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WebSideStory, Inc. (WSSI)

Q3 2006 Earnings Call

November 6, 2006 4:30 pm ET

Executives

Claire Long - CFO

Jeff Lunsford - Outgoing CEO

Jim MacIntyre - CEO

Analysts

Safa Rashtchy - Piper Jaffray

David Hilal - FBR

Kyle Evans - Stephens

Mark May - Needham & Company

Brad Whitt - RBC Capital Markets

Michael Huang - ThinkEquity

Presentation

Operator

Welcome to the Third Quarter 2006 WebSideStory Incorporated Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Claire Long. Please proceed, ma'am.

Claire Long

Thank you and good afternoon. My name is Claire Long, Chief Financial Officer of WebSideStory. Welcome to WebSideStory's third quarter 2006 Earnings Call. Following the live call, an audio archive of this call will be available on the Investor Relations section of our website at www.websidestory.com.

Today's call contains forward-looking statements that are not a description of historical facts. For example, statements about future results of operations, growth opportunities, the anticipated synergies of WebSideStory, Adams and Visual Sciences businesses, and about the projected future financial performances of those businesses, are all forward-looking statements. You should not regard any forward-looking statements as a representation by WebSideStory that any of its plans will be achieved. Actual results may differ materially from those discussed during this conference call due to the risks and uncertainties inherent in WebSideStory's business. Such risks include, without limitation, the company's reliance on its web analytic services for the majority of its revenue, the company's limited experience with digital marketing applications beyond web analytics, the risks associated with the company's indebtedness, the risks associated with integrating the operations and the products of Adams and Visual Sciences with those of WebSideStory, the highly competitive markets in which we operate that could make it difficult for WebSideStory to acquire and retain customers, the risk that WebSideStory's customers fail to renew their agreements, the risk that the company's services may become obsolete in a market with rapidly changing technology and industry standards, blocking or erasing of cookies or limitations on our ability to use cookies, privacy concerns and laws or other domestic or foreign regulations that may subject the company to litigation or limit our ability to collect and use Internet user information, WebSideStory's ability to defend itself against claims of patent infringement alleged by Net Ratings Inc., WebSideStory's ongoing ability to protect its own intellectual property rights, and to avoid violating the intellectual property rights of third parties, and the other risks described in WebSideStory's filings with the Securities and Exchange Commission, including WebSideStory's annual report on Form 10-K for the year ended December 31, 2005, and quarterly reports on Form 10-Q. Do not place undue reliance on these forward-looking statements, which speak only as of the date of this call. WebSideStory undertakes no obligation to revise or update the information or forward-looking statements in this call to reflect subsequent events or circumstances.

Our presentation today includes information presented on a non-GAAP basis. We believe that this presentation of non-GAAP results provides useful information to both management and investors by excluding specific items that we believe are not indicative of our core operating results. The presentation of this additional information should not be considered in isolation, or as a substitute for results prepared in accordance with generally accepted accounting principles. We refer you to the press release we issued earlier this afternoon, which is available on the Investor Relations portion of our website for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP-based measures.

During this call, you will hear us discussing the WebSideStory division and the Visual Sciences division. The WebSideStory division is the reporting segment comprised of our HBX analytics, search, publish, and bid solutions, and all related services. The Visual Science division is the reporting segment comprised of Visual Sciences LLC, the company we merged with on February 1, 2006.

Now, I would like to turn the call over to Jeff Lunsford and Jim MacIntyre, the outgoing and incoming CEOs of WebSideStory.

Jeff Lunsford

Thanks Claire, this Jeff Lunsford, and I am sitting here with Jim MacIntyrethe, WebSideStory's soon to be CEO. As announced Monday, our Board has selected Jim who is Visual Sciences co-founder and CEO, and who has been my operating partner since we merged the companies on February 1, to run the company starting on November 20. Jim is both a product visionary and a proven operator. We are pleased to have him guiding this business going forward.

We also announced that Bill Harris, the former of CEO of Intuit and PayPal, former Director of Macromedia and current Director of Earthlink has assumed the role of Chairman. Bill is a proven visionary and experienced operator who has successfully run and served as Director for companies in the $1 billion revenue category. WebSideStory has a bright future, and we are pleased to have someone with Bill's experience in the Chairman role as we continue to grow our business.

Before handing the call to Jim, I would like to take a second to thank the 300 plus WebSideStory and Visual Sciences employees who have worked diligently over the past few years to build a world-class operation that exceeded estimates in Q3. It has been my distinct honor to serve alongside such a fine group of professionals.

Now, over to Jim for some Q3 highlights.

