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inContact (NASDAQ:SAAS)

Q1 2013 Earnings Call

May 02, 2013 4:30 pm ET

Executives

Gregory S. Ayers - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Paul Jarman - Chief Executive Officer, President and Director

Analysts

Mark R. Murphy - Piper Jaffray Companies, Research Division

Michael Latimore - Northland Capital Markets, Research Division

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Brian Murphy - Sidoti & Company, LLC

Operator

Good day, and welcome to the inContact, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. It is now my pleasure to turn the conference over to Greg Ayers, Chief Financial Officer. Please go ahead, sir.

Gregory S. Ayers

Thank you. Good afternoon. This is Greg Ayers, CFO of inContact. Welcome to our first quarter 2013 conference call. I will begin by presenting the Safe Harbor statement, and I will then turn the call over to CEO, Paul Jarman, to review our first quarter 2013 results and provide an update on important Q1 company developments.

Finally, I will provide additional detail on our financial results for the quarter before opening it up for Q&A.

For access to our news release and other information on inContact, please visit our website at www.incontact.com. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor statement for forward-looking statements made on the company's behalf. All statements, other than statements of historical facts, which address the company's expectations of sources of capital or which express the company's expectation for the future with respect to financial performance or operating strategies, can be identified as forward-looking statements.

Such statements made by the company are based on the knowledge of the environment in which it operates. But because of the factors previously stated, as well as other factors beyond the control of the company, actual results may differ materially from the expectations expressed in the forward-looking statements.

And now I will turn the call over to Paul Jarman.

Paul Jarman

Thanks, Greg. I'm pleased to announce that Q1 was another record quarter for inContact, giving us a very strong start to the year and great momentum towards achieving our 2013 plan.

During the quarter, we achieved the strongest bookings in the company's history, up 51% over Q1 of 2012. We experienced an increase in same-store sales, up 2% sequentially as we expand our footprint and existing customer accounts.

Consolidated revenue results for the quarter were also strong. Software revenue grew 31.5% year-over-year. Additionally, we see increasing leverage in our cloud model and generated adjusted EBITDA of $2.2 million in Q1, up 171% over Q1 of 2012.

These strong results are fueled by the increasing momentum of cloud adoption and our growing win rate in larger enterprise deals.

During our Q4 call, we mentioned a new Fortune 500 customer who selected us in early Q1. InContact is helping them to unify service across 4 enterprise contact centers with more than 1,000 agent seats, approximately 1/3 of which went live during the quarter.

Later in the quarter, we added an additional Fortune 500 customer, and now we have a count of 31 of these leading companies among our customer base. We currently have 13 customers that bill $500,000 or more per year in software revenues.

I'd like to focus now on 3 key drivers of our overall growth and momentum: Innovation, customer success and sales growth.

Q1 was an outstanding quarter for innovation at inContact. We significantly strengthened our cloud software platform, moving beyond core voice channels to include new types of customer interactions such as mobile, social, trouble tickets and CRM cases.

This quarter, we have made major advances in what we built, what we bought and how we partnered. In February, we announced the market availability of a major release of our award-winning cloud contact center platform. As center point of the new release, our cloud Universal Queue addresses a major pain point in the industry by enabling contact centers to harmonize their operations in a way that hasn't been possible in a traditional premise environment.

The cloud Universal Queue creates a single integrated flow of multichannel customer interactions, supporting all the ways that customers want to communicate with companies. This creates a superior customer experience, as well as a more efficient system for agents and gives contact center managers a complete view of their entire operations. This multichannel customer interaction management solution is extremely appealing to enterprise companies.

Our first release this year has been extremely well received in the market. Keith Dawson, Principal Analyst of Ovum Research said, "inContact is leading the way of this market, and this new release delivers strong value for their growing customer base." Building on our multichannel strategy during the quarter, we expanded into the exciting areas of social and mobile, which are relatively new and untapped markets in the customer service arena.

First, we announced a partnership with contact center social media specialist, SoCoCare, to enable Twitter, Facebook, LinkedIn and Blogpost to be scaled, prioritized and routed by the inContact platform. This means that organizations can combine social cases with all other work items being handled in the contact center.

