Marketo's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Marketo (MKTO)

Marketo Inc. (NASDAQ:MKTO)

Q3 2013 Earnings Call

October 24, 2013 5:00 PM ET

Executives

Erica Abrams - The Blueshirt Group

Phillip Fernandez - Chairman and CEO

Frederick Ball - SVP and CFO

Analysts

Greg Dunham - Goldman Sachs

Sitikantha Panigrahi - Credit Suisse

Terry Tillman - Raymond James

Richard Davis - Canaccord

Peter Lowry - JMP Securities

John Byun - UBS

Jason Maynard - Wells Fargo

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to Marketo’s Third Quarter 2013 Financial Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 24, 2013.

At this time, I would like to turn the conference over to Erica Abrams of the Blueshirt Group. Please go ahead ma’am.

Erica Abrams

Thank you, Ben. Thank you all for joining us today for Marketo’s third quarter of fiscal 2013 financial results conference call. Joining me on the call today are Phil Fernandez, CEO; and Fred Ball, CFO of Marketo.

Before we get started today I would like to remind you that this call is being webcast and recorded. The webcast can be accessed live on the Investor Relations section of our website and via replay on our website shortly after the conclusion of the call. The website can be accessed at investors.marketo.com.

On this call today, we will provide you with details about our performance in Q3 of fiscal year 2013. Some of our comments may include forward-looking statements such as statements regarding our outlook for the fourth quarter and fiscal year 2013. These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties. Actual results may vary materially.

Please refer to the section entitled forward-looking statements in our earnings release and read the risk factors included in our filings with the SEC; most recently, our S-1/A as filed on September 9, 2013. I would also like to point out that the results reported today include certain non-GAAP financial measures and that the numbers discussed on this call will be non-GAAP, unless stated otherwise. We provide non-GAAP financial measures because we believe that they are the most relevant, valuable way to review our core operating results.

We have provided a reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website and is also included on the Form 8-K we filed with the SEC today. The forward-looking statements and risks stated in this conference call are based on current expectations as of today and Marketo assumes no obligation to update or revise them, whether as a result new developments or otherwise.

Now, I will turn the call over to Phil Fernandez for his remarks. Phil?

Phillip Fernandez

Thank you, Erica. Hello and thank you all for joining us today, as we report financial results for the third quarter of 2013. We are delighted to again report a very strong quarter. Revenue increased 65% year-over-year and 13% sequentially, to $25.5 million, and other key metrics were also well in line with our operating goals.

Historically, Q3 has been our seasonally softest quarter. Yet this year, I was very pleased to see strong and consistent performance across all elements of our business. I believe this clearly validates the size and growth of the overall market opportunity, and confirms how well we are executing on our plans.

As a reminder, our business strategy is built around being the sustained thought leader and technology innovator in the dynamic enterprise software category of solutions for the modern marketing department. Our recipe for growth is to focus first on new customer acquisition, in this rapidly expanding category, while also working to increase average revenue per customer across our growing installed base. Further, we will grow by pursuing complementary adjacent markets for our vision and technology, to let us capture additional revenue streams.

We sold at all aspects of our strategy in the quarter. We continue to innovate. For example, we announced an important product collaboration with Google, to improve conversion analytics and AdWords. We also saw great strength to cross sell of our application family, and are pushing to, what is perhaps the most important adjacent market, which is selling to B2C industries, really pick up steam in Q3.

More broadly, (inaudible) how vibrant the marketing software category continues to be, as it emerges into the mainstream of technology buying, and I see clear signs that the market is moving in our favor.

Just a year or two ago, our category was often defined or talked about, as an appendage to the CRM or Salesforce automation market. But now, every day, I see more and more marketing leaders stepping forward to take charge of their own destiny. They are selecting and investing in technology and solutions that they need to do their unique and important jobs. I call this a Marketing First World, and I believe it really plays to our strengths, given our singular focus at Marketo, on creating great products for marketing professionals.

Let me turn now to some specific highlights for the quarter. As I just mentioned, a key growth factor for our business, is to extend beyond our roots in B2B marketing, to serve an increasingly large number of consumers, or B2C marketers, and we certainly supercharged that initiative in Q3.

