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Q2 2013 Earnings Call

July 23, 2013 4:30 pm ET


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


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


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Vocus Second Quarter 2013 Earnings Conference Call. The date of this call is July 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 the Vocus website.

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

Stephen A. Vintz

Good afternoon. We are very pleased that you could join us today to discuss Vocus' results for the second quarter of 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 risks and uncertainty. We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future.

Further, statements regarding our product development initiatives, including new products and future product upgrades, updates or enhancements represent our current intention, but may be modified, delayed or abandoned without prior notice, and there is no assurance that such offerings, upgrades, updates or functionality will become available unless and until they have been made generally available to our customers. We encourage you to review our filings with the Securities and Exchange Commission, which are available at, 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 available in the press release we issued today, which is available on our website at Our non-GAAP results and guidance does not include stock-based compensation, amortization of intangible assets, acquisition-related expenses, adjustments to deferred revenue and contingent consideration for earn-outs related to acquisitions, as well as the treasury stock effect of outstanding equity securities and stock comp on our diluted share count.

Thank you. Now I'll turn the call over to Rick Rudman. Rick?

Richard Rudman

Thanks, Steve, and thank you all for joining us today for our Q2 2013 earnings call. Q2 is highlighted by a number of exciting results that support our overall vision and strategy to become a leader in the marketing cloud, with a focus on marketing departments in the large and untapped midmarket. These highlights include continued rapid growth and momentum for our integrated marketing suite, significant increases in our average selling prices and better-than-expected earnings. In addition, we were also very pleased to see PR bookings stabilize during the quarter.

I'd like to provide some additional color on our Q2 highlights and then review our broader strategic initiatives and market outlook. Starting with the Vocus Marketing Suite. In Q2, we continued our rapid march towards becoming a leader in the marketing cloud, with one of the fastest-growing integrated marketing suites available today.

In Q2, bookings for the Marketing Suite more than tripled from last year to reach $6 million to $7 million. This puts us on track to triple overall bookings for the Marketing Suite this year to approximately $35 million. We couldn't be more pleased with the success of our Marketing Suite, which is clearly getting incredible traction in the marketplace.

I think the story of one of our new customers, Two Technologies Inc., helps to illustrate the growing appeal of our integrated marketing suite and the greenfield opportunity we see helping midmarket companies optimize their use of new digital marketing channels. Two Technologies has been designing and manufacturing ultra-rugged handheld computers since 1987. With over 400 distribution partners, 4,000 customers and more than 1 million products in the field, their rugged mobile computers are used by people on-the-go and in harsh field conditions around the world.

Prior to Vocus, most of their marketing was traditional offline marketing, including trade shows and advertising, which was becoming more expensive and less effective. They knew they needed to embrace more modern marketing channels, including email marketing and social media, and also raise their profile in search engines. They also wanted to measure the result of all of these channels to determine the effectiveness of their marketing campaign.

Two Technologies chose the Vocus Professional Edition, which costs $15,000 at our new packaging and pricing that went into effect in Q2. They're already up and running, working to market a product launch of their own, which is scheduled for later this fall. While it's a little too early to report actual results for Two Technologies, out of the gate, they are already saving money with Vocus by replacing their more expensive offline marketing channels, which should create an easy ROI model for them going forward. Just as important, they're very excited to have found an integrated solution that moves them into modern digital channels, including marketing on Facebook and Twitter, sending email marketing campaigns to prospect customers and increasing their presence in search engines and online, with Vocus search marketing capabilities.

So this is a great example of what we typically see on the new sales side of greenfield opportunity to move a company out of the expensive and hard-to-measure offline marketing world and into the broader, more efficient and highly measurable digital marketing space.

In addition to the overall success we're seeing

with our Marketing Suite and customers like Two Technologies, we're also seeing a very positive trend in our average selling prices as we begin to expand our focus on the midmarket. In May, we launched new pricing and packaging for our Marketing Suite and also discontinued our low-end Small Business Edition.

