DemandTec F1Q10 (Qtr End 5/31/09) Earnings Call Transcript

Jul. 1.09 | About: DemandTec, Inc. (DMAN)

DemandTec, Inc. (NASDAQ:DMAN)

F1Q10 Earnings Call

July 1, 2009 5:00 pm ET

Executives

Tim Shanahan - Investor Relations

Daniel R. Fishback - President, Chief Executive Officer, Director

Mark A. Culhane - Chief Financial Officer, Executive Vice President

Analysts

Nabil Elsheshai - Pacific Crest Securities

Keith Weiss - Morgan Stanley

Tom Ernst - Deutsche Bank

Terry Tillman - Raymond James

Laura Lederman - William Blair

Bryan McGrath - Credit Suisse

Jeff Van Rhee - Craig-Hallum

David Bayer - Cantor Fitzgerald

Michael Nemeroff - Wedbush Morgan

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the DemandTec first quarter fiscal year 2010 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Tim Shanahan with DemandTec Investor Relations. Please go ahead, sir.

Tim Shanahan

Thanks, Operator. Good afternoon and thank you for joining us to discuss DemandTec's first quarter fiscal 2010 results. This call can also be accessed on the investor relations website at www.demandtec.com.

With me on today’s call are Dan Fishback, DemandTec's President and Chief Executive Officer; and Mark Culhane, DemandTec's Executive Vice President and Chief Financial Officer.

After the market close today, DemandTec issued a press release with results for its first quarter of fiscal 2010. A copy of the press release is available on our website. Please note that in this conference call, we will be discussing non-GAAP results, which exclude stock-based compensation, amortization of purchased intangible assets, and restructuring charges. We refer you to today’s press release for a reconciliation of these non-GAAP amounts to their comparable GAAP amounts.

During the course of this conference call, DemandTec's management may make forward-looking statements regarding financial projections, plans and objectives for future operations, and management’s beliefs about potential market size and growth, as well as the company’s future performance, financial condition or results of operations.

These forward-looking statements are not historical facts but rather reflect DemandTec's current expectations and beliefs based on currently available information. We undertake no obligation to provide updates in the future. DemandTec's actual results may differ materially from those projected.

The risk factor section of our Form 10-K on file with the SEC discloses the risks that could cause these differences. Please note that any future product, feature, or specifications referenced in today’s call are information only and are not commitments to deliver any technology or enhancement.

DemandTec reserves the right to modify its product plans at any time.

With that, I would like to turn the call over to DemandTec's President and CEO, Dan Fishback.

Daniel R. Fishback

Hello, everyone and thank you for joining us today. I will start with a brief summary of our financial results, then update everyone regarding our execution in the quarter and conclude with our progress against our three-point growth strategy. Mark will then provide more details on our financial results, after which we will take questions.

Despite the challenging macroeconomic environment and the integration of the C3 business, our revenues, non-GAAP earnings per share, and non-GAAP operating income met or exceeded our guidance for the first quarter of our fiscal year 2010. Revenue for the first quarter was $19.5 million, representing an 8% growth on a year-over-year basis. We were break-even on a non-GAAP earnings per share basis, better than our projection of $0.02 loss per share. We had a non-GAAP operating loss of $236,000, better than our guidance of a non-GAAP operating loss of $500,000 to $700,000. While we continue to grow our revenues, add new customers, and expand our network, the current economy continues to have an impact on our business.

On our Q4 fiscal ’09 call in April of this calendar year, I indicated that it was very difficult to estimate the significance or the length of the economic downturn and that trying to predict how customers will respond based on historical trends being challenging at best.

Since then, we have not seen any noticeable improvement in sales cycles or the level of scrutiny required to getting customer agreements signed and closed. This has translated into continued longer sales cycles for us and a premium on execution throughout every function of our business. In the first quarter, we had two significant transactions flip and close in June.

However, we believe that DemandTec is well-positioned to navigate through this difficult environment. We recently had our seventh annual demand better 2009 user conference in San Francisco. At the event, DemandTec provided insights on our next generation, or next gen solutions for retailer and consumer products companies, or CP companies, which we will combine category, brand, and shopper insights into one overall solution to provide a unified understanding of shopper behavior and the ability to leverage those insights to make better business decisions on pricing, promotion, assortment, and collaborations with their trading partners.

DemandTec's next-gen approach helps retailers and CP companies stop treating shoppers as statistical averages. Instead, they leverage the digital footprints and the data they already collect from every shopper interaction, and apply provide DemandTec science to create new actionable insights in an on-demand offering that will bring more shoppers into the store, increase their frequency of visits, and influence them to buy more while they are there.

We now provide retailers and CP companies with the ability to optimize for categories, brands, and shoppers. DemandTec offers a unique capability, not only to provide category brand and shopper insights at the point of decision in an on-demand offering but to use those insights by significant, by specific shopper segments to optimize and execute localized strategies that influence shopper behavior for retailers and CP companies alike.

DemandTec next-gen approach resonates strongly with our customers, partners, and prospects, as evidenced by the strong turnout we had from both retail and CP companies at this year’s Demand Better event.

The ability to leverage our on-demand offering to optimize decisions for retailers and CP companies based on the categories, the brand, and the shopper is truly game-changing in our industry. Our customers are excited about next-gen and DemandTec is uniquely capable of delivering it.

Let me now give you an update on our three point growth strategy.

The first component to our growth strategy is to continue to extend our industry leadership position with the world’s leading retailers. As we announced in a press release on April 29th, the Golub Corporation, which does business as Price Chopper Supermarkets and operates 116 supermarkets in the northeast United States, selected DemandTec’s life cycle price optimization solution, which includes everyday price management and everyday price optimization software services in the first quarter.

