Vocus Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: Vocus, Inc. (VOCS)

Vocus (NASDAQ:VOCS)

Q4 2013 Earnings Call

February 04, 2014 4:30 pm ET

Executives

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

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

Analysts

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

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

Samad Samana - FBR Capital Markets & Co., Research Division

Operator

Welcome to the Vocus Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. The date of this call is February 4, 2014. This call is the property of Vocus Inc., and any recording, reproduction or transmission of this conference call without the express prior written consent of Vocus Inc. is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of Vocus Inc. website.

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

Stephen A. Vintz

Good afternoon. Thank you for joining us today to discuss Vocus' results for the fourth quarter and fiscal year 2013. I will now turn the -- cover the Safe Harbor statement and then turn the call over to Rick Rudman, Chairman, President and Chief Executive Officer.

During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. We want to remind you that these forward-looking statements are based on information available to us today, as of today's date, and are subject to risk and uncertainty. We assume no duty or obligation to update these forward-looking statements, even though our situation may change in the future.

Further, statements regarding our product development initiatives, including new products and future product upgrades, updates or enhancements represent our current intentions but may be modified, delayed or abandoned without prior notice. There's no assurance that such offering, 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 www.sec.gov, for additional information on risk factors that could cause actual results to differ materially from our current expectations. We 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 www.vocus.com. Our non-GAAP results and guidance does not include stock-based compensation, amortization of intangible assets, acquisition-related expenses, adjustments to deferred revenue, contingent consideration for earn-outs related to acquisitions, restructuring charges, as well as the treasury stock effect on outstanding equity securities and stock-based comp on our diluted share count.

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

Richard Rudman

Thanks, Steve, and welcome, everyone, to our Q4 earnings call. I'm pleased to report a strong quarter for Vocus, highlighted by better-than-expected financial results, continued momentum for our Marketing Suite and better-than-expected performance for our PR suite, all of which reinforces our 2013 strategic direction and further sets the stage for a successful 2014. I'll start by providing some additional details on Q4 and then cover our outlook for 2014, both in terms of our financial direction and our key strategic initiative.

In Q4, total bookings were $55.9 million, which exceeded our expectations by $5.9 million. Revenue for the quarter was also better than expected at $47.5 million, exceeding the high end of guidance by $2 million. Earnings followed suit with EPS of $0.07, which was $0.03 above the high end of our guided range. All areas of the business performed well in Q4, which I'll cover now in more detail from a line of business perspective.

We saw continued strong momentum for the Marketing Suite in Q4 with a significant increase in bookings to $9.8 million. This represents 26% sequential quarterly increase and a 108% increase over Q4 2012. Bookings in Q4 were driven by both higher new unit sales and higher subscription prices, which were supported by the strategy we communicated in 2013 to create a separate sales team for our Marketing Suite and focus more attention and resources on the large and underserved mid-market. As part of this strategy, we also made 2013 a year of significant product development, launching 2 major releases of our Marketing Suite with expanded features to support new packaging and higher subscription prices that went into effect at midyear.

We saw meaningful increases in our selling prices in Q3 and, again, in Q4 as the Marketing Suite is better able to meet the needs of larger marketing departments and command higher subscription prices. To put our selling prices in perspective, in 2012, the average selling price for our Marketing Suite was $4,000. In Q4 of 2013, the average selling price increased by over 70% to approximately $7,000. While this reflects the average selling price for customers of all sizes currently buying the Marketing Suite, in the mid-market, where we see the most potential, our average selling price hit $8,500 in Q4. This increase in selling prices was driven by our midyear product release and the associated packaging and pricing changes that went into effect midyear.

In December, we launched our second major release of 2013 that included significant new functionality that was packaged into our higher-end editions. We expect this most recent release to help further increase average subscription prices in 2014. Our results in the second half of 2013 give us confidence that our strategy to put increased focus on the mid-market is working. On a full year basis, bookings for the Marketing Suite came in at $28.3 million, slightly above our forecast and represent a year-over-year growth of 167%.