For the month of June, which was really the first month that reflected our new pricing, we saw average selling prices from new customers increase 45% over Q1. Our new pricing and our focus on moving further upmarket are important components of our broader strategy to become a leader in the marketing cloud, specifically focused on the midmarket, which again we see as greenfield opportunity.

With the increase in subscription prices and the discontinuation of the Small Business Edition, came a corresponding drop in total units in Q2. While we originally expected the mix of lower units and higher ASPs to be bookings neutral, the result was slightly lighter bookings due to fewer units at the low end of our service range. These smaller subscriptions have both lower margins and lower renewal rate.

So the trade-off for us, of fewer units at higher subscription prices, is consistent with our strategy to move further upmarket, and will allow us to increase sales productivity, improve overall unit economics and drive more operating leverage in the business. These positive dynamics will start to take hold in the second half of the year when we expect to see additional bookings growth without any further expansion to the direct sales team, resulting in improved margin.

More importantly, our ability to drive growth going forward through higher ASPs, and not exclusively through more sales headcount, creates a much stronger long-term model for overall growth and profitability.

Finally, it's important to note that this was our first quarter transitioning to our new pricing and packaging. And we believe there is more optimization to come as we expand our pipeline with more midmarket prospects and fully transition the sales team away from the low-end Small Business Edition, to the new pricing and packaging of the integrated marketing suite.

Turning now to our PR product. We are pleased to see bookings stabilize in Q2, with solid renewals and healthy new business. This provides more confidence the PR business will remain stable going forward. In addition, in Q2, we dedicated sales and renewal teams focused exclusively on our PR product, which we believe should optimize performance for the PR product going forward. Longer term, we believe our PR product will produce single-digit growth and very strong operating margin.

So in summarizing the quarter, we are, first and foremost, very excited about our continued success and the rapid growth of our integrated marketing suite. In addition, we're very pleased with our early progress moving further upmarket and the potential for further leverage in both bookings and margin.

Finally, we feel good about PR and what now looks like a very stable business with upside opportunity, potentially driven by the dedicated operational focus.

I'd like to spend a few minutes now covering in greater detail our focus on the midmarket, including our rapidly evolving Marketing Suite and 2 new major releases that will further expand the capabilities of our solution, deliver more value to our customers and address critical paying points in the large and underserved midmarket.

In Q4, we plan to release the next major addition of our integrated marketing suite codenamed "Picard"[ph]. This release will include significant new capabilities to help marketers simplify the complex task of coordinating and running multichannel marketing campaigns, across email, social and search marketing channels.

"Picard"[ph}also includes new analytics capabilities that will help marketers simplify the task of marketing funnel analytics by collecting, analyzing and presenting in one unified dashboard key performance data from websites, landing pages, social networks and email campaigns.

In addition to campaigns and analytics, "Picard" [ph] will also include new Social CRM capabilities that will help marketers automatically build profiles of their prospects and customers, using data from social networks and campaign engagement behavior. This will allow marketers to better segment and target their marketing efforts, producing better overall results and ROI. We believe this release will address meaningful paying points that exist today in multichannel marketing efforts.

"Picard" [ph] will be followed in early 2014 by another major release, code named SIGMA [ph], which will include advanced email and campaign workflow, lead scoring and integration. These capabilities will be built on top of the iContact technology that was rewritten and integrated into our Marketing Suite at the end of 2012.

While these types of marketing automation features are available for the enterprise space, those solutions are expensive and unnecessarily complicated for the midmarket. So here again, we see an opportunity to further expand our Marketing Suite to meet the marketing automation needs of a large and underserved midmarket.

Vocus has a long history of product excellence and innovation, and we're very excited about these upcoming releases, which will further support our focus on the midmarket and drive incremental value and ROI for our customers.

In summary, we're excited about the rapid growth of our Marketing Suite, coupled with our stable PR business, which is helping to fund that growth, along with our investments and further product innovation. We're also excited about our focus on larger subscriptions and the untapped midmarket, where we see an opportunity for Vocus to emerge as a major leader.