Jim MacIntyre

Thanks Jeff. I'm pleased to be here today and to have been selected as WebSideStory's next CEO. I'm pleased to be able to report strong Q3 results as I prepare to take the helm. Q3 was an exceptional quarter for WebSideStory in both revenue growth and margin expansion. We achieved record non-GAAP revenue of $18.9 million, an increase of 67% from our Q3 2005 results. We enjoyed strong performance across the board achieving record revenue in both the WebSideStory and Visual Sciences Division. We experienced combined bookings and renewal rates that are leading us to raise revenue guidance for Q4 and to raise our full year non-GAAP revenue guidance to a range of $69.6 to $70.1 million. We were also raising non-GAAP earnings guidance for the year to $0.53 to $0.54, up from $0.50 to $0.52. The GAAP correlates to this guidance are included in our earnings press release.

Our list of impressive customer wins continued, adding 85 new customers across all product lines in Q3 including major analytics, search, web content management wins, head to head against our usual competitors. In accounts such as Travelocity, MGM Mirage, Avaya, shop.com, active.com, Six Flags, (inaudible), Royal Bank of Scotland, Eastman Kodak, SanDisk, Scientific American and Showtime Networks. Our strong upsell and renewal track record continued with strong retention rates in the quarter and a good portion of our growth coming from upsells to existing customers. Our average customer relationship sides held steady at approximately $45,000 per year. Our enterprise customer base now exceeds 1,450 customers. Our average products used per customer is currently about 1.1 illustrating substantial upsell potential within our existing customer base.

Visual Sciences was a significant factor in our overall performance this quarter. We are pleased this division is performing so well, stocking in with year-over-year growth of 65%. We experienced robust pipeline growth in the quarter and continue to train additional sales and consulting resources on our innovative platform prepared for expanding -- and preparing for expanded distribution capabilities in 2007. Visual Sciences pipeline is over twice the size it was when we consummated our merger just nine months ago.

In the WebSideStory Division, we enjoyed increased referral flow between our search, publish and analytics customers as the market is beginning to recognize the power of our integrated offering. This division experienced solid bookings and renewal rates. The integration we are delivering between website optimization solutions, such as web analytic and site search is leading to powerful return on investments storage from customers utilizing multiple applications to optimize their online presence.

On the capital front, we ended Q3 with approximately $19.4 million in cash and investments having generated approximately $2.4 million in the quarter. Claire will provide more detail on cash generation and projection.

We ended Q3 well positioned with strong products and strong distribution and a healthy and exciting market. We are pleased with this performance and optimistic that our current strategic positioning will lead to continued growth.

I would now like to pass the call to Claire Long for a description of some key financial detail.

Claire Long

Thanks Jim. The third quarter of 2006 was our 12th consecutive quarter of positive cash generation and non-GAAP profitability. We exceeded the top range of our non-GAAP and GAAP revenue guidance by approximately 400,000 and exceeded our non-GAAP EPS guidance by $0.02. This strength in earnings was a direct result of the strength in revenue combined with good operating cost control. We achieved non-GAAP revenue of $18.9 million and GAAP revenue of $17.4 million achieving year-over-year growth of 67% on a reported basis and 34% on an organic basis for non-GAAP revenue.

The WebSideStory Division contributed 76% of consolidated non-GAAP revenue with the Visual Sciences division contributing the remainder. On a consolidated basis, revenue derived from subscription and hosting services represented 74% of revenue in Q3, while stand-alone professional services represented 9% for the same period. License revenue excluding non-GAAP revenue accounted for 7% of our total consolidated revenues for Q3. Of the $4.5 million of Visual Sciences revenue, approximately one-third was non-GAAP revenue which represents revenue that would have been recognized in the quarter, had we not merged with Visual Sciences. We add that amount back into our non-GAAP revenue to show the performance of the company under the pro forma P&L we are managing it by. Our gross margin calculated on non-GAAP revenue and excluding stock-based compensation and amortization of intangibles was 80% in Q3, which is an increase of 1 percentage point from the previous quarter. The gross margin excludes approximately $1.3 million of amortization of intangibles and stock-based compensation, which is equivalent to the amount in the prior quarter. The 1% increase was primarily due to the increase in license revenue as a percentage of total revenues, which has a lower cost of goods sold than subscription services, partially offset by the increase in professional services as a percentage of total revenues, which have a higher cost of goods sold in all other revenues. We continue to expect our ongoing gross margins to be in the 78% to 80% range.