In the B2C category, we added customers like National American University, to help them offer a broader range of online education opportunities. The Portland Trailblazers, to help them sell basketball tickets; and JetSuite, to help them expand their program of innovative private jet memberships. For you dog lovers, we added American Kennel Club, supporting their new Wookieepedia initiative, to revitalize their brand with a younger demographic. And in fact, our largest transaction in the quarter was in the B2C category, where we were in business with a well known family brand. I believe that these and other B2C wins in the quarter, clearly demonstrate the growth opportunity that this category presents to Marketo.

In each case, these B2C customers are moving away from the increasingly obsolete batch and blast model, the email marketing world. They are upgrading to Marketo, in order to build deep, personal and durable relationships with each of their individual customers across channels and over time.

In our core enterprise business, we saw excellent traction in the quarter, adding new customers like Charles Schwab, Pfizer, News Corp, Time Warner Cable, Informatica, Dimension Data, Software AG, ATT, Plantronics, NTT America and Sharp Electronics.

Together with this enterprise success, in the quarter, our win rates and our overall results were also very strong in the competitive SMB and mid-market parts of our business. We closed the quarter with 2,760 total customers.

Cross-sell and usage expansion of existing customers was very good as well. We added substantial additional business at enterprise customers, such as CA Technologies, Paycheck, Hitachi Data Systems, VMware, Trimble Navigation, and Beechcraft. We also grew our relationships to rising stars, like SurveyMonkey and Zoho.

Finally, as I talk about customer expansion, a great highlight for the quarter came from our newest product, Marketo Financial Management, which we introduced just a few months ago. In Q3, we closed a multiple six figure cross sell transaction for MFM, and what was already one of our largest global customers.

Obviously, our recent success in consumer markets and with cross-sell transactions, our growth is powered by our relentless focus on innovation. For example, a few months ago, we released a major new product capability, we call our customer engagement engine. It allows our users to build individual automated conversations with each and every one of their customers, with unprecedented ease and agility. I am thrilled to report that just one quarter later, our customer engagement engine has been adopted by more than 1,000 of our existing customers, and is proving to be a powerful differentiator in the marketplace, and a meaningful factor in our competitive win rate.

But we are never content with standing still, and we have continued our pace of innovation. Just last week, we announced a major new product, we call Marketo Dialog Edition. This product is purpose built for email marketers, who feel stuck with the prior generation of batch and blast marketing software. Now with Dialog Edition, the email centric marketers, particularly those in (inaudible) B2C industries, are able to make an easy and seamless [chomp] at the modern and multi-channel marketing.

I am very excited about the potential for this new product, and apparently, our customers share the excitement. In Q3, we even closed a couple of deals for Dialog Edition, before it was publicly announced or released, and in fact, the B2C deals that I mentioned earlier as our largest new business transaction in the quarter, was actually an advance order for Dialog Edition. Now we have delivered on that promise, and Marketo Dialog Edition went live for our customers this week.

In combination with our own innovation, more and more partners are integrating into Marketo, as part of our LaunchPoint solution ecosystem. In Q3, we announced integrated product offerings, including Box for Marketo; HootSuite for Marketo; RingLead for Marketo; and Certain for Marketo.

Overall, by the end of the quarter, we had more than 190 partner solutions available on LaunchPoint. I believe we are seeing this kind of traction with such a wide range of partners, because they too see this new Marketing First World that I have described, and they know that Marketo has become the clear marketing software of choice.

Few other comments on key progress in the business; we continue to see strength in our professional services operation in the quarter, which is essential to our enterprise growth strategy, and I am pleased that we have been able to deliver strong services growth, while also maintaining a positive trend line on services gross margins. We also continue to see good progress with our international expansion efforts. In the quarter, we added enterprise sales teams for the UK, Germany, and France, coupled with new, full local language products, websites, and go-to-market resources in France and Germany. We recently signed multiple distribution agreements in Latin America, and we continue to be active, working on opportunities in Asia.

We are excited to be gearing up for Dreamforce in November, which other than our own Marketing Nation Customer Summit, is the largest single marketing event we do every year. Our expected role, as a very visible [IFB]-sponsored theme for us, is a testament to the continued strength of our relationship with Salesforce.com, and our support for the many mutual customers that we share.