Like many supermarket retailers, Price Chopper made the decision to be more efficient in generating the information their business users need to execute pricing and selected DemandTec to help align and optimize pricing to drive financial results and price image.

Also I am thrilled to be able to share with you that we recently signed a significant transaction with Ahold USA to expand their use of DemandTec's next generation solutions across all their retail banners in the United States, including stop-and-shop and giant food stores.

DemandTec's next-gen solutions will help Ahold USA leverage category, brand, and shopper insight and execute merchandising and marketing strategies by anticipating the needs of the customers they serve.

The second part of our growth strategy is to deliver measurable business results to our current customers in order to drive renewals as they adopt our full suite of other solutions.

During the first quarter, we entered into add-on agreements with certain of our retail customers, who came to us for additional products or services such as allowance billing, advanced deal management, or ADM, or analytical services such as our merchandising decomposition analysis.

In addition, we are extremely pleased with our execution renewing maintenance agreements with certain former Connect 3 customers. Several key retailers renewed their advertising/marketing execution or AME software maintenance agreement with us as we develop what we believe is a truly differentiated end-to-end promotion management solution.

With the acquisition of Connect Three, our end-to-end promotion management solution provides retailers with B-to-B negotiation capabilities via the DemandTec trade point network, or DTN. Science based promotion management via promotion planning and optimization, or PPO solution, and delivery of promotions via AME to print and digital mediums.

We are confident that DemandTec's end-to-end promotion management solution provides not only the broadest set of workflow functionality but the deepest science-based decision making functionality for both retailers and CP companies alike.

In addition, Radio Shack, a leading consumer electronics retailer with a respected and trusted banner, and a DemandTec customer since 2003, renewed their agreement for our next-gen software services that allow for merchandising and marketing optimization solutions that can help better understand, attract, and server their customers.

And finally, the third part of our growth strategy is to leverage our success with retailers, provide our software services to CP companies. Along those lines, in the first quarter we were thrilled to continue to expand our relationship with Kraft Foods, one of the largest and well-respected CP companies in the world. Kraft Foods selected DemandTec's trade planning and optimization software in the fourth quarter of last fiscal year and in the first quarter added additional analytical services as part of their overall strategy and strategic relationship with DemandTec.

We recently signed a renewal with General Mills for DemandTec's trade, planning, and optimization software services. General Mills, a global leader by every measure, serving customers in over 100 countries, will use DemandTec's next-gen software services to enable them to gain a better understanding of consumer behavior and drive win-win trade promotions and everyday price plans with their retail trading partners.

We have been able to upsell CP companies to higher value add, higher price solutions, which can increase the value of our CP company relationships from tens of thousands of dollars per year to hundreds of thousands of dollars, or even millions per year.

During the first quarter, we continued to increase subscriptions to our ADM software services on the DTN to help CP customers better collaborate with their retail customers on trade promotions. CP companies such as Clorox, Coca-Cola and Sara Lee are just a few examples of companies that renewed or expanded their ADM subscriptions.

When connected via the DTN, we enable our retail and CP customers to collaborate on win-win plans and greatly enhance the end-to-end promotion management process from both a financial effectiveness and a process efficiency standpoint. Nearly 2.3 million trade promotion deals have now been collaborated and negotiated on the DTN since its inception, and it is currently driven by a community of more than 7,600 users.

In summary, our expectations had been and continue to be that for much of our fiscal year 2010, the economic environment will not improve and it will take longer to get deals closed. However, we see clear indications from our customers and prospects that interest in our next gen solutions remains high and we are committed to invest while our competitors are distracted in anticipation of extending our leadership position when the economy strengthens.

So in summary, while our first quarter had its share of challenges, overall our results reflect our focused on continued execution against our three-point growth strategy. With that, let me turn it over to Mark to go through the financials.

Mark A. Culhane

Thanks, Dan. I will provide more details on our first quarter operating results, followed by financial guidance for the second quarter before opening the call for questions. Let me begin with our first quarter operating results.

Total revenue for the first quarter was $19.5 million, at the high-end of our guidance of $19.3 million to $19.5 million, and represented an increase of 8% over the comparable period last year and 1% sequentially over our fourth quarter of fiscal 2009. We generated 81% of our first quarter revenue from the retail industry, with 19% coming from the CP industry. This compares to a vertical mix of 87% and 13% respectively for the comparable quarter last year. Geographically, we had generated $16.8 million or 86% of total revenue from the United States, compared to $15.4 million or 85% of total revenue in the first quarter last year.

Revenue from international operations was $2.7 million, or 14% of our total revenue, compared to $2.7 million, or 15% of total revenue in the first quarter last year.

Turning to costs and profitability for our first quarter, we will be discussing our results on both a GAAP and non-GAAP basis. Please be sure to look at our press release for a reconciliation of non-GAAP to GAAP amounts.

I will begin with a summary of our non-GAAP results, which exclude non-cash expenses associated with stock-based compensation, amortization of purchase intangibles, and restructuring charges.

Non-GAAP gross profit was $13.7 million in the first quarter, representing a year-over-year increase of 6%. Non-GAAP gross profit in the first quarter excludes $466,000 of amortization of purchase intangibles and $418,000 of stock-based compensation.

As expected, non-GAAP gross margin decreased and was 70.2% as compared to last quarter’s 72.2%. The decrease in the first quarter’s non-GAAP gross margin was primarily the result of the dilutive effects related to our acquisition of Connect Three in late February 2009.

Turning to non-GAAP operating expenses for the first quarter, the non-GAAP R&D expense was $7.3 million, a 23% increase year over year and represented 37% on a percentage of revenue basis. Non-GAAP R&D expense excludes $856,000 of stock-based compensation expense.