Operating expenses before stock-based compensation and amortization of intangibles as a percentage of non-GAAP revenue decreased from 67% of revenues to 63% of revenues. We saw improved leverage in sales and marketing and product development, partially offset by an increase in G&A cost due to costs related to 2006 internal and external SOX testing, which we have historically performed in the second half of the year.

Legal costs related to our ongoing patent litigation were $530,000 in Q3 as compared to $550,000 in Q2. During Q3, we took steps to ensure that we would have more predictable and controlled legal expenses through the remainder of our litigation term. We expect our quarterly costs related to this litigation to be in the $500,000 to $750,000 range for Q4 to the end of Q2 2007. Net cast interest is relatively flat quarter-over-quarter.

GAAP taxes resulted in a non-cash benefit of $1.3 million, while cash taxes were an expense of $32,000. We expect to remain at a cash tax rate of approximately 2% to 5% for 2006 and 2007. And we expect our GAAP tax rate for the full year 2006 to be a non-cash benefit of between 35$ and 40%. Non-GAAP net income was approximately 3.2 million, or 17%, of total non-GAAP revenue in the third quarter as compared to 12% in the previous quarter, and 23% in the third quarter of last year. The increase from second quarter is due to the 1% increase in gross margins and the 4% decrease in operating expenses.

Non-GAAP earnings per share were $0.16 on a fully diluted basis for the quarter. GAAP earnings were a net loss of $1.7 million, or a loss of $0.09 per share. A GAAP to non-GAAP reconciliation is provided in our earnings press release.

Turning to the balance sheet, we generated $2.4 million in cash and short-term investments for the quarter. And as we discussed in our Q2 earnings conference call, we will guide you to expect cash generation to approximate our non-GAAP earnings each quarter, less a portion of the deferred revenue add back, which represents cash received prior to the merger or used in the merger.

Depreciation and amortization for the quarter were $2.4 million. Our working capital increased from a negative $9.4 million in Q2 to a negative $6.1 million in Q3. Included in current liabilities are $19.4 million in note issued in conjunction with the Visual Sciences merger. And we currently estimate that we will have approximately $23 to $25 million in cash at the end of the March 2007, when these notes, which have a face value of $20 million and which remain the only debt on our balance sheet become puttable at the option of the holder.

We believe this cash complemented with the possibility of a line of credit or a capital raise, if needed, represents sufficient capital to fund continued growth at current rate. Our accounts receivable balance grew to $14.5 million due to the growth in our business with days sales outstanding remaining steady at 69. Accrued liabilities were inline with the business and our deferred revenue balance grew from 16.9 million to 17.6 million during the quarter, an increase of 5%.

I will now pass the call back to Jeff and Jim.

Jeff Lunsford

Thanks, Claire. So as you can see the business is performing quite nicely, we believe we are well positioned to continue our record of profitable growth, our market is healthy and our pipeline is strong.

I will now hand the call to Jim to discuss Q4 and 2007. Jim.

Jim MacIntyre

Thanks Jeff. I am excited about our prospects as we look out into 2007. Our products are leading the industry and setting the bar by which all other solution providers are measured. Our sales force is executing and being trained on a larger range of products, and our engineering, support, and consulting teams are delivering real value to our customers.

Based on our strong -- current strong performance, we don't expect any major shift in the strategy as I assume command. Our Q3 results demonstrate that the current strategy of building a clearly differentiated innovative market leader in digital marketing and business optimization solutions is resonating and working well in the marketplace.

For Q4, we are guiding to a revenue range with a midpoint that represents 36% organic growth from Q4 of 2005. Q3 was obviously a huge ramp quarter for us, but we think you should focus more on year-over-year than on sequential growth rates in evaluating our Q4 prospects.

The same holds true for earnings. As indicated by our guidance, we are targeting a non-GAAP earnings range of $0.15 to $0.16 per share, and are working hard to invest any excess in laying the groundwork for a robust 2007. We believe that given the growth opportunities before us, we should continue to invest heavily in product innovation and expanded distribution.

We are establishing 2007 non-GAAP revenue and earnings guidance today of $89.5 to $91.5 million and $0.69 to $0.74 per share respectively. We believe this profitability level represents the right mix of growth and margin for the company next year. Like Jeff, I believe in disciplined, profitable growth and the power of compounding that growth over time.

As you're building your models, I want you to be tuned into three factors. One, our Visual Sciences platform has substantial upside in markets we are not even addressing yet. We want to have the ability to invest in the appropriate product management sales and consulting skills to exploit these opportunities. These investments will begin to pay off in the second half of 2007 and will further differentiate us, as both market participants and an investment opportunity from our point solution competitors.