Our datacenter transition program is moving rapidly forward, and is on the glidepath for completion in Q4. Our Q3 results are already beginning to show the positive gross margin trajectory enabled by the key long term investment in our operations.

Last, but definitely not least, let me close with a big shout out and thank you to all of our employees for their continued commitment to the Marketo journey. It’s not easy growing the top line this quickly, simultaneously expanding in multiple different directions and keeping the innovation engine running at full speed. But it’s so clear to me everyday that our team at Marketo is more than up for this challenge.

With that, I will turn the call over to Fred Ball for his financial review of the quarter, as well as our outlook for Q4. Fred?

Frederick Ball

Thank you, Phil. As Phil stated, we had an outstanding Q3. But to first (inaudible) throughout my remarks, the numbers will be stated on a non-GAAP stated, unless I indicate otherwise, and you could find a reconciliation of GAAP to non-GAAP results in the financial table provided today.

The non-GAAP amounts exclude the impact of stock-based compensation expense and the amortization of intangibles, acquired in connection with the acquisition of Crowd Factory more than a year ago.

Now for the numbers; total revenue in Q3 was $25.5 million, up 65% year-over-year and 13% sequentially. Recurring subscription and support revenue was $22.5 million in Q3, increasing 60% year-over-year, and 13% sequentially. Our revenue performance continues to reflect the success we have had this year in new customer acquisitions, and our solid customer retention rates. Subscription dollar retention rate continue to average 100% over the past four quarters.

During Q3, we added a healthy group of new customers, with solid performance coming from the enterprise business, and particularly strong performance coming from our SMB business. We also experienced significant year-over-year growth in upsells and cross-sells into our existing customer base.

Professional services and other revenue for the third quarter was $3 million, up 120% year-over-year and 15% sequentially. This strong revenue growth was particularly notable, given that this quarter did not have the education revenue uplift that we had in Q2 from our Marketing Nation Customer Summit.

In Q3, gross margins increased to 63.1% as compared to 59.5% in Q2 and 58.1% a year ago. Subscription and support gross margins were 73.1%, up 4% from Q2 and up from 69.2% a year ago. We are in the midst of a datacenter transition as Phil mentioned, and as you may recall, we completed phase one of this transition at the end of Q2. Q3 reflects some of the initial benefit from this datacenter transition, along with improvements in margin from scale-up of our business.

We continue to expect this transition to be completed by the end of this year. We believe that we are on track to deliver the four to five margin points promised by this collocation effort. Looking forward, I expect to see a slight incremental improvement in gross margin in the December quarter, with further improvement coming in 2014.

Professional Services gross margin also continued to improve. Margins this quarter were negative 12%, a marked improvement from negative 56% a year ago, and better than negative 13% last quarter.

Turning to operating expenses, research and development expenses were $5.5 million for the quarter, and represented 21% of total revenue in Q3; as compared to 29% a year ago, and 22% last quarter. We expect R&D dollars to continue to increase as we go forward, but for R&D spending to decline modestly as a percentage of revenue.

Sales and marketing expenses were $14.6 million or 57% of total revenue in Q3, as compared to 68% a year ago and 65% last quarter. Total dollars incurred on sales and marketing expenses were flat sequentially, as there were higher variable expenses due to sales and overperformance in Q3, was offset [to period expenses] we had in Q2 related to our Marketing Nation Customer Summit.

As a reminder, we expense commissions in the quarter of booking, which resulted in an increased spend in the current period, followed by increases in revenue occurring in future periods, as we recognized the related revenue ratably over the contractual subscription period.

Looking forward to Q4, our seasonally strongest quarter, we expect sales commissions and bonus rates to accelerate, and therefore expect higher variable sales compensation costs. We also have a significant increase in marketing spend related to Dreamforce in November, which means a larger total sales and marketing spend in Q4, when compared to prior quarters.

