are higher. But the low end, we typically see, maybe, kind of the soccer moms and beauticians and micro businesses that characterize with some higher turn just in terms of where we see it higher turn and set our margins something more competitive. Getting back in that focus on the mid-market is really a focus what we were before when we were a PR-only software selling really at the high-end, 30k 40k and 50k solutions. We expect our dollar renewal rates to tick up over time, we expect margin leverage, and we expect all higher ASPs. So that's the take on the market where we're comfortable, we've been focused before and where we think we can really compete effectively.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Great. And then if I look back at the iContact acquisition, what of that -- and it sounds like you're deemphasizing the email component of it but what of that acquisition is still left than you're really being able to leverage in the marketing and the accretive Marketing Suite?

Richard Rudman

Sure. Well, first and foremost, email marketing. The main reason that we acquired them and our main strategy, we still think, is get on. If you look at the value being created out in the marketplace today, in marketing automation, most of it is around email marketing. So we think it's the right place to be, we don't think you can have a marketing suite without email marketing and we believe it accelerated us in terms of our product roadmap by at least 18 months, if not 24 months. So we're really pleased with that. Again, it forms the foundation of why we acquired them. And in fact, as we look at our 2013 product roadmap, a lot of it is based on further enhancing email and adding lead scoring and other marketing automation features. So nothing's really changed in that regard. There is a component of the business also that is more of a mid-market component, you may recall, when we acquired them. And again, they're a great fit for what we're doing. At the low-end of the market, we did acquire with the acquisition came a certain segment of low-end customers that were paying $500 a year. And as Steve and I both explained today, going forward now, as we focus more on the mid-market, are probably not the best candidates for our mid-market marketing automation subscriptions. And we'll continue to service that base and keep that base. We're just not going to be focused on attracting more and new low-end email marketing customers.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Great. Guys, this is the last one for me. There's a pretty substantial price increase. Can you give us a little more color on kind of the work you did to test the kind of price elasticity you have around that? And that's it.

Richard Rudman

Sure. We did do a lot of research work mainly around customer feedback, competitive alternatives, customer case studies and ROIs. And look, I think a lot of it is, as opposed to going into a lot of the science behind it, I mean, a lot of it is really common sense. I mean, if you look at our old pricing and you look at the value of delivering email and Facebook apps and social media monitoring and engagement, our unique Buying Signals technology, we have subscriptions that are out there at $4,000 and $6,000 a year. And it's just -- if you look at that from a common sense perspective, and almost intuitively, it makes sense to think of those as subscriptions that are $12,000 and $15,000 and $30,000. That was all backed up by the research that we did. And so we believe we have the right shift here in terms of positioning of the Marketing Suite. And we're very confident that we have plenty of value and ROI built into those packages to support the new pricing.

Operator

[Operator Instructions] Our next question comes from David Hilal with FBR Capital Markets.

David M. Hilal - FBR Capital Markets & Co., Research Division

Rick, as you guys go upstream and you have these higher price points, I would think you're getting to a point now where you may be able to attract interest from some of the systems integrators as partners to help you from a distribution standpoint? I guess, do you think that's the case? Is that an opportunity for you to maybe expand distribution without expanding the cost base?

Richard Rudman

Yes, I do think that's an opportunity. And we're looking at some of those opportunities right now.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay. And on the cost base, I just want to be clear because you talked about -- I think Steve has talked about realigning the cost base but still adding bodies and so there is no -- I know you're going to move resources over from some of the point lower-end products to the higher-end Marketing Suite, but is there -- are there any plans to actually, given the uncertainty in the near-term, to have a lower cost base via less heads? Or it's still adding heads and just hoping it all kind of still pans out?

Richard Rudman

Well, I mean, we are getting some cost savings, so we're bringing our revenue down but we're bringing our operating income down by less than that. So there is some cost savings that we're getting. At this point, we're not really prepared to change our strategy on the new sales side given the results we're seeing behind the integrated Marketing Suite. We want to give ourselves a chance as we reallocate some of the spend away from the low endpoint products. And again, recognizing that it does put short-term pressure on bookings and revenue. We want to put those marketing dollars to work and leave our direct sales capacity in place because there may be upside here. Keep in mind, this pricing and packaging is rolling out May 1, and the marketing dollars that we've been reallocating away from the low endpoint products are in support of this initiative. So we will give ourselves a chance to see how effectively our sales reps are selling these new products and what the outcome is here. Down the road, if things don't play out as expected, we could revisit that, but for now, we're going to stick with our direct sales plan.

David M. Hilal - FBR Capital Markets & Co., Research Division

So those cost savings, how are you -- how are they being generated?