Non-GAAP sales and marketing expense was $4.8 million during the first quarter, a 2% increase year over year and represented 25% on a percentage of revenue basis. Non-GAAP sales and marketing expense excludes $619,000 of stock-based compensation expense.

Non-GAAP G&A expense was $1.8 million, a 2% increase year over year and represented 9% on a percentage of revenue basis. Non-GAAP G&A expense excludes $525,000 of stock-based compensation expense.

We had a non-GAAP operating loss of $236,000 in the first quarter, better than our guidance of a non-GAAP operating loss of $500,000 to $700,000. This compares to non-GAAP operating income of $491,000 in the year-ago quarter. Our non-GAAP operating loss excludes $2.4 million of stock-based compensation expense, $1.1 million of amortization of purchase intangible assets, and a $278,000 restructuring charge.

Total non-operating income was $284,000 during the first quarter, compared to a non-operating income of $585,000 in the year-ago quarter and $228,000 in non-operating income last quarter. The year-over-year decline in non-operating income was due to lower interest rates.

We had non-GAAP net income of $29,000, or break-even on a non-GAAP per share basis, better than our guidance of a non-GAAP net loss of $0.02 per share. For the quarter, non-GAAP weighted average shares outstanding were $32.2 million on a fully diluted basis. We had non-GAAP earnings per share of $0.03 in the year-ago quarter and $0.04 in the fourth quarter of fiscal year 2009.

Looking at our results for the first quarter on a GAAP basis, including stock-based compensation expense, amortization of purchased intangible assets, and restructuring charges, our GAAP gross profit was $12.8 million, our operating loss was $4 million, our net loss was $3.7 million, and our GAAP loss per share was $0.13 based on 28.2 million weighted average shares outstanding. This compares to a GAAP loss per share of $0.04 in the year-ago quarter.

Turning to the balance sheet, cash and marketable securities were $75.3 million at the end of May, a decrease of approximately $12.6 million compared to the $87.9 million at the end of February, primarily due to the cash payment in early March related to our acquisition of Connect Three.

Our accounts receivable balance at the end of the quarter was $4.2 million, representing an adjusted DSO of 32 days, taking into consideration the change in deferred revenue, given we have a subscription based business model. This compares to 55 days at the end of the fourth quarter.

We ended the quarter with short-term deferred revenue of $40 million, a decline of approximately $6.4 million over the previous quarter. Historically, we generally experience a sequential decline in our deferred revenue in the first quarter as compared to the fourth quarter because of seasonality inherent in our business. However, as Dan previously mentioned, we also had the two significant transactions which we expected to close in Q1 push into Q2 and close in June. Had these two transactions closed in Q1 as we originally expected, the decline in deferred revenue would have been more along the seasonal declines we have experienced in the past. Having said that, it’s fair to say that had we executed better, these transactions may not have slipped into Q2.

As expected, long-term deferred revenue continued to decrease and came in at $1.4 million at the end of the quarter. We expect long-term deferred revenue to amortize to zero by the end of this fiscal year as we no longer invoice the full amount of our multi-year customer contracts up-front.

Finally, from a cash flow perspective, for the first quarter of fiscal 2010, as expected given the dilutive impacts of the Connect Three acquisition, we used $614,000 in cash from operations and used $242,000 on capital expenditures resulting in a negative $856,000 free cash flow for the quarter. This compares to the year-ago period where we generated $4.4 million in cash from operations and used $1.1 million on capital expenditures, resulting in $3.3 million of free cash flow for the fiscal first quarter of fiscal 2009.

As a reminder, on our Q4 fiscal ’09 call in April, we said that we expected the acquisition of Connect Three would be dilutive for the first two quarters of our fiscal year 2010 on an operating income, earnings per share, and free cash flow basis before becoming accretive over the second half of fiscal year 2010.

Before turning it over to questions, I will finish by providing guidance for the second quarter and update our fiscal year 2010 outlook. The operating income and earnings per share guidance I am going to give are non-GAAP and exclude stock-based compensation expense and amortization of purchased intangible assets.

We continue to expect a challenging worldwide economic environment through the remainder of fiscal year 2010 that will continue to impact sales cycles and the closing of business. With that as our operating assumption, we expect our second quarter revenue to range from $19.5 million to $19.7 million. We expect non-GAAP operating income to be in the range of $200,000 to $500,000 and non-GAAP earnings per share to be $0.02, based on non-GAAP fully diluted weighted average shares outstanding of approximately $33.5 million.

Looking at the full year, given the macroeconomic environment conditions, our visibility is more uncertain at best. As a result, we now expect revenue growth in the range of 5% to 10% and non-GAAP earnings per share in the range of $0.06 to $0.12, assuming non-GAAP fully diluted weighted average shares outstanding of approximately 34 million.

In summary, we are focused on building a long-term business and we believe the investments we are making uniquely position us to benefit in the future once the economic environment improves.

With that, we will now open the call up for any questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Nabil Elsheshai with Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

Thanks for taking my question. First, can you update us on the competitive environment? Have you seen any change from either the large guys or some of the smaller competitors?

Daniel R. Fishback

Really no change. If anything, your traditional enterprise software guys appear to be distracted and not as interested in this space, given the challenging software environment out there today but no significant change to report in the core competitive arena.

Nabil Elsheshai - Pacific Crest Securities

Okay. And then in terms of the deals that slipped, are those new customer deals that you had closed in June or are those installed base types of deals? I think any color you can give us there.

Mark A. Culhane

Installed base customers, existing customer deals.