Not only did we see strong bookings in Q4 for the Marketing Suite, we were able to generate those bookings with a smaller overall direct sales team. In Q4, we began reducing the size of our direct sales team, with reductions specifically on our small business team. With the elimination of the Small Business Edition and with higher subscription prices, we're able to produce higher bookings on fewer units and with fewer sales reps.

In Q1, we plan to further increase sales productivity with the closing of our Manila sales office, which was opened to sell into the small business market. Now that we're focused on selling higher subscriptions to larger marketing departments, we no longer expect to scale our small business teams to a level that would have made Manila a cost-effective sales center.

We're very pleased with the results in Q4 and our ability to generate increase in bookings while reducing the overall number of sales reps. This is the strategy that we outlined in 2013, and the early results are a good indicator that we're on the right track and that our strategy will contribute to leveraging our sales and marketing model 2014.

Turning our attention to PR. We're also pleased to report a strong Q4 with quality new business and high renewals. This resulted in a return to single-digit growth for PR in Q4 and the second half of 2013.

In the first half of 2013, we saw some contraction in PR bookings that, we believe, was the result of our integrated sales team selling both our PR and Marketing products. Selling both products proved to be more difficult overall as sales reps had to learn 2 products, 2 buyer profiles and 2 competitive markets. The result in the first half of 2013 was lower-than-expected sales of the PR suite as reps were most focused on selling the rapidly growing Marketing Suite. At midyear, we created separate sales teams for PR and Marketing in an effort to ensure focus and optimize sales for both products. While we only have 2 quarters of data in hand, we're pleased with the early results, which included return to positive growth for PR while maintaining strong growth for the Marketing Suite.

I'd like to step back from discussion about individual products and talk briefly about net new subscription customers for the company as a whole and the relative importance of this metric in the face of rapidly changing subscription prices and the discontinuation of our Small Business Edition in midyear 2013.

Net customer additions are a function of both new sales and customer account renewals. From a strategic standpoint, we've communicated our strategy to move upmarket, which has led to bringing in fewer new customers but at higher average subscription price. At the same time, we are continuing to churn out small business customers after the discontinuation of our Small Business Edition. Our strategy to move upmarket results in the loss of a larger number of small accounts while retaining a smaller number of larger accounts. While this tradeoff creates negative net customer adds on a unit basis, our dollar renewal rates remained very strong, coming in at the high end of our stated target range of 80% to 85% in Q4. We expect dollar renewals to remain strong going forward and for net customer additions to continue to decline through the first half of 2014.

In the second half of 2014, after the 1 year anniversary of the discontinuation of our Small Business Edition, we expect net customer adds to start increasing again, becoming a more relevant and comparable metric going forward.

In addition to Marketing and PR, our stand-alone point products also performed well in Q4, with iContact, in particular, coming in better than expected, which contributed to our upside result.

I'd also like to provide an update on North Social, the business we acquired in 2011 to add Facebook apps to our Marketing Suite. With the 2-year earn-out now complete, we evaluated the remaining stand-alone North Social platform and have decided to close down that business. While Facebook marketing remains an important part of the social marketing mix, the technology for Facebook marketing has changed as Facebook changed the way business pages work. The modern replacement for Facebook apps is landing in campaign pages, and I'm happy to say that our latest release of the Vocus Marketing Suite includes this Facebook marketing capability. The remaining stand-alone North Social business uses the older stand-alone technology and serves primarily small businesses paying $500 to $700 per year. The business is relatively small and unprofitable and not aligned with our strategy to focus on larger marketing departments, looking for an integrated marketing platform. With modern Facebook marketing now integrated into the Vocus Marketing Suite, we believe it makes sense to close the remaining stand-alone North Social business. This will reduce 2014 revenue by approximately $5 million, which is reflected in our guidance today, but will contribute to increased operating margin in 2014 and allow us to focus on selling an integrated Marketing Suite to midsize companies at a higher price point.