Stephen A. Vintz

It's a combination of salary expense related to headcount. It's a combination of sales commissions, incentive compensation. So I think there's about $12.5 million, I want to say, of softness in revenue and there's probably about $3.5 million, if you will, of cost savings associated with that. So not all that flows to the bottom line dollar per dollar. So reinvesting -- one thing I want to make is that the expansion in the sales capacity is what's driving some of this growth in the Marketing Suite. Just keep in mind, as Rick mentioned, in 2011, we launched the Marketing Suite, we did a little less than a couple of million of revenue. Last year, we did -- sorry, not revenue but billings. Last year, we did $12 million in billings. And this year, we're initially contemplating $24 million, but now, we expect that to more than triple, close to $36 million. So the investments that we're making behind the Marketing Suite is bearing fruit for us in driving some accelerated growth. However, there's some shifting of the dollars that's taking place. So that's all contemplated in the guidance. There's some moving pieces here. But long-term, where we want to go, given the market dynamics, given the value that's created in the marketplace for some of the pure play-only marketing automation companies, we know this is a shift that we need to make. And so short-term pressure on some of our financial matrix, but we are confident this will result in some long-term gain.

David M. Hilal - FBR Capital Markets & Co., Research Division

So some of that weakness on the PR side, the lower-than-expected bookings within PR, how much of that is attributable to -- you're usually at higher turn and you said are people not renewing and/or you've got weaker than expected sales -- new sales. And so as you kind of look at those 2 contributors to the bookings number, is one of those having a greater negative impact that's hurting the PR side of your business?

Stephen A. Vintz

A good question. Now it's approximately half and half; half is coming from new, half is in renewal. Again, we have one data point here, which is in Q1, okay? So it's not a lot to go off of. And what we have done in our outlook is temper that for the rest of the year by extrapolating out what we saw on Q1 for the next 3 quarters. And that's really the best that we can do at this point. To the extent that it's better than that, you'll see that in some of the numbers. But it's all we can do, is just go off the data points that we saw and the information that we have. So we think that's appropriate given where we want to go in the market.

Operator

Our next question comes from Jeff Houston with Barrington Research.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

I believe the number you gave out of annual subscribers added in the quarter was 828, and that was down from about 1,200 in the year-ago quarter. Was that decline a function of the -- of moving upmarket and price increases or is it simply the underperformance of certain point solutions?

Stephen A. Vintz

I think it was really more -- in terms of the current quarter, as I mentioned before, some of the softness we saw on PR is a combination of new business and renewals, both play a part in the net add number. So while our marketing business is scaling nicely and exceeding expectations, keep in mind it's probably going to be about $30 million, $35 million, $36 million roughly in calculated billings for the year. So going forward, that will represent a bigger part of our business. That will be accretive in terms of net adds. But what we're really seeing is the shift right now and some of the softness in PR that's muting the net adds number.

Richard Rudman

Right. Keep in mind also, just on the packaging and pricing as a reminder to everybody, and this shift upmarket, that all goes into effect May 1. So I just wanted to comment on that.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Okay. Then separately, could you talk a bit about the effort to upsell the acquired iContact customers to the Marketing Suite?

Richard Rudman

Sure. It's -- we've really ramped up our first team there around the beginning of the year, so it's a little bit early. We are upgrading customers from iContact to the Vocus Marketing Suite. That will be part of the shift, right, that people will see, again, away from the low endpoint products and into the Vocus integrated Marketing Suite. And again, there will be some customers in the base of iContact that will be great prospects for that and we will pull them along. And there'll be other customers in the iContact base that are simply too small really to benefit from the Vocus Marketing Suite and they won't upgrade.

Operator

Our next question comes from Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Just like to drill down on the price increases that are occurring May 1, of 50% to 150%, can you walk us through, kind of just remind us the additions, the different marketing suite additions you have and where pricing is kind of going on some of those different additions?

Richard Rudman

Sure. We have 4 basic additions. The entry point was $3,000 and that's going to $3,600. But keep in mind, in conjunction with that, we're also dropping our low-end, what used to be called our Small Business Edition, which is basically our PRWeb, press release point product. That started at $2,000. So that's going away. So effectively, our entry point is going from about $2,000 to $3,600. And then up the chain, what was $4,500 is now $7,200, what was $8,000 is now $12,000, and what was $12,000 is now $30,000. So that will give you a flavor for it. Again, though, people should be thinking of this -- this is not just a price increase. I just want to emphasize, we've repositioned these packages. We've added new capabilities to these packages. For example, at the high-end of the subscriptions, we now have mobile marketing where people can actually launch marketing campaigns via email and Facebook apps that go out over smartphones with a closed loop to track how people are interacting with those campaigns. So there's new features, there's new packaging and really a repositioning here. Again, based on customer feedback, we're getting the ROI that we're delivering. And $30,000...