Next, through the small technology acquisition of Silicon Valley-based Sierra 360, we added powerful mobile capabilities to our cloud platform, delivering new ways to support connected consumers on virtually any mobile device. This acquisition gives us both the product IP and subject matter experts we need to deliver a compelling offering for mobile chat, click-to-call and mobile co-browsing later this year.

In summary, this rapid pace of innovation and focus on new channels of communication helps our customers to future-proof their contact centers. This gives inContact strong competitive advantage, provides revenue uplift with cross-sell and upsell offerings and makes us a great fit for enterprise customers who require these robust capabilities.

As I mentioned earlier, the momentum of cloud adoption is increasing, and we are experiencing success across a variety of vertical markets. I will highlight 3 verticals today, including business process outsourcing, financial services and travel and hospitality.

InContact continues to be the solution of choice for business process outsourcers, or BPOs, who provide outsourced customer experience services. These companies are looking to cost effectively scale to address customers' campaigns and programs. As outsourcers, they have more rigorous requirements for flexibility, scalability and reporting than typical in-house contact centers. So the cloud is a very good fit for their needs.

In Q1, we won 7 new BPO customers, including one that represents the single largest deal in the company's history once fully deployed. This leading global outsourcer selected inContact to streamline operations across multiple onshore and near-shore contact centers that operate round-the-clock in 18 different time zones.

In addition, this service provider relies on over 5,000 highly skilled agents who have industry and professional expertise and are particularly attracted to the opportunity to work from home. The company's highly specialized services include customer care and help desk support in a range of industries including banking, insurance, health care, utilities, government, telecommunications and high-tech.

We have also seen additional cloud adoption in the financial services market and added 7 new customers in this segment during the quarter. Historically, financial service providers have been slow to refresh their technology infrastructure because of the heavy capital investment required with premise technology. Now these companies are being compelled to integrate inbound and outbound channels to proactively send messages on balances, fraud and other alerts and to provide a wide array of self-service options.

For financial services, the inContact cloud platform provides seamless and consistent service across channels and site locations. Our software enables cross-sell and upsell opportunities and ensures that the right contact center resources proactively service the highest value clients, all while reducing operational costs and improving efficiency.

And finally, during the quarter, we signed 2 new travel and hospitality service companies. Customer service is paramount in the travel industry where brand loyalty can be destroyed by poor service. These new travel service customers selected us to unify operations and simplify call routing across multiple call center locations. InContact's ability to handle multichannel interactions and integrate with CRM systems gives us frontline agency information they need to provide a high-quality experience no matter how customers choose to connect, whether via voice, email, chat, mobile or social channels.

Our cloud software enables the travel and hospitality industry to scale up according to seasonal needs and to deliver end-to-end connectivity, visibility and reporting across all locations.

I'd like to now turn to our go-to-market strategy. As discussed on our year-end call, we have continued to grow our direct sales team to convert the opportunities generated by marketing and channels into closed business. We now have 38 quota-carrying sales people in the company. Bill Robinson, our EVP of Sales has improved the on-boarding process for new hires, which now includes tailored training, as well as direct marketing and pipeline development programs to get them productive quickly.

We continue to experience very positive momentum in our reseller channel during the quarter and approximately 19% of closed deals were a direct result of these relationships. We are encouraged by the reseller performance in Q1 and have continued this momentum into Q2. For example, with Verizon, we closed our largest channel deal ever with a financial services customer that has multiple locations and more than 1,000 agents. In addition, Verizon is proving to be a great channel to increase our government business, and we've seen success with state and local government deals in both Q1 and in Q2.

We also made progress with Siemens this quarter and closed our largest joint deal to date with -- since the partnership began. In support of the renegotiated contract with Siemens that we discussed last quarter, our focus in Q1 was also to facilitate the onboarding of Siemens' new dedicated inContact sales team. Two weeks ago, we graduated the first 5 Siemens U.S. salespeople who attended the new weeklong sales training at our Salt Lake City headquarters. We are actively engaged in supporting Siemens' hiring of the additional committed sales heads in EMEA and will onboard these as well.

Siemens' pipeline has improved over the past 3 quarters, and we are confident in the traction they are beginning to achieve. Our combined pipeline of reseller deals continues to climb each quarter. Entering Q2, reseller deals are approximately 23% of our total pipeline, which is up 130% from just 3 quarters ago when we began to track this metric.