In summarizing 2013, it was a challenging year, yet a year filled with great progress and many exciting developments. We executed on our strategy to move away from less-profitable, low-end-point products and focus instead on our more-profitable, higher-priced subscription products. We reorganized the sales team to ensure continued focus on both PR and Marketing, resulting in better results for both products in the second half of 2013. We launched 2 major editions of the Marketing Suite, expanding our opportunity in the mid-market and increasing our average subscription prices by over 70%.

Finally, we discontinued the Small Business Edition product and are announcing today the closure of our North Social business, both of which will provide increased profitability and allow us to focus on our higher-end PR and Marketing suites. In summary, we believe these changes will create a better and more sustainable model for value creation going forward.

As we think now about 2014, we believe it's important to go beyond the monolithic view of Vocus to appreciate the underlying lines of business and their associated strategy and value proposition. We remain very excited about our high-growth marketing cloud and the opportunity to become a major player in the large and underserved mid-market. After growing from 0 to over $28 million in just over 2 years, we expect to see continued high growth for the Marketing business in 2014.

Our current 2014 guidance contemplates bookings growth of approximately 40%, which gets us to meaningful scale for our Marketing business in a large and underpenetrated market. In addition, we are still on track for another major release of the Marketing Suite in March, which will include additional enhancements to the mid-market, including lead scoring, salesforce.com integration and advanced marketing automation. We believe this release will deliver even more value for midsize marketing departments and support the continued growth in our average subscription prices.

We exited 2013 with an average subscription price of 7k and expect that to move towards 10k as we exit 2014. Longer term, we believe that our average subscription prices will continue to go up and potentially double or triple in the years ahead as we continue to shift our customer mix towards the mid-market.

In PR, we remain a market leader in a space that, while smaller than the vast digital marketing space, is expected to grow in the mid-single digits. With the evolution of social media and the growing importance of content, we remain confident that PR will continue to be an important part of the broader marketing mix. With the growing market and relatively little competition, we believe we're well positioned to remain a leader in this space. While our 2014 plan contemplates flat bookings for PR, we've now established stand-alone PR sales team and are making other investments that we believe create the opportunity, longer term, to grow in line with market growth while also contributing to overall margin expansion along the way.

In summary, while aggregate bookings and revenue was contracting in 2014, if we look beyond the monolithic view of the business, our core PR and emerging Marketing business are collectively expected to grow in the high single digits in 2014, with the potential to accelerate to double-digit growth in 2015 as the Marketing Suite becomes a larger part of our overall product mix.

With the strong finish to 2013 and with our strategic initiatives beginning to show some promising early results, we're encouraged and excited for the year ahead. In 2014, we expect to make continued progress towards becoming a leader in the marketing cloud and creating value for our shareholders.

Finally, I'd like to welcome Steve Pogorzelski, who has joined Vocus as the new Chief Revenue Officer, taking over the role from Norm Weissberg. Steve is a sales and technology veteran, with a strong track record of success in building and managing high-growth sales organizations of scale, and we're excited to have him join Vocus to help drive our next stage of growth. We want to thank Norm for his dedication and for his many contributions to our success over the years.

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'm very pleased to report a very successful quarter for Vocus, highlighted by better-than-expected revenue, billings, earnings and cash flow. The better-than-expected results reflect the strength and stability of our PR products and our success selling a comprehensive digital marketing suite to midsized organizations. Also, today, we announced the closing of our Small Business sales office in Manila and the closing of North Social, a business that provides stand-alone Facebook applications primarily to small organizations. These events followed the discontinuance of our Small Business Edition products in Q3 and are part of our broader strategy -- value-creation strategy to move away from non-core point products and concentrate our efforts on selling integrated suites to marketing and PR professionals. We believe our strong quarterly results and our efforts to move upmarket have created real momentum for us to pave the way for success in 2014.