D&A expenses were $3.7 million or 14% of revenue in Q3, as compared to 18% a year ago and 15% last quarter. Our operating loss in the third quarter was $7.7 million or 30% of total revenue, as we continue to invest and scale our business. We expect that investment rate to continue in Q4 and start to moderate in 2014, as we achieve greater operating leverage from expected top line growth. Net loss in Q3 was $7.8 million and net loss per share was $0.21, based on 37.1 million weighted average common shares outstanding for the quarter.

Now to the balance sheet; we closed the quarter with $141 million in cash and cash equivalents. This represents an increase of $19 million compared to June 30, 2013, driven primarily by the net proceeds of $22.5 million received in the third quarter from our follow-on offer. We closed the quarter with deferred revenue of $30.6 million, up approximately 86% year-over-year. Our deferred revenue balance remained flat quarter-over-quarter. As I mentioned on the Q2 earnings call, we expect the deferred revenue growth to be modest in Q3, as it has historically been our seasonally slowest quarter.

As we discussed in Q2, billing frequency mix can vary substantially from quarter-to-quarter. We experienced some of this variance in the third quarter, with a mix more heavily weighted towards quarterly versus annual billing. This impacted deferred revenue by approximately $1 million compared to the prior quarter.

As we have discussed in the past, predicting deferred revenue continues to be challenging, as customer mix shifts and related billing frequency shift from quarter-to-quarter. That said, we do expect deferred revenue growth to be more significant in Q4, as it is proven in the past to be our seasonally strongest sales quarter of the year.

Cash flow used in operations in Q3 was $2.4 million, driven by a $1.5 million increase in accounts payable and accrued expenses. Due in part to our payment cycle, as well as the accrual of commissions to be paid down in Q4, and bonuses to be paid out after the end of the year.

While we continue to be very pleased by our strong cash flow quarter, cash flows will fluctuate in Q4 and in future periods, depending on the timing of many factors, including customer mix, billing frequencies, which I described earlier, and the timing of cash flows related to items like variable compensation plan.

CapEx for the quarter was $2.4 million, reflecting equipment purchase in connection with our co-lo transition, and leasehold improvements associated with facilities expansion completed in the quarter. We financed $1.4 million of equipment purchases, increasing amounts under our credit facility to $7.8 million. We expect CapEx to be in the range of $1 million to $1.5 million for the remainder of the year, as we add incremental capacity to support our growth rate. Total headcount at September 30, 2013 was 460, up 47 from June 30, 2013.

Turning to our outlook for the fourth quarter, we expect revenue in the range of $26.2 million to $26.7 million, and non-GAAP net loss per share in the range of $0.25 to $0.27, excluding stock-based compensation expense of approximately $2.5 million and $125,000 of amortization of acquired intangibles. This assumes approximately 38.3 million weighted average common shares outstanding.

With that, I’d like to turn the call back over to Phil for closing remarks.

Phillip Fernandez

Thank you, Fred. In virtually every dimension, our third quarter marked another solid step in our progress as a public company. I was particularly pleased to see the increasing contribution coming from several of our key growth initiatives, such as expanding into the consumer marketing space. Going forward, we will continue to excel at innovation, thought leadership and solid business execution, and that makes me very confident in our market position and assures me that we will take great advantage of the emerging Marketing First World that I described today.

And with that, I will turn the call over to the operator for the Q&A session. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Greg Dunham with Goldman Sachs. Please go ahead.

Greg Dunham - Goldman Sachs

Yes, thanks for taking my question. I guess the first is just a clarification if I heard you right. On the mix shift into quarterly versus annual, was that a $1 million headwind to billings? Did I hear you correctly on that?

Frederick Ball

That’s right. It was a $1 million headwind to deferred.

Greg Dunham - Goldman Sachs

Okay.

Frederick Ball

The deferred in an equal world of billings frequency from Q2 would have gone $1 million higher.

Greg Dunham - Goldman Sachs

Okay. So I mean, 77% growth normalized, was actually an acceleration from last quarter. Okay, so I just wanted to clarify that. Then I guess, a bigger pictured question, maybe Phil, on the – you mentioned the influence and the buyer strengths within the organizations at the marketer level. Can you elaborate a little bit more on that? What are you seeing from your customers that talk to the marketing leaders, having more [power] within the organization and they are swaying the decision more than, maybe they did two years ago?