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. Revenues for the quarter were $46.6 million, which represents a 5% increase year-over-year and a 1% increase over the prior quarter. Please note that all references to revenue, specifically the comparisons to the prior year are on a non-GAAP basis, which we believe more appropriately reflect the economic realities of our business and the revenue that otherwise would have been recognized from acquired companies on a standalone basis.

Revenue was better than expected, as it exceeded the high end of our guided range by $1.1 million. The upside in revenue was due to strong renewal sales and better-than-expected e-commerce revenue. After a slow start in Q1, we are pleased to report that our PR subscription business stabilized in Q2, as renewal rates for our PR products were better than expected and pushed our total blended dollar renewal rate towards the high end of our 80% to 85% target range.

Also, we did see better-than-expected performance from our PRWeb e-commerce channel. Part of the upside in PRWeb is due to the push upmarket, as some of the low-end customers who would have otherwise purchased a subscription to the Small Business Edition under the old pricing plan instead purchased one-off releases through our self-service channel.

In terms of bookings, our Q2 calculated billings defined as the change in deferred revenue plus revenue, was $47 million, which is up from $45 million over the prior quarter. We ended the quarter with 17,801 active annual subscription customers compared to 14,116 at the end of Q2 2012 and 17,322 at the end of Q1 2013.

As Rick mentioned earlier, in Q2, we discontinued the Small Business Edition, our low-end subscription product, and introduced higher-priced packages for the Vocus Marketing Suite, which pushed selling prices notably higher in the quarter. The new pricing and packaging positively impacted our average selling prices in the quarter for new sales, as ASPs increased from $4,200 in Q1 to $6,100 in June alone, which is the first comparative month under the new pricing plan.

The increase in subscription prices and the discontinuation of the Small Business Edition resulted in a shift to larger subscription

[Audio Gap]

and fewer net subscription costs, specifically in the small markets. While we anticipated some pullback in new units in the quarter, the drop was slightly higher than expected as net customer adds came in at 479 versus our modeled estimate of 800, which pressured bookings by approximately $1.5 million to $2 million in the quarter.

The takeaway here. The units we lost come at the low end of the market, which have a $2,000 to $3,000 ASP, higher churn and lower margins.

Now looking ahead to the rest of the year. We're assuming a similar mix of units and ASPs, resulting in modestly lower bookings but stronger operating margins later in the year. More on that to come.

However, we believe our focus on selling integrated marketing suite subscriptions at higher price points and the push upmarket to serve midsize customers will produce a higher dollar renewal rate, better customer lifetime value and more attractive and profitable financial models for Vocus going forward.

On the cost side of our business. Our non-GAAP gross margin for the quarter was 82%, down from 84% compared to the same period last year and flat from last quarter. Our gross margin for the quarter is in line with expectations, reflecting investments we are making in our business to expand our service offerings for the Marketing Suite and drive higher ASPs and optimized penetration in the midmarket.

Looking forward, we expect cost of revenues on an absolute dollar basis to remain essentially flat in the second half of the year, and our gross margin to increase by approximately 50 basis points in Q2 to Q4.

Non-GAAP operating expense for the quarter was $37.6 million, a 10% increase over the prior year and a 6% increase from the prior quarter. As a percent of Q2 revenue, sales and marketing costs were 58%, R&D was 5% and G&A was 18%. Sales and marketing expenses were $26.8 million this quarter compared to $23 million last year and $25.9 million last quarter. The increase in sales and marketing costs over the prior year is attributed to higher sales commissions due to higher bookings, the expansion of our direct sales force and investments in building our brand to -- and generating leads.

The increase in sales and marketing over the prior quarter is primarily due to costs associated with our annual industry conference, which occurred during the quarter.

Research and development expenses were approximately $2.3 million this quarter compared to $2.7 million last year and $2.4 million last quarter. Please note, the decrease in R&D expenses over the prior year is due to higher R&D costs from the iContact email integration work that was completed late last year, specifically in December.

Now looking ahead, we expect R&D expenses as a percent of revenue to remain essentially flat for the remainder of the year.