I will review our 2014 guidance shortly, but let's move on to the numbers for the quarter. Revenues for the quarter were $47.5 million, which is flat year-over-year and a 2% increase over the prior quarter. Revenues were $2 million above the high end of our guided range due to better overall billings in the quarter, upside from our e-commerce revenue channels and higher professional service revenue, which typically spikes higher in periods in which we report stronger sales. Important to note that while approximately 2/3 of our revenue is derived from annual prepaid subscriptions, approximately 1/3 is derived from non-deferred sources such as multi e-commerce revenue from iContact, e-commerce transaction revenue from PRWeb and professional service revenue [ph]. The mix of business in billings can impact revenue within our current quarter.

For the full year, revenues were $187 million, which represents an 8% increase over the prior year. 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 reflects the economic realities of our business and the revenue that otherwise would have been recognized from acquired companies on a stand-alone basis.

Calculated billings, defined as revenue plus the change in deferred revenue, were $55.9 million for the quarter, which is up sequentially from Q3 billings of $44.2 million. Overall, we are pleased with billings for the quarter as annual subscription sales, e-commerce and services all performed better than expected.

In terms of subscription sales, the Vocus Marketing Suite had its best quarter yet, with bookings at $9.8 million, which represents 108% growth on a year-over-year basis.

Now to put matters in context here, in Q4 of 2012, we did $4.7 million in billings for the Marketing [indiscernible]. 2013, we did $5.2 million in Q1, $5.4 million in Q2, $7.8 million in Q3 and now $9.8 million in Q4. The acceleration in billings in Q4 is partially attributed to seasonality as Q4 is seasonally our strongest quarter and partially attributed from strategic changes we made in our business in 2013.

First, discontinued the Small Business Edition product midyear 2013. As a reminder, the small business product was our low-end subscription product that's skewed heavily to very small businesses, with revenue typically less than $1 million from these businesses. Second, we split the sales force in PR and Marketing so that reps could concentrate their efforts on selling one product. We believe dropping the SBE product and bifurcating our sales force helped deliver better overall sales performance in the quarter, not just for Marketing but also PR. In that regard, billings for our PR product in the fourth quarter were better than expected as we saw low-single-digit growth compared to negative growth for PR in the first half of the year.

In terms of customers, we ended the quarter with 16,854 active annual subscription customers compared to 17,484 last quarter. The decrease in our subscription customers was anticipated and reflects the churn related to the discontinuance of our Small Business Edition, which will continue into the first half of 2014.

With our move upmarket and the increased focus on attracting midsized organizations at higher price points, we believe that our customer counts are a less meaningful metric of success. Alternatively, we believe ASPs, or average selling price, specifically for new sales to Marketing Suite, is an important data point to gauge our success in moving upmarket. The new pricing and packaging we introduced in the second quarter of 2013 is lifting ASPs higher for new sales as ASPs for the Marketing Suite increased from $4,500 in Q1 to $5,200 in Q2 to $6,200 in Q3 and now $6,900 in Q4. We believe increasing our ASPs will yield a higher renewal rate, which would pave the way for long-term profitable growth for Vocus.

Now onto the cost side of our business. Our non-GAAP gross margin for the quarter was 83%, which is flat compared to last quarter and down compared to last year. For the full year 2013, our gross margin was 83%, which is down slightly from 84% in 2012 due to investments in expanding our consulting business for the Marketing product.

Looking forward, we expect our gross margin to approximate 81% in 2014 as we continue to expand our service offering, drive higher ASPs and optimize penetration in the vast but underserved mid-market.

Total non-GAAP operating expense for the quarter was $37.7 million, an increase of 6% year-over-year and 4% over last quarter. As a percent of Q4 revenues, sales and marketing costs were 58%, R&D was 4% and G&A was 17%. Sales and marketing expenses were $27.5 million this quarter, which is up from $26.2 million last year and $26.4 million last quarter. Sales and marketing expense for Q4 included $1 million on the incremental sales commissions from higher sequential sales booked during the quarter. As a reminder, we expense all of our sales commissions as they are earned in the period rather than amortize the expense over the periods in which we recognize the related revenue.