Two, our Visual Sciences pipeline is populated with some decent size opportunities that you and we certainly want to be pursuing, because they provide us with anchor relationships and large global accounts, which lead to ongoing additional upsells as we further penetrate those accounts. This means that you may see slightly more quarter-to-quarter variability in our numbers than you have seen in the past, but this should all even out over any give year.

And three, every year we ramp expenses towards the end of Q4 in anticipation of growth the next year, and we award merit pay raises at the beginning of Q2. These two practices mean that you will generally see more backend-loaded years with respect to earnings generation. 2006 is shaping up to be just such a year, wherein we expect to have generated approximately 40% to 42% of our earnings in the first half and 58% to 60% of our earnings in the second half. We are recommending that for accuracy you model 2007 with the same approximate split, so earnings models do not end up -- out ahead of us in Q1 and/or Q2.

We are confident in our ability to perform in 2007 range as provided and want to make sure that we have the room within investor expectations to make the appropriate investments in resources at the optimal time. I am looking forward to working with you all over the coming years as we continue to grow the company. As a near-term update our Q4 pipeline is healthy, October bookings and renewals were solid, effective expense management controls are in place, user forum attendance is at record levels, partner participation is strong and our overall marketplace is healthy and growing. We feel great about our near-term and long-term prospects for creating sustainable shareholder value by profitably designing and delivering innovative solutions for our expanding global customer base.

At this point, we would be happy to take any questions you might have. Operator, over to you for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Safa Rashtchy with Piper Jaffray. Please proceed.

Safa Rashtchy - Piper Jaffray

Hi, thank you and good afternoon everyone. Thanks Jeff and best of luck in your new ventures and welcome aboard Jim. Thank you for giving us some good guidance for 2007, especially on the quarterly variations. Regarding that could you -- since the expense levels have been varied, could you give us what level of margin -- profit margins, operating margins whatever are you expecting next year or put another way you are looking in the range of I believe 38 to 40% or so revenue growth, what kind of operating profit goal should we look at for 2007? And, I had a quick follow-up.

Claire Long

Okay. We are obviously going to keep increasing our operating margins, but I wouldn't expect to see a lot of leverage between Q3 and Q4. As we talked about, we’re going to be some investments in marketing and sales, and we should see some leverage in G&A, which will offset that. Going into '07, we’re going to continue to reinvest into sales and marketing and product development. We expect to get to about 20% operating margin by the end of '07.

Safa Rashtchy - Piper Jaffray

Okay. Thanks, Claire.

Claire Long

You're welcome.

Jeff Lunsford

Yeah, and the only thing I'd add to that Safa is that's with litigation expenses and then what we've said in the past, it should be 3 or 4, 5 points higher without.

Safa Rashtchy - Piper Jaffray

Right, that's perfect for which my follow-up, which is can you give us an update on your policy towards the litigation, is there any rational to consider settlement or where are you kind of in evaluating what you should be doing next regarding that?

Jeff Lunsford

Well, as we've said all along, we view that situation very pragmatically and are constantly evaluating whether it makes sense to engage in those type of discussions. We're really -- trying to back away from discussing any particulars around it. We continue to say that we believe we do not infringe on the patents they've asserted against us, and that they are in fact infringing on the patents that we have asserted.

Safa Rashtchy - Piper Jaffray

Great. Thank you. Great quarter.

Jeff Lunsford

Thank you.

Claire Long

Thanks.

Operator

Your next question comes from the line of David Hilal with FBR. Please proceed.

David Hilal - FBR

Thank you, few questions. First on the guidance, I think you have made two comments, one about the legal costs through 2Q '07, so my question is the full-year '07 guidance assumes legal cost just through 2Q or through all of 2007?

Claire Long

It includes legal costs all throughout '07. However, our estimates for the second half of the year will be higher than our estimates for the first half of the year.

David Hilal - FBR

Okay. So I think it's 500 - 750 per quarter for the first half and it should be higher in the back half?

Claire Long

Correct.

David Hilal - FBR

Okay. Can you also give us a little more color on the different product mix, in the past, we are able to talk about some of the non-strategic business, like HitBox Pro and I think you're able to breakout Adams in the past. I am just trying to understand within core WebSideStory, so excluding Visual Sciences if I could understand what HBX delivered, what Adams delivered, and what the non-strategic business delivered?