Phillip Fernandez

Well I think – Greg, I think we just see a – just much more active dialog in the industry at large, about the role of the marketer and you can go to conferences, you can talk to industry analysts, you can talk to CEOs at lunch or whatever it is, and people are talking about the topic, is the first thing, and there is enough success stories out there about marketers actually transforming the top line of the business with their great efforts, that I think – you start to see the case studies emerging as well. And I think, with that, comes a little bit of credibility and a slagger that marketers have, that they are not, just at the end of a rope in terms of other technology decisions going on in the enterprise. And we just see it all around this in different industries light up, and are buying marketing automation as consumer industries are. I just think its pervasive throughout the industry.

Greg Dunham - Goldman Sachs

Okay. Then one last one if you let me; the B2C win, obviously a big highlight and the Dialog release is definitely probably going to help you there. Are you going to do anything from a go-to-market perspective as you go forward from a B2C standpoint that we should be aware of? Thank you.

Phillip Fernandez

Gosh, I am not sure. Yes, we are going to go to market powerfully strongly with the Dialog Edition and overall in B2C. Go-to-market is a constant process of innovating and bringing products to market, getting beachhead customers, making them wildly successful, leveraging their success stories to build upon that, to grow and ultimately catalyze the market. And we intend to do all the same things we did in our B2B market, with B2C, and the fact that we are able to already be earning very substantial transactions from B2C customers, shows that we – that those go-to-market efforts are starting to pay off, and we will just keep doubling down as we go.

Greg Dunham - Goldman Sachs

But nothing from a personnel or specialization perspective out there?

Phillip Fernandez

Not yet, although I think there is a non-zero chance that we decide that we do want to do some specialization. We do have specialization in marketing, and we do have in our enterprise sales team, a couple of B2C specialists, but at this point, all of the sales team is fully quoted and compensated to sell across B2B and B2C. I would guess that you will see us do some further specialization in the brand and e-commerce area, as we continue to grow there. But that’s for another day, because it adds complexity along with the benefit of focus.

Greg Dunham - Goldman Sachs

Okay great. Thanks guys.

Operator

Thank you. Our next question comes from the line of Phil Winslow with Credit Suisse. Please go ahead.

Sitikantha Panigrahi - Credit Suisse

Hi, this is Siti Panigrahi for Phil. Congrats guys on another great quarter. So given all this consolidation that we have seen over the last few quarters in this space, just wondering, have you seen any changes in the competitive environment or any change in how competition’s pricing or your (inaudible)?

Phillip Fernandez

Well clearly, you can’t have two or three major transactions take place and claim there hasn’t been any change in the environment. But what we see is really this Marketing First World that I talked about, which is that, marketers are looking at solutions on their own terms, for their own features and functions and ability to make them successful and the way that we have driven our growth over the years, I think we stand out as still the gold standard in that space.

We have seen here and there, kind of consolidated enterprise selling by Oracle, where they are trying to bundle in Eloqua in, and deal with the CIO, but that’s not a material – certainly is not any kind of a material headwind in the business, that I can tell. And we just compete very favorably across all the competitors. What we haven’t seen, is frankly any competitive move. We are introducing new products, we are moving – we are going, and the rest of the world kind of seems to be standing still, and that, if anything, has played strongly in our favor.

Sitikantha Panigrahi - Credit Suisse

That’s really helpful. Thanks Phil.

Operator

Thank you. Our next question comes from the line of Terry Tillman with Raymond James. Please go ahead.

Terry Tillman - Raymond James

Hey guys. Good afternoon. Congratulations as well from me on the quarter. First question I guess is on the enterprise business. I know the need of the business is still SMB, but you did announce some household names there that I assume that you had solutions in place, so maybe you could correct me on that. I mean, those names you mentioned, are those divisions that didn’t have automation or optimization before, or do they typically have something in place, and you are replacing them, and then if so, any common corollary in terms of what you would be replacing? That would be the first question.