R&D expenses were approximately $2.1 million this quarter compared to $2.2 million last year and $2 million last quarter. R&D costs increased slightly sequentially due to personnel-related costs resulting from higher average headcount.

G&A expenses were $8.1 million this quarter compared to $7.2 million last year and $7.8 million last quarter. G&A expense is higher sequentially in Q4 due to investments in HR, including employee training and recognition programs.

In terms of profitability, our Q4 non-GAAP operating income was $1.7 million compared to $4.4 million last year and $2.5 million last quarter. Our operating margin was 3.7% in Q4 compared to 5.3% last quarter and reflects the higher sales commissions in the quarter.

For the full year, our non-GAAP operating margin was 3.9%. Non-GAAP net income was $1.6 million for the quarter compared to $3.9 million last year and $1.9 million last quarter. Non-GAAP diluted earnings per share was $0.07 for the quarter compared to $0.16 last year and $0.08 last quarter. EPS was $0.03 above the high end of our guided range for the quarter.

Now onto our balance sheet and cash flow statement. We closed the year with $34.7 million in cash, cash equivalents and investments, down from $35.9 million last quarter. During the quarter, we used $1.3 million in free cash flow compared to positive cash flow of $7.4 million last year, and we used $1.4 million last quarter. For the year, we generated $5.5 million in positive cash flow.

Accounts receivable was $28.9 million, and DSOs for the quarter were 56 days. Non-GAAP deferred revenue totaled $84.5 million at year end, which represents an increase of $5 million over last year.

Now I'd like to move on to guidance for the first quarter and full year of 2014, which we are providing for the first time based on information as of February 4, 2014. The guidance we are providing today assumes calculated billings of approximately $183 million to $185 million. Our outlook for the year assumes our billings is directionally flat for PR and grows approximately 40% for our Marketing Suite. Resulting growth of these 2 products combined will be offset by the discontinued SBE product, which contributed approximately $8 million in the first half of 2013, the closing of our North Social business and declining billings from iContact. In the interest of clarity, the new event on this call in relation to our guidance today is the closing of North Social, which was expected to contribute $5 million of billings and revenue for the full year 2014. Without the closure of North Social, our guidance for billings and revenue for 2014 would have been higher by $5 million.

Turning our attention to the first quarter of 2014. Revenue is expected to be in the range of approximately $45.1 million to $45.5 million. This assumes approximately $43 million in billings for Q1. Non-GAAP EPS is expected to be in the range of $0.07 a share to $0.08 a share, assuming an estimated non-GAAP weighted average of 24.6 million diluted shares outstanding and an estimated tax provision of $500,000. The estimated non-GAAP weighted average diluted shares outstanding assumes 3 million in common shares from the conversion of the Series A redeemable convertible preferred stock. Non-GAAP adjustments are expected to be $0.50 per share. GAAP EPS is expected to be in the range of a loss of $0.43 a share to a loss of $0.42 a share, assuming an estimated weighted average 20.6 million basic and diluted shares outstanding. Please note that our first quarter 2014 guidance excludes approximately $900,000 of expected revenue contribution and $200,000 of expected operating losses related to the North Social business discontinued during the first quarter of 2014.

As I mentioned earlier, approximately 1/3 of our revenue comes from e-commerce transactions and consulting service. Our Q1 revenue guide now reflects the same level of strong performance that we recognized from these sources in Q4 of 2013. Additionally, a non-GAAP adjustment related to the closure of the small business sales office in Manila is expected to be approximately $5 million or $0.22 per share. The $5 million restructuring-related charge for Manila is non-recurring and includes lease termination costs, write-off of leases, leasehold improvement and severance-related costs. We believe the closure of the Manila sales office and North Social and the expected sales productivity gains associated to the move upmarket that Rick spoke of earlier will create very meaningful leverage in sales and marketing in 2014.