In summary, this was a great quarter for inContact. We have a clear leadership position in a market that is rapidly growing and have the right innovative products that contact centers need to address their biggest challenges. We are winning in a variety of promising new vertical markets and are having increasing success in large enterprise deals. We have a strong and growing distribution channel to help us reach the broadest possible audience for our award-winning portfolio solutions. These factors give us great confidence in our strategy and in our guidance and growth commitments for 2013.

Now I'd like to turn the call over to Greg to provide additional details on our Q1 financial results.

Gregory S. Ayers

Thank you, Paul. First, I will recap the definitions for our 2 operating segments, Software and Telecom. I will then cover our Q1 operating segment and consolidated results, as well as other financial highlights.

Our first segment is the Software segment, which includes all monthly recurring revenue related to the delivery of our software applications, as well as associated professional services and setup fees. The Software segment does not include any telecom revenue.

For Q1 2013, I'm pleased to report that our Software segment revenue increased to $16.2 million, which represents a 31.5% increase or $3.9 million over the $12.3 million in Q1 2012. Q1 '13 marks the 10th sequential quarter of Software segment revenue growth. This increase was driven by the following 3 key drivers of our software revenue: The first driver of quarterly software revenue growth is the existing customer retention. Our software revenue retention for the quarter remained strong and was consistent with previous quarters at a rate above 92%.

The second driver of quarterly software revenue growth is the variable utilization of software services by existing customers. This metric fluctuates due to seasonality, customer service activities and macroeconomic conditions, as well as the revenue generated from the sale of additional services to existing customers. The measurement of this revenue growth is similar in concept to the retail industry's uses of the same-store sales metric.

In other words, it excludes attrition and new customer contract revenue. With these existing customers, we experienced the same 2% sequential increase in Q1 of 2013 that we experienced in Q1 of 2012.

The third and final driver of our Q1 software revenue growth is revenue from new contracts that are not yet included in the same-store sales metric. We closed 57 new contracts in the first quarter, 39 of which came from new customers and 18 of which were upsells to existing account, where we expanded our footprint in agent seats, new locations or additional software application offerings. We estimate the expected future value of these contracts will be approximately 51% higher than the total estimated annual contract value of our Q1 2012 bookings.

As a reminder, we will recognize the majority of the incremental revenue of Q1 bookings beginning in Q3. Some of the larger deals that were booked in the quarter will be incremented in stages, with revenue coming later in the year.

It should be noted that the Q1 Software segment was impacted by approximately $120,000 due to a longer professional services revenue amortization period related to a positive increase in average customer life.

In Q1 2013, Software segment gross margin was 60% on a GAAP basis and 72% with noncash charges added back compared to Q1 2012's 59% and 71%, respectively. This slight improvement in GAAP gross margin is attributable -- principally attributable to leveraging infrastructure costs against higher levels of quarterly revenue. Q1's $9.7 million of Software segment gross profit represents a company record.

Our second segment is the Telecom segment, which includes all voice and long distance services provided to both our Telecom-only legacy customers, as well as to our Software segment customers.

Telecom segment revenue for Q1 2013 was $15.5 million, a $2.2 million or 16.7% increase over the $13.3 million in Q1 2012. The Q1 Telecom segment gross margin increased to 35%. This increase from Q4 2012 is principally attributable to continued leverage from our telecom equipment investments.

Telecom revenue generated by software customers continues to grow and for the quarter, represented approximately 80% of total Telecom revenue, up from 76% in Q4. Q1's $3.4 million of Telecom segment operating income also represents a company record.

Our consolidated results for Q1 are as follows: Consolidated revenue increased to a record $31.6 million, a $6.1 million increase or 24% from Q1 2012. This revenue increase was driven by the growth in our Software segment and Software-related Telecom and is the 10th sequential quarter of consolidated revenue growth.

Now that the Software-related Telecom revenue has grown to 80% of total Telecom revenue, 90% of our consolidated revenue is either Software or Software-related Telecom and for Q1, represented $28.6 million.