Jeff Lunsford

Yes. Dave, I'll take that one. So, the Web -- Adams has been completed folded into the WebSideStory division from a financial reporting standpoint, so we do not breakout those product line separately. We have talked in the past about, sort of the relative bookings trajectory of the businesses, and there was a small dip in the Adams bookings and the growth rate, couple of quarters after we effected that combination and that has picked back up now. We actually saw a record bookings quarterly for them last quarter. HBX bookings were solid as well. I think that division is growing at about -- I want to say 34% rate when you have the -- the way the revenue breaks down, about 4% of the total company's revenue is what we call the non-strategic revenue. And, that is primary ad revenue that is the monetization of free site search. And the revenue line is still sort of declining at a 15% or so year-over-year rate, but it's a nice profit source for us, a nice funding source. And, then if you look at total company, so that's 4% of the revenue, I think, and then of the other 96% of the revenue, about 25% or so that was Visual Sciences and about 75% of that was the WebSideStory division.

David Hilal - FBR

Okay. Thanks. And let me ask you, on the mix between subscription and license, the license is a little bit harder to model and I want to understand how to trend that. I mean, it was a great quarter this past quarter, should we assume that business grows from here or how lumpy is that going to be? I am just looking for some insight in terms of how to model that license piece for Q4 next year?

Claire Long

Yes. We really look at revenue in total. We don’t really get caught up on the individual line items, because we may have a deal that comes in. Initially it might be planned to be licensed, and maybe they decide to do it on a managed service basis. So, really what we are doing is, guiding to a total revenue line and a total revenue growth rate, and it will continue to be lumpy as far as how it comes out in the individual line items because of the license deals. But, really I would guide you to just look at the total revenue line and model that.

David Hilal - FBR

Okay. Let me ask you about new bookings, kind of, record revenue, but the number of new bookings is lower than what it's been in the past. And I guess I want to make sure its apples-to-apples, because in the past you talked about new customers. I think it was 130 last quarter, down to 85. Is that apples-to-apples? And if so, why the drop?

Jeff Lunsford

Yes. That’s apples-to-apples. I think that the first thing to focus on is, what we did with guidance, and I will then give you a sense of whether or not we had a good quarter, and guidance -- we raised revenue guidance rather substantially here. Q3 is historically a little less active for us. And the other thing you are going to see in that customer ad number is the fact that we are adding a smaller number of much larger deals into the pipeline that take up a lot more of our sales resources, and we are also spending a lot more time up-selling existing customers. So, I think the first thing we focus on and thus we hope investors to focus on is, what we do with revenue guidance, and that will be your proxy of whether or not we had a strong quarter. And then, we are going to keep the customer ad thing as a focus, of course. We want to keep expanding the, sort of, the universe of WebSideStory customers. But as Jim mentioned in his comments, we have 1,450 of them in the average products end user only 1.1 product per customer. You may see us spend a lot more time up-selling, search into an analytics customer and vice versa, selling a lot of Visual Sciences products into the HBX customer base, and so that number isn't going to be the primary thing to focus on going forward. Jim, do you have any --

Jim MacIntyre

No, I think you captured it. I mean, we have a pretty substantial customer base at this point with a good bit of demand from it for different of the products that we have to offer, and our consulting and sales team are spending a great deal of their time working with those customers on their expansion.

David Hilal - FBR

Okay. I'm going to squeeze one more question in. I think you gave the metric for average one-year relationship value for all customers was 45K. In the past you've also given us the one-year value for new customers, and I want to know what that number was.

Jeff Lunsford

Yeah, we don't even -- I don't think we calculated that this quarter, Dave. What's happening is we have three businesses that we’ve combined and every business has a different definition for what a booking is, and so we are not -- we are back in a way from some of these really granular metrics that have different meanings within the three different businesses. And again, saying look at the revenue guidance, look at the earnings guidance, and that will dictate whether or not we have a great healthy business here. And by the way, since you gave us grief for the call being too long last time, can't do it this time since we have several follow-up questions.

David Hilal - FBR

All right, I'm going to go. Thanks guys.

Operator

Your next question comes from the line of Kyle Evans with Stephens. Please proceed.

Kyle Evans - Stephens

Hey guys. Nice quarter.

Claire Long

Hi.

Jeff Lunsford

Hey Kyle. Thanks

Kyle Evans - Stephens

I'll try to keep it brief, gee. A few questions for Jim. I would like to know, kind of, your views long-term, strategic for how Visual Sciences plugs in to the rest of the solutions that you have there. Kind of give us an update on where Bid is and when you think you will be through beta? And lastly, maybe Jim also your, kind of, take on your competitors in the market at large? Thanks.