Accordingly, we expect sales and marketing costs in the first quarter of 2014 to be approximately $2.5 million to $3 million lower in comparison to the fourth quarter of 2013, with modest increases sequentially throughout the year.

For the full year of 2014, revenue is expected to be in the range of $182 million to $183 million. Non-GAAP diluted EPS is expected to be in the range of $0.31 a share -- $0.34 a share and assuming an estimated weighted average 25.1 million diluted shares outstanding and an estimated tax provision of $1.2 million. Our non-GAAP EPS reflects a non-GAAP operating margin of 5.2%, which is up from 3.9% for the full year 2013. Our non-GAAP operating margin reflects the accretion from discontinuing the North Social operations, as well as better sales or [ph] productivity.

Non-GAAP adjustments are expected to be $1.26 per share. GAAP EPS is expected to be in the range of a loss of $0.95 a share to a loss of $0.92 a share, assuming a weighted average estimated 21.1 million basic and diluted shares outstanding. Free cash flow is expected to range $7 million to $8 million, which includes any cash-related charges from the Manila closure, which we are still finalizing. We're not currently expecting to incur any significant cash charges related to the closure of North Social as many of these leases and contractual commitments were short-term in nature. However, we may incur a noncash charge related to the impairment of a tax goodwill associated with North Social, but that amount, if any, will be determined later in the year. Capital expenditures are expected to be $7 million.

In summary, we believe our strong quarterly results and our efforts to move upmarket create real momentum for Vocus and should position the company for success in 2014.

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

Question-and-Answer Session

Operator

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

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

So first question, I understand that you're closing North Social, and it has an impact to the revenue this year. I guess I wasn't entirely clear why that operation is being shut down. Are there elements of it that you're able to continue to wrap inside of the Marketing Suite? How many individuals were there? And I guess probably related to the decision to close that piece of business, how unprofitable was that business?

Richard Rudman

Yes. So I think as I partially covered, I mean, technology has changed somewhat, and we've now built Facebook marketing technology into the Vocus Marketing Suite, which is primarily in the form of landing page technology. So the stand-alone North Social platform is the old Facebook apps technology, and it's business that was not profitable and being sold primarily to small businesses. So while we're giving up some of the revenue, the business wasn't generating a profit, so we didn't really see it as a value driver for us. And again, with the focus on small business, it's really not aligned with our strategy to push further upmarket.

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

And Steve, was that $5 million a recurring revenue, or was that predominantly services revenue? I'm just trying to understand how much of that was sort of yet to be booked, with the expectation that you're going to generate $5 million. I'm just trying to understand where that comes from.

Stephen A. Vintz

Sure. So just in terms of pure size, North Social did approximately $4.5 million to $5 million last year. As we look forward to 2014, we're expecting relatively the same level of contribution, $5 million. It's expected to generate a loss of $1 million. There's going to be marketing spend included in that number, which is roughly about $2 million a year. So when you look at North Social -- and the average headcount was probably 15 to 20 employees. So the change to North Social was really the decision that we made post-earnings call in October of last year. And the business is comprised mostly of monthly subscriptions to Facebook applications, as well as some consulting-related revenue.

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

Got it. So in other words, you're not losing all the Facebook application functionality. You've just really converted that strategy to focusing on landing pages that you've wrapped inside the Marketing Suite. Is that fair?

Richard Rudman

Yes. Well, the capability is now part of the Vocus Marketing Suite, but we've rebuilt -- the technology is a lot different than what we originally bought from North Social. So you could argue that we got some of the blueprint to do contest and sweepstakes and video and things like that, but again, we built that as part of our product roadmap. We built that with the latest campaign in landing page technology that's now really being used by customers who want to do Facebook marketing. So yes, Facebook marketing is absolutely a part of the new -- of our integrated Marketing Suite, and therefore, selling these older apps to small businesses at a loss doesn't make any sense to us.