Consolidated gross margin percentage was 48% in the first quarter compared to 44% for the same period in 2012. This meaningful increase in gross margin is principally attributable to improvement in the Software segment through leveraging fixed costs. But the Telecom segment also showed improvement in gross margin. Adding back noncash charges, consolidated gross margin percentage was 55% for the first quarter compared to 51% for the same period of 2012.

Operating expenses were $16.2 million, up $3.3 million from Q1 2012's $12.9 million. Approximately 43% of the increase came from higher levels of investment in Software segment sales and marketing. The investment in sales and marketing has paid off over the past 9 quarters as we continue to achieve year-over-year strong bookings.

GAAP net loss for the quarter was $1.2 million or $0.02 per share as compared to a net loss of $1.9 million or $0.04 per share for Q1 2012.

Adjusted EBITDA, which is a non-GAAP measure, is an important metric of our operating results due to the significant amount of depreciation and amortization, resulting primarily from previous acquisitions of software products, customer bases, network technology, amortization of capitalized software development costs and stock-based comp. Q1 2013 adjusted EBITDA was $2.2 million versus $816,000 during the same period in 2012.

Although pleased with this result, it in no way indicates a change in our strategy to manage the business to approximately $4 million in adjusted EBITDA for the full year. We anticipate that adjusted EBITDA will fluctuate in the remaining quarters of 2013 as we make necessary investments in our business.

Q1 marks the fifth sequential quarter that we have generated positive adjusted EBITDA and represents 17 out of the past 19 quarters that we've done so. As of March 31, we had $44.8 million of cash and had access to an additional $12.5 million under our line of credit and term note facility.

Based on the strength of our Q1 results, we're able to confidently reaffirm our financial guidance for the full year: software segment revenues of between $71 million and $74 million, total revenue of between $135 million and $139 million and adjusted EBITDA of the $4 million.

In summary, we are very pleased with the company's execution during the first quarter. We're off to a great start. Paul and I will now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to the side of Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Paul, I was hoping to get some more texture around the larger enterprise deals that you mentioned. How large are the businesses? How many contact center employees do they have? And relating to that, do you see a new catalyst that is driving these larger enterprises to throw in the towel on the older on-premise technologies more rapidly than you've seen them do in the past?

Paul Jarman

Mark, there are couple of things to that question. First of all, I am seeing larger companies have more confidence in the cloud, period. First of all because they've had experiences in other verticals and other areas. Secondly, I am seeing that we can successfully sell and service and implement these larger deals, which also gives them more confidence as they start to work with us. And I'm also seeing where in the past, these larger companies might have started with smaller seats and tested us, they're more willing now to start with larger implementations and put more commitment to larger parts of their business from the start. I think partly, it's the dissatisfaction in the premise model or their particular premise providers. I think it's confidence in the cloud, and I think it's our ability and capability to show that we're capable to handle their business.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Great. And as a follow-up, I wanted to ask how important has your infrastructure advantage been just in terms of security and uptime, the hot-swappable data centers that you've got, is that helping you to win in the competitive bake-offs? Or is it really more about the sort of an evaluation at the user interface level?

Paul Jarman

It's certainly both because these companies, as they make an evaluation, they look at what are my risks and what are my rewards. And our ability to go in there and talk about our redundancy, our scalability, our security, our uptime and the different things that lower their risk is the first step. Then secondly, our ability to show them the opportunity for savings, better customer set and the different channels, interfaces and really the flexibility that is created through the cloud then is the other side to that.

Mark R. Murphy - Piper Jaffray Companies, Research Division

And Paul, what are you seeing in terms of pricing trends across the various business segments? Is there any directional change in the price per seat that you're realizing? If some of the larger providers are increasingly dissatisfied with the premise vendors, is there less of a -- is it a less intense pricing negotiation that you're seeing?

Paul Jarman

I haven't really seen any major changes in pricing, not significant pressure nor significant increase in what we can sell it for. What I would say is that what the larger players look for more is what's my return on investment versus what's my TCO. So as we can effectively show them the advantages of self-service, of leveraging their employees, in that way, they're less sensitive to price as we show them really their return of what they can achieve through using inContact. But it varies across the board, Mark.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Okay. And then just a final question for you. How would you characterize the deal pipeline and the coverage ratios here as you're entering Q2? And/or any comments on the pace of activity thus far in Q2?