Jim MacIntyre

Sure, thank you. In terms of -- to answer your first question, Visual Sciences has a very interesting set of possibilities for -- that it provides to customers who are currently using HBX or any of our other products. So, we -- over time here that we've had, we've worked on a number of different cases, and we found that the Visual Sciences platform is able to be installed in large enterprise situations where HBX collective data -- where can be flowed into it and become the source of data from the Internet channel as the Visual Sciences platform is used to analyze data from other customer facing systems and applications. So, we are finding that many HBX customers might consider using the Visual Sciences platform to extend their analytical capabilities across the different customer channels that they are serving and to do other types of customer analytics work altogether, and that's been very promising as the main course of expansion for us with that platform. We started, of course, with Visual Site application on that platform, and added Visual Call, and over time we've been adding different -- and applying that platform for different types of customer facing data. That's the main vector of expansion for the Visual Sciences platform.

Kyle Evans - Stephens

And do you today have a Visual Site HBX live installation?

Jim MacIntyre

Yes, we do. It's not yet -- yes, the customer cannot be announced at this point in time.

Kyle Evans - Stephens

Okay, great. Sorry to interrupt.

Jim MacIntyre

In terms of Bid, I'm just beginning to work with Bid now. The team is -- the Bid product is somewhat dependant on third party APIs, and over the last weeks I have begun to spend some time with Bid, and I'll have a better update for you in regard to that on the next call.

Kyle Evans - Stephens

Okay. Some competition then?

Jim MacIntyre

Yeah, in regards to competition, as time has gone by and our platforms have become stronger, both on the HBX side and on the Visual Sciences side, the competitive environment really hasn't changed a great deal over the last couple of years. We've become stronger, our teams have learnt how to represent our products better. The products themselves have become stronger, and we've become deeply rooted in a large number of the 1,450 accounts that we have. In many of those cases, we face very little competition. In certain cases, we face some, that’s become quite routine, as you know from my history, selling Visual Sciences products from 1st of 2001, just about every deal that I've entered into on a new sale basis has been a competition against the same set of companies in the market, and the track of successes we’ve had through that period of time is apparent from our results. We expect that given what we've learnt, we'll be able to continue to expand the difference between the products. Already, we feel we have significant technology advantage over and above what competitors can offer in the marketplace today, and we believe that that lead is expanding, not contracting.

Kyle Evans - Stephens

Thank you.

Jim MacIntyre

You're welcome.

Operator

Your next question comes from the line of Mark May with Needham & Company. Please proceed.

Mark May - Needham & Company

Thanks for taking my questions. I think if my numbers are right, it looks like that on a GAAP basis, the Visual Sciences revenue was flat sequentially, just wondering if you could validate that, and if so, what is your expectation, what drove that, and what are your expectations for sequential growth in Visual Sciences over the next couple of quarters? The other question, I guess, I was interested in your comments earlier about how the primary figure number that you are -- a number that you are not really focused on anymore is the number of new customers or modules or I guess it's more the number of new customers, not much the number of new modules. Should we take from that that the web analytics market is somewhat matured and that it's really more of an upsell story going forward, and then will add one other question.

Jeff Lunsford

So, I'll take the one on VS, the GAAP quarter-to-quarter revenue for Visual Sciences is -- first of all, we are running the business on the pro forma revenue number for that business because there was a such a huge haircut to the deferred revenue when we did the combo. And that number was up substantially and that's -- you are building deferred revenue and your cycle through deferred revenue. So the GAAP almost doesn't really make sense, Jim's guys could have been working really heard on delivering a project that had a big deferred revenue component to it and that's how we run that business as we allocate people to projects and hit certain revenue delivery milestones and you work off the deferred revenue and then, you also build more deferred revenue with bookings. So I wouldn't read anything into that, that business is growing 65% and we think it's going to continue to grow.

Mark May - Needham & Company

What was on -- what was like the sequential change in the Visual Science or is that not a relevant way of looking at it?

Claire Long

The GAAP revenue went from $1.7 million for the three months ended June 30 to $3 million for the three months ended September, so there was a large increase in GAAP revenue as well as total pro forma revenue for that division.

Mark May - Needham & Company

I am sorry. I meant non -- I guess, non-GAAP, was that about $4.5 million and guess I am a little confused, the last quarter non-GAAP revenue for Visual Sciences was what $2.9 million?

Jeff Lunsford

You are talking about the deferred revenue, that is going to shrink, but again you got to look at the total top line number because the non-GAAP revenues, the deferred revenue that was on the balance sheet, it was written down when we -- on February 1. So that number is going to whittle away and we have said that number is going to primarily be cycled through at the end of Q1 next year.

Mark May - Needham & Company

That’s it, two quarters.