Nabil Elsheshai - Pacific Crest Securities

Okay, and then last question, any kind of commentary for the full year on cash flow? Any guidance you can give us there?

Mark A. Culhane

You know, we don’t have a full-year metric there yet today, Nabil. We’re still in the midst of our C3 acquisition, as we said last quarter. We want to get through that across the first half of the year and then take a look at what we see.

Nabil Elsheshai - Pacific Crest Securities

Okay.

Mark A. Culhane

But we expect it -- as we said, we -- it was obviously a negative impact in Q1 and we expect it would be that way in Q2 and then it will turn accretive across Q3 and 4.

Nabil Elsheshai - Pacific Crest Securities

Okay. I’ll get back in the queue. Thanks.

Operator

Your next question comes from the line of Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley

Thank you for taking my call, guys. So it’s apparent that the macro economy continues to be difficult. From the fact that there’s still deals slipping out and we’re seeing deferred revenue now declining on a year-over-year basis, and that sort of -- the growth in deferred revenue has been coming down for a while, is the macro environment getting worse for you guys? I mean, is the sales environment getting -- continuing to get worse for you guys in this quarter versus like 4Q last year or 3Q, or has it stabilized to any degree and we’re now dealing at just like a very low level of demand?

Daniel R. Fishback

Well, you know, we’re enthusiastic about the reception of our products in the market we serve. You know, clearly from my perspective, you step back to 40,00 feet, I mean, there are going to be defined winners and clear winners and losers in the market we serve. And post this recession, there will be retailers and manufacturers alike that are again clear winners and losers and that slow-down, you know, in our mind -- and we’ve been consistent on this, we see the consumer and the jobless numbers, the asset depreciation for the average consumer and the effects of that on a global basis, you know, really put an emphasis on FMCG or the grocery market that we serve as our biggest opportunity.

So my only observation would be is that we continue to see FMCG, fast-moving consumer goods or grocery and mass market as a tremendous opportunity regardless of the economy. Hard goods, defined by maybe electronics or do-it-yourself hardware being more of a challenging market and if anything, our response is to continue to focus more on our customers in the markets where we think there’s more of a vibrant consumer supporting that retailer and manufacturer, and you can see that today from General Mills earnings today. They were out and many of our worldwide customers, FMCG is our sweet spot.

So I’d say it’s more the same. You know, we do big deals. In many cases, it takes a dozen or so signatures to get those done.

Keith Weiss - Morgan Stanley

Got it. Were there any other impacts on deferred revenues in terms of like billing length or average contract length that may have impacted that, or was it really just to slip deals in, the weak selling environment?

Mark A. Culhane

No, term lengths, average deal size continue to be across the historical norm. It’s just the timing of when they happen.

Keith Weiss - Morgan Stanley

Got it. Now, did I hear correctly that you guys said that retail was 81% of your revenues?

Mark A. Culhane

Correct. CP was 19.

Keith Weiss - Morgan Stanley

If I’m doing my math right, that implies it’s a sequential decline from 4Q because I believe it was 86%.

Mark A. Culhane

Yeah, we’ve said all along that we expect CP revenue as a percentage to continue to escalate and so Q4 was 86%, was the retail mix versus 14 CP -- I’m sorry, 84 and 16; in this quarter, it’s 81 and 19, so CP as a percentage is continuing to rise, as we expected.

Keith Weiss - Morgan Stanley

Right, but if we look at the absolute dollars, the retail revenue dollars, at 86% I think you are talking about like $16.6 million; at 81% of this quarter, you are talking 15.8, so did you see a dollar decrease quarter over quarter in retail?

Mark A. Culhane

No, I think it was 84% in Q4, Keith, and 16% was CP in Q4. In Q4 -- are you going back to Q1 of last year or Q4?

Keith Weiss - Morgan Stanley

Q4.

Mark A. Culhane

Yeah, it was 86 and 14 and now it’s -- you’re right, it was 84 and 16; it’s now 81% and 19%.

Keith Weiss - Morgan Stanley

Okay.

Mark A. Culhane

I haven’t done the math.

Keith Weiss - Morgan Stanley

I think you still have on an absolute basis a decline in retail revenues.

Mark A. Culhane

Yeah, and that’s -- that’s again, that goes to the timing of when deals close. It’s a timing thing as much as anything.

Keith Weiss - Morgan Stanley

Got it. Were there any significant non-renewals in the quarter?

Mark A. Culhane

All our multi-year customers renewed with the exception of Long’s, which was acquired by CVS and we’re in sales cycles at CVS.

Keith Weiss - Morgan Stanley

Okay.

Daniel R. Fishback

I would like to go back to the CPG comments. You know, we are -- you know, if you look at our three-point growth strategy, get new retailers, leverage to make them successful and ultimately monetize that across our network with their trading partners, you know, we are thrilled by the reception of our products within the CPG community and we think that opportunity really is the prize for DemandTec because we deliver our offering on an on-demand environment and via network and there is not an alike competitor in our market to compete there, so we look at that increase -- certainly the total number was growing faster but that split is encouraging to us.

Keith Weiss - Morgan Stanley

Got it. And then I was just wondering if I could sneak in a few on Connect Three. Was there any significant contribution from Connect Three either to -- I mean, to deferred revenue? You mentioned some maintenance renewals which I assume would add to deferred revenues, or total revenues?

Mark A. Culhane

No significant contribution in the quarter from a revenue perspective. All of our C3 maintenance renewals did occur in the quarter but again, we’ve said most of their renewal opportunities happened across the back half of our fiscal year.

Keith Weiss - Morgan Stanley

And then I was wondering if we could get an update on the integration of the products -- the Connect Three products [we’d particularly sort of be putting it on to your SMS platform] and how that’s going.