Paul Jarman

Yes, I mentioned a very nice deal that we won through Verizon in the talk, and it helped us have a great start to the quarter. We feel very good about second quarter as well and as I mentioned, are seeing really nice adoption.

Operator

We'll go next to the side of Mike Latimore with Northland Capital Markets.

Michael Latimore - Northland Capital Markets, Research Division

The last couple of quarters, you've given average deal size, could you do that again for this quarter, maybe compare that to the first quarter of 2012?

Paul Jarman

It was about 60% higher as an average versus a year ago.

Michael Latimore - Northland Capital Markets, Research Division

Okay. Do you have...

Paul Jarman

A nice increase.

Michael Latimore - Northland Capital Markets, Research Division

Yes, do you have an absolute dollar number there?

Paul Jarman

We don't necessarily give the absolute dollar value but like I said, it's the 60% would be the increase over last year's average.

Michael Latimore - Northland Capital Markets, Research Division

Okay, perfect. And then how about -- I know you have a little more flexibility to pursue channels in Europe? Maybe can you give us an update on kind of European channel development efforts?

Paul Jarman

You bet. So we are still -- we're actively working on some channels with Siemens, and we're also actively working on some additional channel directly through our own self-processes and people. We've begun that process. We are in some conversations in that area and have not announced any particular channel yet. But we have begun the effort, and we are in conversations with some key people.

Michael Latimore - Northland Capital Markets, Research Division

And then I'll let you summarize the Telecom revenue. This has been kind of in a mid-teens percentage growth rate for while. Does that seem like it should stay there for a while or is that might accelerate it? Or how do you think about that, generally?

Paul Jarman

It should stay in that area. Remember that as we sell through these in Europe or through Verizon, we don't include Telecom. And then some of the cross sell and upsell that comes from workforce optimization doesn't include Telecom. So what we see is more and more of our Telecom is associated to Software. There's less negative attrition against it from the legacy. But we also see more partners in Software that sold without it. So you kind of mix all that together, and we feel like just kind of it stays steady where it's at.

Operator

We'll go next to the side of Jeff Van Rhee with Craig-Hallum Capital Group.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

A number of questions. First, can you just touch on since Bill Robinson's arrival, you touched on -- maybe expand on it in terms of sales or changes process, structure. What's new? What has he changed?

Paul Jarman

Yes, you bet. So Jeff, we changed a few things. First of all, as I mentioned, we have streamlined our on-boarding process. We brought one of our team leads on the quota-bearing sales team and put him in charge of on-boarding and training, and have a very specific sales training curriculum today and process. We have done more targeted regional marketing, is it really a partnership with marketing and sell. We've also really done quite a bit of training and processes around how to work larger contact center deals and more enterprise type companies. We also worked a lot in the areas of how we run the territories, how we do solution selling. And the other thing that I would say is part Bill and part the situation we're in is we're seeing more qualified people approach us to sell for inContact. We hired someone recently, last couple of weeks, who had been working for premise ACD companies for around 15 years and approached us and said, "Look, I really want to move to the cloud. I'm not satisfied with the company I work for. Is there direction in the cloud?" And it happened to be a territory we were looking for and a nice fit for us and it's good to see us attract and bring in people like that.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Got it. And what's the year-end goal for sales heads?

Paul Jarman

Our first goal was to get to right around 40. By the end of the year, remember that we split them a little bit between how we work with a partner team and the quota-bearing sales team, but somewhere between 45 and 50.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

And how would that break down, the 45 and 50?

Paul Jarman

The 45 to 50 would be the quota-bearing sales people and then we've got about 8 to 10 that would be in channel.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay, okay. And then you mentioned the improved win rates in the enterprise, can you expand on that? Who are you -- first, are you seeing any differences in the people you're seeing, but is there a concentration of particular vendors that win rate's improving on or just expand on that?