Phillip Fernandez

All over the map, we very frequently replace an email marketing solution, and certainly some of the cross (inaudible) the names that I described, that is probably ubiquitously the case, they will be replaced -- typically a brand name email marketing solution in that process. There are certainly replacements of older generation technology going on, replacements of an Aprimo, a Unica, Teradata, that category is (inaudible) some exposure in the enterprise, and there is a couple of examples of that, and their names are circulated. Then, there is still a vast territory, as much of the enterprises is in the SMB, where this is a world of ad hoc tools and spreadsheets and people running to the same place, where this is the first marketing automation tool of a mature form has been deployed. So we see all of those, just in every permutation you can possibly imagine.

Terry Tillman - Raymond James

Okay. And I guess a product question, I think I may have asked last quarter, but in terms of financial management, it’s nice to see the cross sell happening there. I would just be curious in terms of – is that a product that your entire sales force sells, and how do we think about the attach rate of that product, whether it’s the S&P, mid-market or enterprise? Could we see notably different attach rates?

Phillip Fernandez

It is a product that the entire sales force sells, and it is – we brought it to market currently, primarily as a cross-sell into the install base, although we certainly see opportunities to sell it independently as well, going forward. It is concept biased towards the high end of the market, and the deals like the transaction I described, replacing an older generation of technology in that kind of space. But we have seen actually surprising traction in small and mid market, because even though the company – 100 or 200 people in the entire company, it’s not unusual for them to be devoting a full time person to – just keeping on top of the marketing budget, and this product can just be transformative in terms of its ROI there. So we are actually seeing reasonably good attach across up and down the entire customer base.

Terry Tillman - Raymond James

Thanks Phil. And I guess Fred, just a financial question or a two part financial question, is there anything we should appreciate into the fourth quarter in terms of the split between the recurring revenue and pro services? I mean, does anything happen with seasonality on the services side in the fourth quarter, and then I just had a quick follow-up with you?

Frederick Ball

Yeah, that’s a great question. What we tend to find, as we enter Q4 from Q3 is that there is a lower – with a little bit less of a services demand, just as a function of the type of deals that were closed and going into a seasonally slower – excuse me, from a seasonally slower Q3. So I expect services revenue to come down a little bit, relative to what we saw in Q3, and then catalyze through Q4 into the next year, to be stronger again.

Terry Tillman - Raymond James

Okay great. And then, I think both of you were talking about the stickiness with the installed base and they tend to buy more. Any – and I know this might be a hard question, but how do we think about the business, the add-on business that you sign with the installed base. The mix of them buying new product footprint, as opposed to their getting value of the traditional product and just adding more database? Thank you.

Phillip Fernandez

We see clearly both of those going on. We have the lever turned – first, towards new customer acquisition, just to the (inaudible) priority, is first about new customer acquisition, because in this market, that’s ultimately the key.

Second, towards new product cross-sell, and we have been putting a lot of emphasis on cross-sell to attach to new products, because that’s all about exploiting the R&D investments and the positive steps that we have been bringing, and this third priority is frankly pursuing new business upsell and I believe, that that represents the really interesting growth factor, because not that customers aren’t today growing, but that has been a lower priority to pursue and capture those dollars, and so primarily, you see cross sell activity.

Terry Tillman - Raymond James

Thank you.

Operator

Thank you. Our next question comes from the line of Richard Davis with Canaccord. Please go ahead.

Richard Davis - Canaccord

Thanks. When I kind of look at your platform, you basically have, and correct me if I am wrong, a complete customer engagement record. So what would keep you guys from acting like a full-functioning CRM system, at least for your smaller customers? In other words, what could you add on the front, to increase wallet share, also on the larger customers? But really -- could you pivot that way, or does that make sense or – anyways, that was my thought.

Phillip Fernandez

It depends how you define a CRM system. We have an extraordinarily powerful data set that gets captured underneath Marketo. It’s the data set that goes well beyond anything that gets captured in a CRM system [by a] traditional meaning, and that is that we have this vast (inaudible) of customer behavioral data, as it complements, names, addresses and like the graphic kind of data. So from that respect, we are a CRM system in the most fundamental way. We don’t aspire to be on the salesperson’s desktop. We don’t aspire to be on the service person’s desktop as their primary application. We are the product for this marketing first company.