Daniel R. Fishback

It’s going great. So first of all, we’re very pleased with just the progress we are making in integrating that business. That’s completed. All the functional departments have all been integrated and aligned along our departments here at DemandTec, so it’s one company. We have dedicated teams to support the current product to make enhancements to it. We also have a dedicated team to replatform the technology that has been put in place. I am pleased by the progress we’ve made there. Certainly we’re encouraged by the amount of available talent in the market, so we’re benefiting from being able to hire really great folks and the validation certainly, you know, [inaudible] U.S.A. and their usage of AME in the past and the broadening of their footprint to expand and endorse this relationship of bring a full suite of promotion tools together ultimately driving promotions to digital and paper mediums is really a unique solution in the marketplace that no one else has today, both on breadth and depth.

So I am very pleased with the progress. Our teams have made all the tough decisions. 90 days into it, we are well down the road.

Keith Weiss - Morgan Stanley

Got it, and as far as distribution, the sales force is pretty well trained up on it and going to market with --

Daniel R. Fishback

Yeah, this is -- I have, you know, less the challenges of integration and buying companies, I have no regrets on the decision nor any second thoughts on the execution to date on this acquisition.

Keith Weiss - Morgan Stanley

Excellent. Thank you for taking my questions.

Operator

Your next question comes from the line of Tom Ernst with Deutsche Bank.

Tom Ernst - Deutsche Bank

Two questions for you -- first, a quick numbers question; Mark, I noticed the accrued compensation was up pretty significantly in the quarter. Is there a change in accounting policy or is that on the back of some of these bookings you mentioned?

Mark A. Culhane

No, I don’t think there was really any difference on the accrual side other than -- you know, it’s -- I assume you are referring to our accounts payable and accrued expenses line. That historically in Q1 has been a little bit higher than in Q4, just the nature and timing of renewals on certain expense things that are incurred here, whether it’s benefit plan related and those kinds of things, so it’s just -- it’s your normal course.

Tom Ernst - Deutsche Bank

Okay, good. And last quarter you talked about a new price-to-win strategy with marketing to the customers. What’s been the reception of that and are you tuning that now this quarter or continuing the program?

Daniel R. Fishback

So the price-to-win, what we’ve really found, it’s been interesting -- we’ve found that it’s really been more of a marketing tool. It’s opened opportunities in certain target markets where there’s been a perception that our price point was too high or we’ve been positioned by competitors as being too high, so what we really found is that most of our prospects, once they begin the dialog with us, [where they are] more encouraged to make a bigger decision than the price-to-win, which would [be to get started]. That being said, we’re going to continue to invest in it. I would anticipate that we’ll probably do a deal or so a quarter going forward.

You know, as you can imagine, what we do in many cases drives business process change within a retailer or manufacturer. We effect the way they work, so it’s not like a sales force automation tool or something, HR tracking system of some type that you might just try it. Typically there’s a commitment from the executive suite to go forward with DemandTec, so the program is working as more of a marketing tool would be my -- how I would characterize it today.

Tom Ernst - Deutsche Bank

And then how would you expect that it helps then? So if we continue to have this very weak environment, is it something that takes a couple of quarters to generate momentum?

Daniel R. Fishback

You know, I like having it in the market as a hedge bet. You know, certainly if we were to sell 15 or 20 deals this year and take our new user account up that high, that would be a good thing for DemandTec because the longer people do business with us, the more they buy more technology, they support our network. I like having it out there in addition because who knows how long this current economic environment is going to last and maybe as we get more marketing and sales support for it in the field, it will become more of a popular option to start with DemandTec.

But to date, I haven’t seen a dramatic increase in volume of deals on the actual pricing option.

Tom Ernst - Deutsche Bank

Okay, good -- one final question, following up on the renewal question; it’s good to hear strength continues in the renewals. What about from a pricing perspective? Any changes that you are noticing either in the request or what you are actually doing with pricing?

Daniel R. Fishback

You know, renewals is a great opportunity for us. I mean, we don’t -- we actually look forward to renewals because we are investing a lot in our business. You know, our next-gen systems and promotions and advancements have been really, really received well by our customers, so in many cases renewals is an opportunity to revisit the platform, the solution, the technologies, and reconstitute our footprint and expand it. So you know, we’re not seeing any trends that I can speak to around renewals. In some cases, somebody wants to expand and somebody wants maybe potentially doesn’t have as much money, we’ll entertain that but we cut back the amount of functionality or usage they would have for the software.

So we think this is -- you know, we are very pleased to have the next gen suite of add-ons and functionality in place so that we can really broaden these opportunities with renewals, so we’re -- we feel good about renewals right now.

Tom Ernst - Deutsche Bank

Okay, thanks again.

Operator

Your next question comes from the line of Terry Tillman with Raymond James.

Terry Tillman - Raymond James

The first question relates to the two deals you are talking about that closed in June -- were those just renewals that happened to then add on more services or were those actually kind of meaningful incremental footprint expansions of other products?

Mark A. Culhane

One was a significant add-on deal and meaningful expansion of footprint, and the other one was what I would say is a pretty consistent renewal.

Terry Tillman - Raymond James

Okay, and in terms of -- I think the comment was if those deals would have closed in the quarter and potentially some cash could have been collected, you would have seen more normal sequential trends but what about on a year-over-year basis? Would there have been growth potentially in deferred revenue on the short-term?

Mark A. Culhane

Historically, we’ve typically always seen deferred revenue decline in May over February, so I think we’d still, it’d be fair to say we still would have experienced that but it would have been along those seasonal declines, not what we experienced by having the timing of these deals pushed beyond the end of May.