General and administrative expenses were $8.5 million this quarter compared to $8.4 million last year and $7.2 million last quarter. While G&A expenses were essentially flat year-over-year, the increase in G&A expense over the prior quarter is due to higher professional fees related to the adoption of our shareholder rights plan and higher depreciation expense and facility costs due to the opening of our new Manila facility. For the year, we expect G&A to be around 17% of revenue.

In terms of profitability. Q2 non-GAAP operating income was a $594,000 a decrease compared to $2.9 million in the second quarter of 2012 and a decrease compared to $2.5 million last quarter. Our operating margin was 1.3% this quarter compared to 6.6% last year and 5.5% last quarter.

Our operating margin reflects the ongoing investments we are making in our marketing automation business, we believe will drive higher margins in the second half of the year, push margins for the full year, up to approximately 3.5%.

Non-GAAP net income was $139,000 for the quarter compared to $2.5 million last year and $2.1 million last quarter. Non-GAAP diluted earnings per share was $0.01 for the quarter compared to $0.11 last year and $0.09 per share last quarter. Q2 was significantly better than expected and $0.03 above the high end of guided range.

Now onto the balance sheet and cash flow statement. We closed the quarter with $36.3 million of cash, cash equivalents and investments, down from $41 million at the end of Q1. In terms of source for the cash, we used $300,000 of free cash flow this quarter compared to positive cash flow of $2.3 million last year and $8.5 million last quarter. Please note, that cash flow is seasonally strong in Q1 due to strong billings from the fourth quarter and translates to higher collections in the first quarter of the year.

Also, Q2 cash flow reflects the capital expenditures associated with opening our new Manila facility.

Accounts receivable decreased to $22 million from $29.8 million at the end of last year and DSOs for the quarter were 43 days. Deferred revenue totaled $78.5 million at the end of the second quarter, which represents an increase of $9.6 million over the second quarter last year.

Now let's turn our attention to guidance for the third quarter and full year of 2013. Our guidance assumes the following: For the third quarter of 2013, revenue is expected to be in the range of approximately $46.5 million to $46.8 million; EPS on a non-GAAP basis is expected to be in the range of $0.03 per share to $0.04 per share, assuming an estimated weighted average 24.4 million diluted shares outstanding and an estimated tax provision of $400,000. The estimated non-GAAP weighted average diluted share count assumes the conversion of 3 million shares of the Series A redeemable convertible preferred stock. So we are not treating the convert as debt but rather than [ph] equity.

Non-GAAP charges are expected to be $0.29 per share. GAAP EPS is expected to be in the range of a loss of $0.26 per share to a loss of $0.25 per 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 $0.18 per share to $0.21 per share, assuming an estimated weighted average 24.4 million diluted shares outstanding and an estimated provision of $1.7 million, that's an estimated tax provision. Non-GAAP charges are expected to be $1.35 per share. GAAP EPS is expected to be in the range of a loss of $1.17 per share to a loss of $1.14 per share, assuming an estimated weighted average 20.1 million basic and diluted shares outstanding.

Free cash flow is expected to be in the range of $11 million to $12 million for the full year 2013, which assumes cash backs of $6.5 million.

Our revenue outlook for the second half of the year and our cash flow guidance for the full year reflects modestly lower bookings due to the chipped up market, the discontinuance of the SBE product and the new pricing and packaging we discussed earlier. As a result, our guidance assumes accelerating bookings growth in the second half of the year in the 7% to 8% range.

Overall, we are pleased that the growth will come on higher ASPs, overall better quality deals, better margins in the second half of the year and higher EPS for the full year.

At this time, I'd like to turn the call over to the operator who can take your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Tom Roderick from Stifel.

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

So I guess my first question here, just thinking about the bounce back or stability on the PR side of the business. Can you talk about what you did tactically this quarter to sort of boost those renewal rates back to the high end of the 80% to 85% range that you target? Is that a sustainable number? What -- or how should we think about that going forward?