Paul Jarman

Typically, the people that win these from have been the legacy providers. It would be the Avayas, the Genesis, the Ciscos or others that are providing that premise solution. And as they -- what we're getting a little more of today is it used to be they would say, "We'll let you talk about it but really probably would go premise." We're seeing more and more opportunities where they'd say, "We prefer the cloud. If we feel good about what you can achieve, we prefer this over premise." And that's been a nice emotional change in the recent quarters. And then typically, it's -- on the cloud side, it's been us. Sometimes, we've competed against interactive to win that deal against the legacy provider or some others.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. And then just 2 last quick ones. I guess, Greg, I need you to just expand or revisit that Q1 hit related to the change and I missed part of that $100,000 -- I think you said $100,000, $150,000. And then the last one was just on the Verizon 1,000-seat deal. Can you talk about the implementation cycle, how does that roll in?

Gregory S. Ayers

Yes. So I'll take the first part. So the impact to Q1 revenue was a deferral of about $120,000 of professional services revenue. So when we turn a customer up, we are required by the accounting standards to amortize that implementation revenue over the estimated annual or the estimated lifetime of the customer. As we get more experienced with customers, we are delighted to see that, that more customers are staying with us for a longer period of time. Unfortunately, that longer period of time means it's a longer amortization period. And so therefore, as we transition from what we were, the period that we were amortizing professional services revenue over in 2012 to a new denominator in 2013, about $120,000 didn't get recognized in Q1 that would've been recognized under the old method.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

And going forward, that dollar amount is a rough approximation of kind of the impact we ought to see as that new process is in place?

Gregory S. Ayers

Correct.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. Okay. And then, yes, and just on the Verizon, the thousand seat, what's the timeline?

Paul Jarman

So Jeff, that will probably take us between -- start at about 3 months and take us up to 9 to 10 months to finish it. And what you see in these bigger companies is they go kind of call center by call center or department by apartment, so they stage them.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

So the thousand roll in fairly linearly over that 3 to 10 months period?

Paul Jarman

I think that's fair.

Operator

[Operator Instructions] We'll go next to the side of Mark Schappel with Benchmark.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Paul, starting with you, with respect to the recently acquired mobile capabilities, I was wondering if you could give us a sense of how you plan to go to market there? Will it be an add-on project -- or excuse me, product, to your ACD backbone or will this just be kind of incorporated into the existing products?

Paul Jarman

So we would have an incremental charge for those features. And they would be an additional charge on top of the primary ACD product. So it would be additional revenue opportunity for us.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay, great. And then building on the prior caller's question. You mentioned Verizon, the 1,000-seat deal, your largest ever. You also mentioned a large deal, partner deal with Siemens. Can you -- is the Siemens deal close as far as seats go to the Verizon deal?

Paul Jarman

That was smaller. So the Siemens deal would be more in a 300 range, and the Verizon deal certainly was a large deal in the finance area, and it was a great deal for us.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay, good. And Greg, I was wondering if you could just review one more time the $120,000 impact of software revenue? I didn't catch your complete comments there.

Gregory S. Ayers

Sure. So when we implement a customer, we'll charge them for an implementation fee. The accounting standards require us to amortize or recognize that professional services implementation fee over what's calculated as the average life of a customer. So we were using a smaller denominator in 2012. We have a larger denominator in 2013. So as we have increased the average life of a customer, the calculation gives you a longer amortization period. Therefore, the impact in Q1 relative to what we would've amortized professional services revenue into the income statement reduced recognized professional services revenue by about $120,000. So it's just a flip-flop between what's recognized and what stays in deferred.

Mark W. Schappel - The Benchmark Company, LLC, Research Division

Okay. And then finally, Greg, the 35% telco gross margins in the quarter, it strikes me as being an all-time high. Is this sustainable? Is this a new level here for us?

Gregory S. Ayers

Yes, Mark, I think it is. Between the -- with regard to the investments that we made in Q3 and Q4 of '11 and the pricing improvement that we're receiving from carriers as a result of the volume, we should be able to stay in that 30%, 34%, 35% gross margin on telco.

Operator

Your next question is from the side of Brian Murphy with Sidoti & Company.

Brian Murphy - Sidoti & Company, LLC

My question has been answered.

Operator

And I'm showing no further questions in queue at time.

Paul Jarman

Well, we appreciate everybody on the call today. We're excited about the quarter we just had. And excited about the year and the opportunity we have in front of us. And we appreciate your interest and your investment. And thank you and have a great day.

Operator

This concludes today's conference. You may disconnect at this time, and enjoy the rest of your day.

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