Stephen A. Vintz

It's sort of the high-end.

Richard Rudman

It's really the high-end today of the subscription, however, there is the opportunity also today to add, potentially, services onto that as well. And we have a new product roadmap and initiative in 2013 that we think will further support that and potentially higher prices.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

So if -- what happens to the legacy customers who are on the $3,000 or $4,500 product, when they renew, are they going to renew at a higher price or are they grandfathered in at their legacy lower price?

Richard Rudman

Yes. So we will move our legacy customers over to their new products which, again, will have enhanced features and benefits. And then we will work with them on pricing of their subscriptions, which would be somewhere probably between what they're paying today and what the new pricing is. We wouldn't expect them to step up immediately to the new retail pricing. But over time, we would have a plan to migrate them there as they're getting the additional value out of the package that they have.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

And as we look at your business, you had built kind of a funnel where leads were flowing from PRWeb and flowing from iContact down to sort of the Small Business Edition and then some of the lower-end marketing suites and all of that was kind of aligned. And now you've moved over to the mid-market and I'm just wondering about lead generation and kind of building the infrastructure of flow around this new market if that's going to take time, and how you kind of readjust to that?

Richard Rudman

Yes, Steve, that's great question, and goes to, I think, a piece of what we're doing here. You're right, we do have these lead channels that essentially are PRWeb sign-ups and iContact sign-ups. They'll continue the flow through, a lot of them are great prospects, moreso for our small business group that is selling the Marketing Suite today but what you're seeing here in this -- in the enhancement of our marketing strategy is, really, then to take some of those marketing dollars that are really attracting the micro businesses today and reallocating them. We're taking them away from the point products. But we are putting them into new marketing programs, experimenting with other marketing programs more geared to the mid-market and they will take a little bit of time. And again, I think this is probably what we're seeing here today as we look out over the next few quarters. And our outlook here contemplates, again, the short-term pressure on maybe the loss of some of this low-end e-commerce and point product revenue, yet a delay in ramping up the marketing programs behind the mid-market products, and trying to figure out what kind of results we're going to get there. So strategically, I mean, we couldn't be more excited and confident that this is the right move for us. We believe we have the right products, but there is a little bit of a timing shift here as we go through the transition.

Operator

[Operator Instructions] Our next question comes from Richard Baldry with Wunderlich Securities.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

There's a fair value adjustment to the acquisition consideration in the quarter. Can you talk about whether that was at the sort of the high, medium or low end of what it could have been, depending on the performance of the entity? And then, it's hard to discern in the numbers, would've been, I guess, an upside contributor for the year. So sort of surprised even to see a reevaluation in that to a higher level?

Richard Rudman

Sure. Well, the contingent consideration relates to the acquisition of North Social, what's -- we closed 2 years ago. And most of our earn-out -- most of our deals do not have earn-out components, this one did, as a way to bridge the valuation gap. If you recall, the purchase price was $7 million down and North Social could earn up to another -- could earn up to $20 million, including the $7 million, so up to $20 million of consideration. The earn-out calculation is somewhat extensive towards the end of the earn-out period. So what we saw was a couple of hundred thousands -- probably $200,000 to $300,000 more of revenue, we skewed the earn-out payment higher. So overall, the total consideration was close to $19 million, business is performing better than expected. And as a reminder, the Facebook apps business is also included as part of our Marketing Suite. So it's part of our social tools.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Okay. And on the balance sheet, there's still a convertible preferred, it's a decent-sized obligation going forward. Can you revisit the terms of that? The maturity dates? Sort of what the conversion features might look like, sort of as a counterbalance to lower the expectations on the cash flow for the year ahead?

Richard Rudman

Sure. So there's a -- so the convertible stock that you see on our balance sheet is not a public market converter. It's a little different. The convertible stock was stock issued to the lead investor in iContact. And so the lead investor of iContact rolled their equity investment from iContact into Vocus when we closed the deal, they also took a seat on the Vocus board. And one of the principals there became a Director. So if you look at the terms of the convert, the conversion premium is roughly 10%. So that implies a strike price -- I want to say about $25 per share. They can convert at any time over the next 5 years. It's their option to convert. And when they do, it will convert into common stock. Or at the end of the 5-year period, they have a right to -- but only at the end of the 5-year period, they will have a right to put the convert back to us for the face value. Not interest or anything else included, but just for the face value, which is approximately -- we'll call it $75 million.

Operator

I'm not showing any other questions. I'd like to turn it back over to Steve Vintz for closing comments.

Stephen A. Vintz

We just want to thank everybody for joining us here on the call today. We look forward to speaking with you again soon. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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