Stephen A. Vintz

So for Q2, I don't know that we really changed anything specifically. I think we just -- we were expecting to see or hoping to see just a more stable Q2 and had expected that Q1 was maybe just more of a blip and that's exactly what it turned out to be. Now what we have done though in the quarter, that I think could be better for us going forward is, we did go on then to split out a dedicated sales and renewal team. That really didn't have any impact on the performance of Q2. Q2 just came in solid overall. But going forward, we now have a dedicated team that's just going to be focused on new sales and renewals for the PR product line, and so we're actually hoping that longer term, there's actually upside opportunity for us in the PR business. We'd like to see it get back to single-digit growth. So that's what's going on in PR right now.

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

Okay, great. And maybe a follow-up to that, Rick, just in terms of thinking about your company as the Marketing Suite continues to grow very rapidly, the PR suite. You're investing, it sounds like a little bit more in that, to sort of get the renewal rates back. But as time goes on and as marketing becomes more important, what sort of strategic alternatives would you consider with respect to that business? Is that a business that you always intend to keep core to Vocus? Is it something that you would consider looking at strategic alternatives? I'm trying to think about how the business evolves as they're sort of tactically going in two separate directions.

Richard Rudman

Yes, certainly, it's something that we look at. We realize we have very a high-growth Marketing Suite business and coupled with kind of a flattish PR business that generates a lot of cash and supports the growth of Marketing Suite. So I think at this point, we want to keep all of our options open and really just focus on optimizing all areas of the business as best they can be optimized. That's what we're doing right now.

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

Okay. Last quick one for me. Steve, last quarter, I think you had guided to a bookings target this year of $210 million, give or take, a little bit. Is that a number that's still on the table after this bookings performance this quarter? Do you think that's achievable for the year?

Stephen A. Vintz

Tom, as I mentioned my commentary in the outlook for the year, I mentioned that specifically in Q2, bookings came in a little lighter, $1.5 million to $2 million. That's a result of pricing and packaging and the discontinuance of the Small Business Edition. So we did about roughly 300 fewer units. We do expect that trend to continue in the second half of the year, specifically in Q3 and Q4. So our outlook in the second half of the year, and our cash flow guidance, plus modestly lower bookings due to the chipped up market and for all the things we talked about, we're assuming bookings growth in the second half of the year to be roughly 7% to 8%, and that's all organic growth. And then directionally, if you think about the bookings flow in Q1, we reported a calculated billing of $45 million. Q2 is $47 million. Q3, directionally, we would expect to follow sort of a similar trend and a slight step-up modestly. And in Q4, we do expect seasonally strong bookings. And Q4 typically represents about a little more than 30% of our total sales. So yes, so that's reflected in our outlook for the year.


And our next question comes from the line of Brendan Barnicle from Pacific Crest.

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

Rick, I noticed in the press release that you guys listed Avaya, and I was interested in the what you were doing there. Is that -- that's, honestly, a very large enterprise. Are you doing some divisional work for them? Is that a PR customer? I was wondering if you could give us any more color on that.

Richard Rudman

Sure. No, I mean, most of the enterprise customers that you see listed in our press releases are typically going to be still on the PR side, and they are as well. So they're using our PR product. And...

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

Have you seen any, on the interactive marketing product, have you started to see any subsidiaries of some of your large PR customers look at that, and -- or is that an opportunity to kind of sell into those existing large enterprise customers, but maybe with the interactive marketing products at that division or at the subsidiary level?

Richard Rudman

Yes, I -- we were not currently doing that, but I absolutely think it is an opportunity going forward. And it's very possible that as we go into 2014, that we'll be looking to put in place a more of an enterprise-type team to go after those types of sales on the marketing side as well. So we're not currently doing that though.

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

Okay. And then we've seen a bit of a consolidation within your new interactive marketing group, particularly in the kind of midmarket to larger-end enterprises, and I was wondering if you've started to see any benefit from some of that consolidation, as we've seen that consolidation play out in some other segments within SaaS. We've seen some of the folks who've remained independent see a nice lift from that.

Richard Rudman

Yes, well, I think I don't know that we've gotten any benefit from it yet. But certainly, we're hearing a little bit more. We're starting to hear a little bit less, sorry, from some of those in terms of our kind of our early sales process. So I do think it helps companies like ours, when other people potentially in this space become part of much, much bigger organizations. So if anything, we think it will be a net positive for us going forward.