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

Got it. One last one for me, just shifting gears to the e-commerce side of the business. So you've quantified that at about 1/3 of revenue. Can you provide some level of comparison to how that came in this quarter as a percentage of revenue versus sort of typical historical levels? Or do you just want to look at last year in Q4? In other words, I'm really just trying to understand why there's some sort of shift in marketing strategy that generated -- that was responsible for generating some of that extra revenue this quarter. Is that repeatable in nature, or was that just sort of a one-off blip, do you think?

Stephen A. Vintz

Well, in terms of revenue, of the $2 million of upside in Q4, probably about half of that was related to our e-commerce channels and service-related revenue. As we look out into 2014, we're not assuming that same level of contribution that we saw in the fourth quarter of this year. Some of it's seasonality, but some of it's just -- was attributable just to a better overall quarter. So overall, we're pleased with the contribution that all channels had to our business in the quarter, contributed better bookings and better revenue. So as we look ahead, we're actually -- we're assuming less upside attributable to those channels in 2014.

Operator

Our next question comes from the line of Steve Ashley from Baird.

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

This is Chaitanya Yaramada sitting in for Steve Ashley. I was wondering if you could comment on Marketing Suite, just your success in converting some of your older customers who had bought it at the lower prices. Are they coming back and renewing, or are they part of the customer churn that you're seeing as well?

Richard Rudman

Sure. Well, I would say right now, our bigger success is coming from new sales. So the new product that we've launched in May and the product that came out in December, the enhanced capabilities specifically for the mid-market are driving higher average selling price, as I mentioned. They've almost doubled from 2012 to Q4 of 2013, and we're clearly seeing a lot of success on the new sales side. We do get upgrades from our older kind of small business customers, and that's the e-customers. But I would say to a lesser extent, that's driving, I think, the success we're having with the Marketing Suite. And I think as we talked about on this call and the previous call, there is -- we are churning out some of our smaller end customers, our low-end customers, which is getting us to the negative net adds. And some are upgrading, but again, I'd characterize our success more on the new sales side.

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. That's helpful. And then just on the sales rep hiring side, you mentioned that you had some trimming late last year. What are your plans for 2014 on the sales rep front? And if you could just give us some color on small -- mid-market versus SMB, how you expect to hire.

Richard Rudman

Yes. So for 2014, we expect fairly flat headcount for sales, although there is a continuing shift in the mix of sales reps. So we're probably -- in 2014, while the headcount will stay about the same, we'll continue to see fewer small business reps but more mid-market reps. And so while the headcount's the same, our quota capacity is rising as we go through 2014, again, pointing to some of the productivity gains we're getting by focusing on the mid-market. And we expect that to drive our bookings as we go through the year.

Stephen A. Vintz

This is Steve. The comment that I'd like to make with regards to sales and marketing spend on a quarter-over-quarter basis is that sales and marketing spend will step down notably in Q1 of 2014 in comparison to Q4 of 2013. I mentioned this earlier, that in Q4 2014, about $27.5 million spend, we're anticipating that sales and marketing spend will be $2.5 million, maybe $3 million lower in the first quarter and then tick up sequentially modestly throughout the year. And what's really driving that is the spending with regard to Q1. Our bookings is seasonally strong. In the fourth quarter, we did $56 million. Seasonally steps down in Q1, so there's about $1 million of commission savings. North Social represents a $0.5 million of savings on marketing spend. And then between closing the Manila office and rightsizing the sales force for the discontinued Small Business Edition product, we have probably another $1 million or $1.5 million savings in there. So there's a notable step-down that I want to point out in sales and marketing spend in Q1 versus Q4, and that's driving some of the leverage that you see here and some of the better-than-expected earnings for 2014.

Operator

[Operator Instructions] Our next question comes from the line of Samad Samana from FBR Capital.

Samad Samana - FBR Capital Markets & Co., Research Division

As I look at the Marketing Suite and the different SKUs, right, there's about 5 SKUs that were launched. Where is the company seeing the greatest traction? And where are you potentially facing some headwinds that you didn't expect, and how do you plan on tackling that? And then I have a couple of follow-ups.