Terry Tillman - Raymond James

Okay, but what about on a year-over-year basis?

Mark A. Culhane

You know, I don’t even look at it on a year-over-year basis. Quarter over quarter from Q1 a year ago to Q1 today, our deferred revenue fluctuates on a quarterly basis given the types of deals that we do and the timing of when they happen, so on a quarter over quarter basis or even with the four sequential quarters, it will bounce around but on a long-term basis, we know it’s been higher at the end of a year, you know, at the end of our fiscal year than the prior fiscal year and we don’t see any reason why that trend wouldn’t continue.

Terry Tillman - Raymond James

Okay, and Dan, in terms of earlier in your script, you talked about execution becomes -- the onus is even that much greater in this kind of environment on execution and I know, Mark, you were talking about maybe execution -- if I’m not mistaken, maybe execution could have been better on the deals or maybe the timing. Is there anything actually -- are you all saying that there’s changes or the way you go to market or things internally you are making some tweaks, or are there no actual tweaks being made in terms of just dealing with the economy and just trying to get business done?

Daniel R. Fishback

We’re tweaking this business all the time, candidly. You know, when I look at -- when I reference execution, I mean, these are kind of in-process alignment of resources, so we’re always focused on hey, where’s that revenue opportunity coming from? Clearly FMCG retailing is where we need to place our bets on prospecting -- if you sell food or [mass], we should be prospecting there.

If you are a customer of DemandTec and you are a winner in the markets you serve, we should be dedicating more resources there.

And then lastly, our network is a unique -- you know, our on-demand offering, coupled with our network is a unique delivery medium that we have to invest in because it is a unique, long-term differentiator for our business in my mind.

So when I kind of look at how do we align our resources, we have moved some seasoned executives into more customer focused roles, as well as more dedicated resources or services for CPG now as it’s expanding. Where we used to pool those resources, we have clear lines of management for those lines of businesses, which we couldn’t do before because we just didn’t have the scale.

So when I speak to execution, they are kind of more in-process alignment of resources than any significant change of personnel or pricing or --

Terry Tillman - Raymond James

Okay, that’s good to know. And I guess an earlier caller was doing the math around potentially sequential decline in retail oriented revenue, and I haven’t done the math so I’ll just go along with that, but -- and I don’t know if you could look at this with the numbers you have in front of your or if you’d have to follow-up, but if we were to look at retail and it was actually maybe down sequentially on the revenue mix, could that just have something to do more with the services component maybe falling off? And I know you all don’t break it out on your income statement but I’m kind of more focused on the actual core product revenue -- why would that have actually declined sequentially or would it have been more maybe related to services?

Daniel R. Fishback

Yeah, I don’t think -- as a percentage of revenue if you are looking at Q4 versus Q1, the -- you know, it’s probably -- you know, it may be down somewhat but not dramatically and I think that just goes to the timing of when deals happen and when things come up for renewal.

Terry Tillman - Raymond James

Okay.

Daniel R. Fishback

And some things take longer to get renewed and you lose a month within a quarter, it can impact. It doesn’t mean long-term it’s gone. It just means the timing of when things happen, so I think it’s a timing issue as much as anything. Yes, you are correct in your first part of your comment when you said services can have some impacts because that clearly -- the timing of when that occurs in the quarter can affect the recognition of when it gets billed and that kind of thing and it’s not something that typically gets renewed if it’s related to the initial implementation. But again, I think it’s a timing thing as much as anything.

Terry Tillman - Raymond James

Okay, and just a last question, and maybe the hardest one, is just I am sure you guys are looking for risk mitigation, so am I. Before it was 10% to 18% I think was the outlook and now it’s 5% to 10%. Have you all done anything post this quarter closing in just looking out into the world to say okay, well, maybe there was little to no new retail banner deals or can you give us a sense on the step-down and maybe where there’s some risk mitigation here or some more cushion involved or any help at all on that? Thank you.

Daniel R. Fishback

You bet. Fair question. So let me take this from a bookings perspective, first of all. You know, I think from our prepared comments, we weren’t pleased -- our bookings were below our expectations for the quarter. That being said, you know, we control the business, we manage the heck out of it, so from an income statement perspective, you know, we’re managing the heck out of the business on the expense side all the time. But some observations about bookings, because that’s the juice that makes this thing go, right, like any business.

You know, hey, we’re not losing competitive deals, nowhere. If anything, our competitive position is better and more sticky than ever before, which gives me a lot of confidence to continue to invest because I know that sooner or later these customers are going to spend more money and new prospects will be easier to get and we’ve got a unique set of tools.

You know, we have had and -- we had one non-FMCG prospect fall out of the quarter that we had won and they made the decision to delay their contract because of their economic situation. It tells me, back to that alignment issue or execution issue, that we need to prospect at FMCG. And we need to be cautious how much investments we make outside of FMCG today, in my humble opinion.

You know, our competitors are completely distracted. So we mitigate our risk, you know, we manage the heck out of expenses, we see upside in our customer base, tremendous upside in our customer base. We have the winners on the equation, in my opinion, in our customer base and we are going to continue to get those new customers and we are going to continue always to rebalance our resources where we think the best opportunity is.

And I guess I’d close on is we’ve got a great opportunity to the renewal side to expand our footprint in this fiscal year. So we are going to mitigate on managing the heck out of expenses, balance that against what we think we can close, and continue to be cautious in what is a really challenging economic environment on a worldwide basis.

Operator

Your next question comes from the line of Laura Lederman with William Blair.