Stephen A. Vintz

I think the takeaway here is that we have one of the fastest-growing marketing clouds today, typically in the midmarket. So that's our focus.

[Audio Gap]

in the conference call. It's all geared towards our push upmarket to higher ASPs, and better sales for productivity and higher margins.


[Operator Instructions] Our next question comes from the line of David Hilal from FBR.

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

A few questions. First on the sales force, so I think you guys both mentioned the ability to extend margins and ASPs without the need to expand sales capacity. So I guess my direct question is what is the plan in terms of sales headcount? Do you feel comfortable with the number you're at? Or do you -- are you going to expand it? And then related to that, some of the sales folks that were selling more of the lower-end solution, how have you found your ability to kind of retrain them, so to speak, to go upmarket?

Richard Rudman

Yes, so we had originally planned to continue to add more reps in the second half of the year. And now, given the higher selling prices that we're seeing, we think we can produce the bookings that we have slated in our plan, the second half of the year with the existing sales team. So we're really focused moving into the second half of the year on larger ASPs and kind of quality of deals. And then so to your second question, in terms of the sales force, we're pleased with the early results as we have started to make this transition away from the Small Business Edition and to the integrated marketing suite, but there's clearly more work for us to do and more opportunity ahead. So I think anything like this is a process. And as our sales reps get a little bit more comfortable selling the integrated marketing suite instead of the Small Business Edition and also as we expand the pipeline of opportunities, to be more focused on the midmarket, I think there's absolutely optimization to come here as we move through the year.

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

Okay. And then on ASPs, you commented it was 4,200 in Q1 and then in the month of June, anyway, we saw 6,100. Obviously, that's a function of the new suite and the higher ASPs associated with the comparable SKUs. But I assume there's also some lift because that 4,200 number included some of the lower-priced units that you no longer sold in June. And I guess -- so I guess if you had to kind of separate the ASP lift, how much was attributable to just the fact that you stopped selling the lower-priced versus the benefit you're getting from the new SKUs that came out in June?

Stephen A. Vintz

I think it's fair to say it came. I think both were contributing factors. And Rick commented on -- to give a customer example, today, which came in at the $15,000 new price point. So keep in mind, we raised the low end by roughly 20%. We introduced higher prices. We're starting to get traction really at the high end of the price range here. So I think it's a combination of just between the Small Business Edition and raising the ASPs. We think there's actually more improvement to come, and we're excited about directions where the ASPs go. I think long-term, what all this means is that we plan to serve the midmarket with selling -- with ASPs. That can range anywhere from, what, $6,000-plus, all the way up to maybe $30,000, even $50,000. So it's higher ASPs, with lower churn, higher margins. And we think consequently, it's also going to be a catalyst for growth going forward. So I think for the quarter, about 1/2 from the discontinue to the Small Business Edition, and 1/2 from higher ASPs.


[Operator Instructions] We also have a question now from the line of Jeff Houston from Barrington Research.

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

It seems like the pricing increases for the Marketing Suite has been received pretty well. Is there room for more increases? Or should we expect the current pricing to stay in place?

Richard Rudman

I think when our new editions come out, we have a major new release coming in Q4, which I covered in my script. But certainly, the first one that's coming out that we've codenamed "Picard" [ph], has a lot of new marketing automation capabilities built into it. So it's going to deliver more ROI to our customers, more value, and there will be some -- there will be a cost associated with that in one form or another. So I don't think we've finalized yet exactly how we're going to roll that through, if that's going to be price increases across-the-board for all the editions, or we would maybe bring up the entry point a little bit more or simply make those higher-end subscriptions specifically for the midmarket. But I do think the products that we're going to be releasing in Q4 and Q1 will have a cost associated with them and continue to support our move into the midmarket, and help us generate higher subscriptions and higher margin.

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

Got it. Then following up on the dedicated team for the PR suite. How many salespeople are focused on that product? And comparatively, how many are focused on the Marketing Suite?