Claire Long

Yes, it's about -- Yes, it's only -- it goes down to 200,000 in Q1 of ’07, but our total GAAP revenue as well as our total pro forma revenue continues to grow in that division.

Jeff Lunsford

Yes.

Mark May - Needham & Company

Okay. Maybe I will ask and just my follow up is more of a macro question about looking at the 130 to 85 modules and I think Jeff you made a comment that should we have take that as though sort of most of the major customers have been won and now it's a game of upselling them, value-added products.

Jeff Lunsford

No. I mean we don’t think the market is saturated. We think of the top 10,000 websites that we believe is our core focus and there are different companies out there to define the market differently, but we are focused on the top 10,000 globally. We think about 60% of that market is probably using the next generation web analytics package and remember we are also talking about other non-web products, enterprising [us with] VS and then we're talking about other web products like site search, so we think that market for the next two years or so is still a bit of a land grab, and we -- don’t misread me, it's not that we are not focused on adding customers, but from quarter-to-quarter you might have a quarter where we spend a lot of time on a couple of big up-sells and that same team could have closed ten small deals and instead they're trying to close $1.5 million big deal as an example. So we continue to add the customer base and to up-sell.

Jim MacIntyre

Okay. Just to clarify, the 85 number is new customers, where the number of modules up-sold into existing customers or within those deals wasn't disclosed.

Jeff Lunsford

It would have been in the hundreds.

Jim MacIntyre

Right.

Mark May - Needham & Company

Okay, I'm sorry, I thought I read -- that's actually my next question, so it's perfect. Just the semantics around some of the data, which I think is important. I think and I'm trying to find it right now, it's in the press release. 85 new bookings for various modules and then it says bringing our customer base to 1,450?

Jeff Lunsford

Yes, the new --

Mark May - Needham & Company

And they sound like two different -- they sound like two different numbers.

Jeff Lunsford

The new customer, if we count out all the modules, like someone ha bought a new either Report Builder or some accounts or added active segmentation or something, that number is not in the 85. This is a major new product expansion with a new customer.

Mark May - Needham & Company

So the 85 and the 1,450 are the same -- are essentially the same number?

Jeff Lunsford

Same definition, yes.

Mark May - Needham & Company

Same definition.

Jeff Lunsford

Okay.

Mark May - Needham & Company

Thank you.

Operator

Your next question comes from the line of Brad Whitt with RBC Capital Markets. Please proceed.

Brad Whitt - RBC Capital Markets

Hey guys, thanks for taking my questions. Claire, did you give a CapEx this quarter and expectations for next year?

Claire Long

I didn't yet. I think I actually may have given the cash number, but we spent $1.8 million in cash this quarter on CapEx, brought our total CapEx for the year to 3.8 million. There is a swing kind of between cash and non-cash CapEx there between quarters. So, total is $3.8 million. We still expect to spend around 1.5 million in Q4, and then for '07 somewhere between 6 and 8 million for total CapEx.

Brad Whitt - RBC Capital Markets

Okay. And Jim, maybe you mentioned that it sounds like because of the demand you are seeing in the Visual Science business, that you are shifting some resources, may be some sales resources over there, could you give us a little more color around that?

Jim MacIntyre

Sure. We've been in the process of training our enterprise level sales team across the board on all of our products and we've been through a few sessions and have a concerted effort underway to make sure that all of our senior sales reps and senior consulting team members are able to represent our product line across the divisions. You will see more of that in 2007, but there is a significant amount of energy and effort going into making sure that we can -- the Visual Sciences product line is at work and take advantage of the distribution potential that our existing sales force and consulting team provides.

Brad Whitt - RBC Capital Markets

Okay. So do you envision at some point that you essentially have one sales force that sells all the products, that's the ultimate goal?

Jim MacIntyre

There are -- certain of our products are most appropriate for large enterprise accounts, and we believe that by class of accounts that we are serving in the market that our sales force across that whole market will have the same set of products in their bag to represent.

Brad Whitt - RBC Capital Markets

Okay. And then also, Jim, I don't know if you can give us any more color on this. You mentioned that you see new market opportunities for Visual Sciences for us to allow you room to make those kind of investments. Without giving away any big secrets, is anything you can add there or any color you can provide us?