Richard Rudman

Sure. We do have -- we sell the Marketing Suite, right, currently in 4 editions, which maybe you would call SKUs, ranging from the low-end edition, which is really geared towards a marketing person or a small marketing team, all the way up to the enterprise edition, which is the large marketing teams at larger companies. And I mean, I would say most of the -- the bookings right now are fairly well distributed among the first 3 editions, and then the fourth edition, the enterprise edition, represents a smaller percentage of the 4 editions. But I think we're seeing our best traction right now probably in the 2 middle editions and expecting to see even more so probably in the third edition and even making up some additional progress in the fourth. I mean, keep in mind that every -- all the releases are coming out now. The release we did in December and the release that's coming out in March are all focused on mid-market functionality and the type of lead scoring and marketing automation and sales force integration that really appeals to larger companies. And so we expect to sell -- to have bookings come from the higher-end editions, and that's ultimately what we see taking our average selling prices up further.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay. And then going back to last quarter's call, management provided first-blush guidance for '14 billings growth of about 50%. And today, the 40% number that you mentioned is still very healthy, but I'm just kind of wondering what led to that slightly lower outlook for the year and if there's some other dynamic, whether it's product release cycle, et cetera, that caused that slight reduction.

Richard Rudman

Sure. No, there was nothing really specific. And in fact, Q4 came in as expected, and for the full year, we were a few hundred grand above where we expected to be. Keep in mind that while the business is reaching scale, it's still we're growing off the $28 million base, so $2 million or $3 million makes a big difference in the growth rates. And as we continue to go forward into 2014, we, again, are continuing to release new editions to change our pricing and packaging. So as we look out at 2014 and think about kind our targets, 40% seems like an appropriate number for us. And as you mentioned, it is still a very healthy growth number. We're really pleased with it. We're pleased with the momentum in the business, and we'll see how the rest of 2014 unfolds.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay. And then I'll ask one more question and pass the baton along. In the last call, at 12 to 18 months, the company has exited their PR Newswire partnership, you closed down the Small Business Edition and now North Social. How has the customer base reacted to the departures from some of these products that they liked enough to buy in the first place? I was just curious how the reaction there has been and how that's affected the ability to up-sell some of them as well.

Richard Rudman

Sure. Well, I mean, the products that you're speaking about were all geared towards the small business market. I mean, the consistency in what we're doing here is really just eliminating products that were being sold to the small business market, most of which generated an operating loss and we didn't feel had a good business model for going forward. The result of that is that the customers we have today that are buying our integrated Marketing Suite and our PR suite are unaffected because that technology -- they weren't using that technology and they didn't want that technology. The customers that were affected, which were our very small and micro businesses, a lot of them have left, which is the low-end churn, essentially, that results in our net customer adds. So I think we're moving forward with the strategy that we've communicated. We're building Marketing and PR suites for the mid-market, and again, the products that we've discontinued are just not products they were interested in using. So our current customer base remains happy and is excited to see us continuing to invest in the products that they're using.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay. And I lied, actually, I have one more question. So the new hire, the Chief Revenue Officer, has he already begun to -- are we going to expect any major sales changes? It sounds like the sales force was already restructured recently. Should we expect any additional big changes in the near term, or is that pretty much set the way it is?

Richard Rudman

Steve is a seasoned sales and technology veteran, so I couldn't say at this point what changes he may or may not want to make. But he's the senior executive, and obviously, he's going to have the leeway to do what he's done at other companies, which is to build a high-growth sales organization at scale. So I imagine that he'll take his time and learn the business, and any changes that get made will be possibly made down the road. But we brought him on to help us get to the next stage of growth here at Vocus, and we're really excited about that.

Operator

[Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Richard Rudman

Great. Well, we just want to thank everybody for participating. We look forward to speaking with you again soon.

Stephen A. Vintz

Thank you.

Operator

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

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