Laura Lederman - William Blair

Thank you for taking my questions. Just a few sweep-ups -- one is, if you look at -- sorry about that, I’ve got a cold here. If you look at the 5% to 10% revenue growth, how much is organic? In other words, if you take out C3?

Mark A. Culhane

You know, it depends on how you characterize that, so the Ahold transaction that Dan referred to on the call is a combination of expanding footprint across not only the traditional C3 product line but into a lot of the DemandTec product lines for one overall fee. So how much of that is -- how much do you allocate towards C3 versus being organic DemandTec? So I think those lines start to get blurred as we do more of those kinds of transactions. I don’t think we feel that there’s a big difference in the contribution from the maintenance streams that we anticipated and thought about when we were on our call in April, so I see no change there. So I think when we say 5% to 10%, I think it’s -- the lion’s share of that is organic growth of DemandTec depending on how you want to classify when somebody buys both an expanded footprint of the traditional Connect Three products versus with the DemandTec products and how you allocate that.

Laura Lederman - William Blair

Fair enough -- could you talk a little bit about how the pipeline is in terms of new customers going in the pipe? Are there any new discussions or is it sort of exact same ones that have been around for a while and deals are just taking longer?

Mark A. Culhane

No, I would characterize our pipeline as improving in part because I think we’ve broadened our footprint. I mean, with our end-to-end promotion solution, which would be the origination of a deal over the Internet and the DTN, the analytics and the creation of a seasonal plan in our promotional product and then ultimately the execution of that via a circular or a digital medium with AME, the C3 acquisition -- you know, we have a broader footprint. Parts of that can be sold too as a standalone solution, the AME by itself and certainly Connect Three had department store customers, for example.

So that being said, we have more to sell, we have more that’s unique. Our customers are having success with our products so I’m seeing it get bigger based on more -- as really a by-product of the investments we’re making in R&D and I think some better marketing execution, candidly, in the field. And certainly I think we’re going to see -- I’m optimistic that we are going to see more things come out of the funnel, or out of the pipeline, in the second half of the year. Not because of an improvement in the economy but just the fact that we are differentiating ourselves, in my opinion, and distancing ourselves from the competition.

Laura Lederman - William Blair

[If the old number of new customers you thought you would add] was 8 to 12, what is that now? In other words, do you expect to sign fewer customers or are they just going to be signed later in the year and so they represent less revenue to the year?

Mark A. Culhane

We’re still committed to that range.

Daniel R. Fishback

Yeah, and I think it continues to be back-end loaded like we originally anticipated. I don’t think there’s any change to that.

Laura Lederman - William Blair

All right. Could you -- final question -- when you look at the Ahold deal, could you give us sense of how big that is?

Daniel R. Fishback

It’s a significant transaction.

Laura Lederman - William Blair

Thanks for taking my questions.

Daniel R. Fishback

You can imagine that they wouldn’t want us to speak to that.

Laura Lederman - William Blair

Yes, well, you can’t blame a girl for trying.

Daniel R. Fishback

Take care of your cold.

Laura Lederman - William Blair

Yeah, I don’t know, I forgot to take my probiotics. Whenever I forget those, I get a cold. Thanks, guys.

Operator

(Operator Instructions) Your next question comes from the line of Bryan McGrath with Credit Suisse.

Bryan McGrath - Credit Suisse

I guess most of my questions have been answered. Back to the new customer metric, with the price-to-win strategy, and I assume maybe that you roll out other strategies along those lines, how was that mapped to the new customer addition metric? Wouldn’t it kind of make it a little more noisy or less meaningful?

Daniel R. Fishback

Well, I mean, it becomes -- certainly that could have an -- well, certainly that will have an impact on our average sales price, our annual contract value, so you are right, it makes it a little bit harder to model, so we effectively incur some risk because you can do 20 deals and have total bookings be less, if they were -- conceivably. So yeah, it makes it a little bit noisier but we feel that we’re pretty good at pricing. We do it for our customers. We think it makes sense.

Bryan McGrath - Credit Suisse

So you don’t anticipate, at least from the experience you have so far with this package that this will be the new model of customer adoption, AKA starting small and --

Daniel R. Fishback

No, no, not at all -- as a matter of fact, just the opposite. No, this -- I don’t see any change in worldwide retailers investing millions of dollars in this economy or any economy to better understand their customers to localize their offering to gain long-term trusted loyalty and drive long-term economic benefits. This is more important than it’s ever been -- I don’t see that pricing model changing one iota. Nice having this option as a marketing tool and in some cases we may have some traction but I am still very comfortable, even in light of the current economic environment, that we’ve got the right pricing model and it’s working.

Bryan McGrath - Credit Suisse

Got it. Thanks for taking my questions.

Operator

Your next question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee - Craig-Hallum

Thanks, great. Most of what I need is cleaned up, I just have a couple remaining -- the last quarter you gave us the new CP customers to ADM. I was wondering if you could give us that metric.

And then back to the deferred revenues for a second -- because of how critical that number is, can you put a number on that in terms of the value, the one-year value that would have been in short-term deferred that has been closed since the end of the quarter?

Mark A. Culhane

So I think on the CP metrics, I assume you are referring to -- I mean, I think we said in our prepared remarks we have over 7,600 users on that network and over 2.3 million deals.

Jeff Van Rhee - Craig-Hallum

Well, no, you had said there were new -- 60 new CP customers on ADM last quarter, 60 incremental users of ADM added last quarter.

Mark A. Culhane

Sixty instances across -- we continue to grow that number of -- we had net new customers as well as instances there were also driven in the quarter. I don’t have those numbers off the top of my head. I’ll have to take that offline.

Jeff Van Rhee - Craig-Hallum

Okay.