Jim MacIntyre

Sure. I can tell you a little about some of areas that the Visual Sciences platform is being applied. One of the major developments really over the last 6 months has been that the Visual Sciences platform has become quite general in its ability to handle any type of high volume events like data as well as historical customer data, warehouse data. So we have seen from the expansion of applications related to our Visual Call application, which might be the usage of IVR systems and activity within a call center. We've seen expansion into data coming out of point-of-sale systems as well. And we've also seen people take in their entire customer data warehouse, pulling again to the Visual Sciences platform to take advantage of the unique type of interactive data analysis that it allows. Those are just a couple of examples. In other areas, it's been used to analyze airline flight activity, reservation system activity, and so there's a wide range of applications for the Visual Sciences platform. When we find a market that we believe is robust enough to package a whole application around, we make them out with another brand name around that. But up until that time the Visual Sciences platform can be applied by our consulting team to take on new application areas that it's appropriate for in regard to being a match with the type of data in that arena.

Brad Whitt - RBC Capital Markets

Okay, and very good. I'll pass it over. Thanks for taking my question.

Jim MacIntyre

Sure.

Jeff Lunsford

Thanks Brad. We have time for one more question.

Operator

Your next question comes from the line of Michael Huang with ThinkEquity. Please proceed.

Michael Huang - ThinkEquity

Hey guys.

Jim MacIntyre

Hi Michael.

Jeff Lunsford

Hi Michael.

Claire Long

Hi.

Michael Huang - ThinkEquity

A few questions for you. The first, I think you had mentioned that the Visual Sciences pipeline had doubled over the past several quarters. In your view, what actually is driving this growth? Is it the new products, is it the evolving customer specification, or is it the stronger marketing efforts or is it a combination of all?

Jim MacIntyre

It's been a combination of all of those things, but we've seen both significant demand in our pipeline from our existing customer base, who are looking to take aspects of the Visual Sciences pipeline and apply -- to apply Visual Sciences platform to other parts of their business. And that has provided really a pretty significant opportunity for us. At the same time a good portion of our team's efforts have been focused on new opportunities in the market, especially those that we see as strategic and important for us in the longer-term. So, we are constantly making a tradeoff between where we send our teams, whether it's the expansion of an existing strategic account or whether it's a pursuit of a new account in a strategic market. But we are a much more -- over the last months, we've become much more directed in terms of where we are focusing those efforts and since we now have the capability to sell significant -- items of significant additional value into our existing account base, a good bit more of our time has been spent in that area over this last quarter.

Michael Huang - ThinkEquity

Alright. And another question, I know you don't provide specifics on bookings or bookings growth, but qualitatively speaking, how did organic bookings growth compare with Q2, especially given the nice improvement that you saw on the Adams side of the business?

Jeff Lunsford

Michael, it's -- as I said earlier, the bookings and renewal rates were solid and let us raise revenue substantially. So felt pretty good across the board and the overall market is still very healthy.

Michael Huang - ThinkEquity

Okay. So in terms of -- that the level of activity that you saw out of the Adams side of the business, obviously some of the recent product releases have helped out there, but is it fair to say that some of the upside in Q3, did that -- was that coming from the Adams side of the business?

Jeff Lunsford

Yeah, the search and publish -- what we call the search and content solutions group, those guys are doing a fantastic job. They released active ranking, active browsing, Ajax-based site search, just some really exciting staff, and active insight. I think you were there actually, half of the presenters were people that were using some search product or some publish product and they were up on stage demonstrating how they could drive intelligent search results off of web analytics data or site behavioral data, and they were showing how Ajax-based sites search is driving up their conversion rates dramatically because it's a much more compelling and efficient user experience, so that team is doing a fantastic job and we have to say here, which is the innovations sales and they have been innovating and that has manifested itself directly in improved pipeline activity for that products.

Michael Huang - ThinkEquity

And last question for you guys. I know you have already touched on the competitive environment, but how would you actually characterize the pricing environment versus say six months ago or a year ago and how do you believe that this pricing could trend as customers become more sophisticated with their web channel effort?

Jeff Lunsford

The pricing environment has been intensely competitive for 4 years and it's -- I think going to continue to be intensely competitive, and we have been able to tune our business to be able to grow it with nice margins. I think that nothing has changed dramatically in the last six months. Jim would you --

Jim MacIntyre

Yeah, I mean in both directions, I mean the pricing competition that you have seen over the last quarter has continued and where we have highly differentiated products, our ability to price them at a value premium continues as well.

Michael Huang - ThinkEquity

Right. Thanks guys.

Jeff Lunsford

Alright, Michael, so thank you, I think with that we are going to wrap up the call. We appreciate the time everyone spent and once again want to welcome Jim MacIntyre to the CEO role and Bill Harris to the Chairman role. Thank you for your time and we'll see you potentially this week as we are out on a weeklong (Northyear) road show that starts Wednesday. Thanks.

Jim MacIntyre

Great, thank you.

Claire Long

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and you have a great day.

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