I think, in a marketing first world, the marketing team is the corporate steward of the customer, and so to the extent that the marketer is the steward across the whole enterprise of the customer, and we are the primary technology supplier to the marketer, then we are something pretty interesting. But I don’t – I have no desire to declare war on the CRM market at this point, in a literal sense.

Richard Davis - Canaccord

Got it. Okay. Thanks very much.

Operator

Thank you. Our next question is from the line of Patrick Walraven with JMP Securities. Please go ahead.

Peter Lowry - JMP Securities

Yeah, it’s Peter Lowry actually in for Pat. A quick question just on the landscape. As you move into B2C, what do you see is the advantages, or are there advantages coming from a B2B background, versus a B2C background or a CRM or enterprise software background in attacking that space?

Phillip Fernandez

Great question; and the answer is emphatically, yes, I believe. And it was the founding of concept that my co-founders and I sometimes had when we started, which was that there is this really-really business problem, which is how do you help a marketer design and sustain a personal ongoing dialog over time with many-many buyers, and if you think about the B2B world, the problem we solve so often is, getting a buyer from the day they first start to think about the purchase, until the day that they actually close a purchase. And they consider purchase cycle and B2B might be weeks, months, or even years, for a large ticket item. So the core of our original innovations were all about how to help marketers maintain this throughout the conversation over that time.

It turns out in B2C, that’s exactly what people are now wanting to do. Right. If you have a brand, and you are trying to maintain loyalty for your brand, what you want to do is, stay in touch with your best and active, most (inaudible) buyers, and be sure they stay loyal and don’t choose a different brand when they are in the shopping – the supermarket aisle; or if you are otherwise trying to sell a B2C product, what you are trying to do, is maintain lifetime value, up-sell, cross-sell and the like.

So the problem of maintaining unique individual productive relationships over time, is the center of where we cut our teeth. The innovations we have brought, and it’s exactly what the B2C market is crying out for. So we think we are just wildly well positioned in that market.

Peter Lowry - JMP Securities

One follow-up, if you look at the pricing on the B2C side, does that follow the B2B model or is that a different pricing model?

Phillip Fernandez

We use the same model of pricing based on the number of records in the database for the core data centric applications in the suite. But with a different price per record, because typically – and really it’s not fair to look at it as a B2B and a B2C model, it’s better to look at it as a high unit value pricing model and a low unit value pricing model. We have customers that sell products with an average selling price of $4 and we have customers with an average selling price of $500 million. So a obviously a leader, a name or a person has a different value. So we have some different pricing schedules that are really pegged towards the different of a name in the database, and obviously in B2C, that tends to be more names in lower value, and in B2B it tends to be fewer names in higher value.

Peter Lowry - JMP Securities

Okay. Well thank you. Congratulations on a great quarter.

Phillip Fernandez

Thanks.

Operator

Thank you. Our next question is from the line of Brent Thill with UBS. Please go ahead.

John Byun - UBS

Hi, this is John Byun for Brent. Wanted a little bit more color in the enterprise segment. You highlighted the strength in SMB and mid market. Was there anything notable in enterprise, other than may be some seasonality?

Phillip Fernandez

No. I am going to start, and I will turn over to Fred. But since I have the long arc of watching the business for a lot of years. In 30 years, in the enterprise software business, I think there is – enterprise buyers tend to – just the nature of the longer buying cycle tends to be just a little bit stronger in Q2 and a lot stronger in Q4. So there is nothing even remotely weak about the enterprise business in Q3. Just nothing like that away from it at all. It was simply standard, old, everyday Q3 quarter in the enterprise market, and our SMB business was really strong, but we haven’t seen – there haven’t been any changes in win rates or decline and exposure to deal cycles or anything like that, whatsoever going on in the enterprise.

Frederick Ball

And I would add just quickly, that the enterprise team, as it’s reaching more and more scale, they are outperforming even our internal planning assumptions overall. So it’s doing very well and it is (inaudible) as we go through the rest of 2013 and go forward, I feel good about their scale up.

John Byun – UBS

Okay great. And then I guess, a little bit related to that. I mean, I think in the past, you talked about billing frequency being, I guess, more quarterly in Q1 and Q3 and may be more annual in Q2 and Q4, is that something that we should still expect, I guess, into Q4?