Mark A. Culhane

And then your question on deferred revenue, I think -- we don’t -- we can’t talk about the specifics of these deals but I think you can -- from what we have said, the current deferred revenue would have been down much less than what it was down had these two transactions closed by the end of May and been more along our seasonal declines that we have experienced over the last nine years of deferred revenue declining May over February, so it would have been right along in those lines but I can’t quantify that because that starts to talk to the size of these deals and we’re not at liberty to disclose those.

Daniel R. Fishback

Just keep in mind we’ll follow-up on the metric that you asked for regarding CP but again, we already spoke to that there was a 14% to 19% increase as a percentage of revenue in our CP business so I feel comfortable with the execution across that product suite there.

Jeff Van Rhee - Craig-Hallum

Yeah, it certainly looks like CP [inaudible]. Thanks, appreciate it.

Operator

Your next question comes from the line of David Bayer with Cantor Fitzgerald.

David Bayer - Cantor Fitzgerald

Thanks for taking the questions. The first question has to do with the R&D line item. Could you talk through a little bit about what’s going on there? It seemed like it was up fairly substantially on a percentage basis from the previous quarters. Is that really the Connect Three or just help us understand what that is, and then I have a couple of other, smaller questions.

Mark A. Culhane

It’s related to Connect Three, so it’s all the -- as you can imagine, mostly what we bought from Connect Three was their domain expertise in technology, which manifests itself in the R&D line.

David Bayer - Cantor Fitzgerald

So should we expect to see sort of a similar level of R&D expenditures then through the remainder of the year?

Mark A. Culhane

Yeah, I mean, we’re continuing to invest, as Dan has said, so there will be -- you know, you will see this percent investment in R&D in the mid-30s range for most of this year. I don’t think it will be quite as high as it was in Q1, given that was the first part of the integration and we start to gain efficiencies as we go through that but it’s not going to drop dramatically into the low 30s on a full-year basis.

Daniel R. Fishback

Just a point that might be helpful here is that we use a programming technique called agile development and it’s a unique methodology that’s used by I guess a lot of software companies, so there’s a ramping up when we acquire a company to bring them on board, have them assimilate their team that we’ve kept on using that technique, so I would expect that the performance and the efficiency of our R&D to improve. I certainly don’t think we’re going to -- you might see it moderate a little bit but I -- there’s a little bit more expense maybe in Q1, Mark, then -- yeah, then the remaining year.

David Bayer - Cantor Fitzgerald

Okay, that’s helpful. And then on the question of deferred revenues, I’m not going to ask that question that’s already been asked about the decremental difference if you had signed those two deals and all that stuff. That’s not where I’m going to come from on this question. What I’m going to ask is now that you are no longer really trying to put long-term deferred revenues, anything more than a year out onto the balance sheet, are you going to try and give us at least some qualitative sense as to average contract lengths and whether those are going up or down, or any sort of sense of the duration of engagements, or you know, any color along those lines?

Daniel R. Fishback

Sure. I don’t think average contract lengths have changed. They are two to three years on the retail side and generally been one year, generally on the ADM side of the CP business when we get into the trade planning optimizations, those are now trending from one to three-year deals.

David Bayer - Cantor Fitzgerald

Great. Okay, thank you very much.

Operator

Your next question comes from the line of Michael Nemeroff with Wedbush Morgan.

Michael Nemeroff - Wedbush Morgan

Thanks for taking my questions, guys. On Connect Three, maybe I missed this, did you tell us exactly what the revenue contribution was from Connect Three this quarter?

Mark A. Culhane

No, we said it was not significant.

Michael Nemeroff - Wedbush Morgan

Okay, not significant, just a couple hundred thousand -- were the renewals on the maintenance side, were those in Q1?

Mark A. Culhane

There were renewals in Q1. They all renewed but the majority of their customer base that we inherited comes up for renewal across the back half of our fiscal year.

Michael Nemeroff - Wedbush Morgan

Okay. And then also, talking about next gen, I was just curious if a customer wanted to move to next gen to get a little bit more functionality but pretty much keep the same product profile that they currently have, is there an incremental revenue lift that you would see from that customer?

Daniel R. Fishback

You bet, and that’s exactly how we envision next-gen rolling out, is it would continue to use the same suite of tools, just the inside that would be put into the science and displayed on the screen would expand beyond the elasticity or the price sensitivity of an item, a product, to the characteristics of a key segment’s baskets over time. You know, if you had a segment called elite shoppers. You know, over time can I change their behavior and influence their trips, the items in baskets, the characteristics of what they buy and at the same time forecast what the outcome is going to be for those prices for a unique category or group of categories.

So that’s exactly right. We envision an uplift to leverage exactly what our customers are already using to drive more value beyond just the category but into the brand and ultimately the shopper insights.

Michael Nemeroff - Wedbush Morgan

That’s very helpful. Now, could you maybe quantify what that uplift would look like for a customer that’s using a similar product profile? Would it be an incremental 5%, 10%, somewhere in that magnitude?

Daniel R. Fishback

No, I don’t think we’re in a position yet where we can really comment to the specific number but I would be very disappointed if it was only 5% or 10%.

Michael Nemeroff - Wedbush Morgan

Okay. Thanks very much for taking my questions.

Operator

Thank you. Ladies and gentlemen, this does conclude our question-and-answer portion of today’s call. I would now like to turn the conference back over to Mr. Fishback for any closing comments.

Daniel R. Fishback

Again, thank you for joining us today. We look forward to updating you again on our quarter’s call and everybody enjoy the Fourth of July weekend. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the DemandTec first quarter fiscal year 2010 earnings conference call. We thank you for your participation. You may now disconnect. Thank you for using ACT conference.

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