Richard Rudman

Yes, it was -- on the new sales side, keep in mind, this was predominantly the midmarket because our small business team was already focused pretty much exclusively on marketing. But it was about a 50-50 split of our midmarket new sales team. And then on the account management side, basically, the former side where they do renewals and upgrades, I don't know the exact split. It was a just -- it was aligned based on the customer sizes, so it's going to be skewed more to the PR. That's, today, more cost.


And our next question comes from the line of Steve Ashley from Robert W. Baird.

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

I was just going to ask about the new customer additions. Obviously, the new pricing went in May 1. You had that for just 1 month of this current quarter. You added 479 new customers. As we look out, just directionally, maybe setting expectations, would you assume that the number of new customers in the third quarter would be less than the 479 you brought in in the second quarter?

Stephen A. Vintz

Steve, that's such a good question. We are estimating modest growth in net adds in Q3 and Q4. But the bulk of our bookings growth over the next 2 quarters will come from higher ASPs. So I think the right way to think about that is probably about 1/3 of the growth, that we're forecasting in the second half of the year, will come from additional units. About 2/3 will come from the higher selling prices. This is a fundamental but important change we're making to the model. Overall, we believe it's going to result in better sales, or productivity and higher margins, which is contemplated in the outlook for the year.

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

Yes. Can you say whether the PR business, the billings, were they positive year-over-year in the quarter?

Stephen A. Vintz

Yes, we didn't comment, and we're so -- in Q1, what we had guided to was PR billings growth of negative 5%. We did better in Q2, predominately on higher renewals. And I think if we look out the second half of the year, we're leaving the guidance relatively unchanged with respect to PR. We had a good quarter, but we're going to see how that plays out. And so overall, a little better, but really, our outlook is unchanged for PR. Directionally though, we feel pretty good that long term, we can get PR back to kind of the single-digit growth on very high margins. So the PR business is characterized by high renewal rates, high margins. That will continue to be the case, and then we believe we can optimize PR going forward, but the price per case, [ph] and the sales team is another initiative rolling out.

Richard Rudman

And it's certainly moving in the right direction.

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

And then just internally, you've divided your world up a little bit into the, I assume, small business market and midmarket. With the change in mix, do you change kind of the mix of number of reps in each of those groups going forward?

Richard Rudman

Yes, well, I'd like to see us a little bit more focused on the midmarket given our vision and strategy. I don't know, again, that as we move into next year, that we would need to expand the small business group. We would hope to get more bookings growth from ASPs there, but in the midmarket, especially now that we've split the midmarket team between PR and marketing, that's where I think there will be opportunity potentially to grow the sales organization in much more moderate ways than we did in 2012. But that's where I would hope to see the growth, would be in the midmarket marketing sales team.


[Operator Instructions] Our next question comes from the line of Richard Baldry from Wunderlich.

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

When you look at your guidance sequentially, the revenues could be either slightly down to slightly higher. Can you talk about the moving pieces there, with PR sort of stabilized and marketing accelerating? I guess I'm a little surprised to see there the -- even the potential in your guidance for a sequential decline?

Stephen A. Vintz

Sure, Richard. As we commented in Q2, we would like to see $1.5 million to $2 million more in bookings. With the new pricing and packaging that was rolled out during -- in Q2, we produced 479 net new customers. Initially, we were targeting about 300 units higher. So the new pricing and packaging, the good news is, it is pushing ASPs higher. It is driving higher EPS in the -- for the full year and higher margins in the second half of the year. But this is the first quarter in which we've done so. We did see a pullback in units more than we anticipated. So we're taking that and we're pulling that through the second half of the year. So what you have is bookings is probably a couple of million dollars lighter than what we were modeling last quarter for Q3 and Q4 on higher ASPs, and better overall margins. So we're in the midst of a transition here are pushing upmarket, making these changes, we're pleased with what we've seen to date, but the guidance reflects exactly that, some of the shift in mix in our customer base.


And that concludes our question-and-answer session for today. I would like to turn the conference back for any concluding comments.

Richard Rudman

I just want to thank everybody for joining us today. We look forward to speaking with you again soon. Thank you very much.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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