Phillip Fernandez

I think it is. I think we do see, I think as I mentioned last quarter. We are seeing increasing shift towards the annual, but I do think we see that oscillation with Q2 and Q4 being particularly, as I mentioned in the last question, more enterprise heavy, and as a result, we will see probably a shift – if I had the guts, I’d shift back towards a little bit more annual.

John Byun – UBS

And if I could, just one more, in terms of the CRM vendors that you work with and that you see in your daily activity. Are you seeing any sort of shift – are you trying to drive any shift, retain your different partners, including Salesforce and (inaudible) and so on?

Phillip Fernandez

We are trying to drive any shift. I have talked a bunch of times today about this Marketing First World, and we see lots and lots of buying going on from all of those segments. We see buying going on from places, where none of them are present. Still common in the B2C world. And we are just sort of not thinking about the world in that way, as opposed to thinking about the world through the marketer’s eyes, and so we are not driving any aspect of the business relative to the CRM marketplace, we are driving it relative to the customers. And I think that’s going to – as we go forward, you will see just this increasing diversity of the kind of nature that customers and what other systems they have in their enterprise.

John Byun – UBS

Okay. Thank you.

Operator

Thank you. (Operator Instructions). Our next question is from the line of Jason Maynard with Wells Fargo. Please go ahead.

Jason Maynard - Wells Fargo

Hey, good afternoon guys. I had a couple of questions. First, I would love to get your sense, given Salesforce buying ET and taking a Pardot, what do you see, if at all, from the sort of early feedback from customers? Has there been any ripple effect, anything that you might have seen in terms of folks looking at that, not looking at that? Has it even come up in discussions yet?

Phillip Fernandez

Well, the exact target in Pardot have always been key competitors. So, they come up all the time, because they have always come up all the time. They don’t come up as, oh gosh, now it’s all part of Salesforce, and so that’s a different thing. Once or twice it does. Salesforce has great relationships with a number of their customers, and they obviously work to use those relationships to their advantage. But in this Marketing First World, you know, the marketing buyer is evaluating technology to a different land and in that world, the competitive dynamic is very similar to how it was before any of that acquisition worked.

Jason Maynard - Wells Fargo

Well just recently I asked, they are not putting Pardot in the marketing cloud, it’s actually going into the sales cloud, which is I guess – told you what they think of that functional area. I am curious that’s raised in the eyebrows amongst folks or if that’s maybe even actually helped you a little bit, given how they are positioning the product?

Phillip Fernandez

Yeah, I think it’s probably helped a little bit. I think there was a rationality, when exact target has acquired Pardot about what they were trying to do with the technology, and this seems to be somewhat of a virtual course. But I sort of held them to talk about – through the Marketo eyes, I think there is a set of buyers that are looking for a marketing automation platform. There is a competitive dialog we are part of, it was an active competitor. Has been and continues to be on the low end of the market. Target is an email vendor that competes in a different segment, and those competitive dialogs are more or less like they have been.

Jason Maynard - Wells Fargo

Then maybe the last question, I assume you guys are probably going through your 2014 planning process right now. Given the success that you had this year, and just kind of thinking about next year, how should we sort of – at this point maybe – I don’t want to say forecast, I am not trying to get guidance, but the pace of hiring has been strong. Is there any reason to not believe that we should see continued hiring, given the size of your TAM and the opportunity in front of you?

Phillip Fernandez

No, that’s right. No. Look, we are going to continue to hire. We are doing the planning, the capacity planning right now to continue to hire. I don’t feel like we have a closed view of where -- and thus from a guidance perspective, with the (inaudible) in Q1. We are going to continue to take advantage of hiring to address the TAM and you may even see us doing a little bit of acceleration hiring in Q4, in anticipation of what we need for next year.

Jason Maynard - Wells Fargo

Great. Thank you very much and congratulations.

Phillip Fernandez

Thanks.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. That does conclude the Marketo’s third quarter 2013 financial results conference call. If you’d like to listen to a replay of today’s conference, please dial 1800-406-7325 or 303-590-3030 using the access code of 4645518 followed by the “#” key. We’d like to thank you very much for your participation. At this time, you may now disconnect.

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