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Marketo, Inc. (NASDAQ:MKTO)

Q4 2013 Earnings Conference Call

February 11, 2014 17:00 ET

Executives

Erica Abrams - The Blueshirt Group

Phil Fernandez - Chief Executive Officer

Fred Ball - Chief Financial Officer

Analysts

Greg Dunham - Goldman Sachs

Phil Winslow - Credit Suisse

Terry Tillman - Raymond James

Richard Davis - Canaccord Genuity

Pat Walravens - JMP Securities

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Marketo’s Fourth Quarter and 2013 Financial Results Conference Call. During today’s presentation, all parties 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, February 11, 2014.

I would now like to turn the conference over to Ms. Erica Abrams. Please go ahead.

Erica Abrams - The Blueshirt Group

Thank you, operator. Thank you all for joining us today for the Marketo’s fourth quarter and 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 Q4 and 2013. Some of our comments may include forward-looking statements which 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 as filed December 23, 2013. 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 review them whether as a result of new developments or otherwise.

Now, I will turn the call over to Phil Fernandez for his remarks. Phil, please go ahead.

Phil Fernandez - Chief Executive Officer

Thank you, Erica. Hello and thanks for joining us today as we announce Q4 and full year 2013 results. In short, we had an absolutely great fourth quarter putting an exclamation point on what has been a milestone year for Marketo. We came out of the gates fast, growth in momentum throughout the year. We of course had a successful IPO and continued to raise our profile in the marketplace. Our product team continued their track record of amazing innovation and our numbers speak for themselves, showing our traction with customers as the leader in the exciting and fast growing category of software platforms for marketing professionals.

On top of all the success we have had, the thing that was most clear to me everyday during the last year is our success is really all about our people here at Marketo. I am proud of how our team repeatedly stepped up in such a pivotal year. I want to thank my staff and everyone in the company at Marketo for going all out to seize the opportunities that we have created for ourselves.

Now, let’s get down to it. For the quarter, we had revenue of $28.2 million, up 67% year-over-year and 10% sequentially. For the year, revenue was $95.9 million, up 64% over the prior year. We closed 2013 with 3,001 customers. It increased in the third quarter of 241. I have mentioned this on past quarters as well, but one of the things that continues to strike me is how well all parts of our business are performing in both North America and internationally in SMB as well as enterprise and in new sales as well as expansion within our installed base. We continue to see strength in our traditional business to business sector and increasing momentum in our newer consumer sector, which I have highlighted as a key growth engine for Marketo. So fair warning, I am not intending to necessarily give you this number every quarter, but let me note that in Q4, B2C marketing solutions represented 12% of our new bookings, up from virtually 0% a year ago.

So if we zoom out, 2013 was clearly the year that marketing software merged into broad awareness as the most dynamic category in enterprise software. As we have been saying since the day we started Marketo, this is happening because marketing professionals uniquely have their hands on today’s levers for business growth. They are the owners of their company’s presence on the web in mobile and on social media. And more broadly, they are the storers of their customers’ experience and lifetime value. This has compelled marketers in virtually every industry to step forward and to become essential catalysts for revenue growth. And because this role for marketers is so important to their businesses and so different from what their colleagues do in other parts of the enterprise, marketers are demanding a technology solution built just for them. This is what’s driving our business to being the independent thought leader and technology innovator for marketers. And this is what I call a marketing first world.

On a more emotional level, I think that marketers increasingly see Marketo as their key friend and ally in helping them excel at their mission. For example, I was with the CMO of a large security technology company recently and I was talking with her about how the needs of marketing really must come first and she got this huge smile on her face. She realized that for the very first time, a technology partner who truly understood her job and the contribution she makes to her business every day. This really illustrates the unique position we have in a marketplace and the opportunity we have to build the iconic marketing software company.

Now, turning specifically to the fourth quarter, let me again note the diversity of new customer wins that we earned in the quarter. We closed business across a broad set of industries including customers like Schneider Electric and Manufacturing, Cirrus Aircraft and Aviation, Four Seasons Hotels and Hospitality, Novartis in healthcare, and NVidia and Brocade Communications in technology. As I mentioned earlier we accelerated our sales to consumer markets. A few of our new customers in the B2C space include the U.S. international guard, USAA and the World Poker Tour. In addition to all of the great new customers that joined us, we continued to see excellent traction, expanding existing relationships, selling to customers like McGraw-Hill, SunGard and Microsoft.

One or two years have been fascinating as we have seen awareness of our category and really specific awareness of our Marketo brand spread across the globe. This resulted in strong sales from multiple geographies in Q4 such as with Orange and BNP Paribas in EMEA and Hyundai and the National Rugby League in Australia. In the coming quarters, I look forward to telling you more about our international expansion opportunities that we will be pursuing as a result of these very strong demand signals we see from the global market.

Now, moving on from this customer discussion let me make some other notes. I will note that our LaunchPoint ecosystem continue to grow in 2013 finishing the year with more than 250 partner solutions, that’s well more than double from a year before. This is of course a great proof point for our emergence as the de facto leader in our category. What I really like most about the growth that we have seen with our ecosystem is also the way that our sales folks are now using these partnerships to craft ever more strategic solutions for our customers.

Our innovation engine continued to run at full speed in Q4 with the release of Marketo Dialog Edition as well as very major upgrade to our personalized email capability. Together these provide a fast and seamless bridge for marketers to transition from their current grab bag of batch and blast email tools, disconnected social marketing tools like to a complete and powerful marketing automation solution from Marketo. We capped the year with the acquisition of Insightera, a leader in real time personalization for websites and mobile apps. The integration of Insightera is going very well and we are seeing excellent sales transaction with the combined team. Insightera is an outstanding solution in its own right and we will continue to sell it as an independent product and even to customers who currently use the competitive marketing automation solution. But things get really interesting when we combine this real-time personalization capability with our unique customer engagement engine, which we released to market last summer. Together this makes Marketo the first and only marketing software provider able to help marketers build individual, personal and relevant dialogues with their customers all spanning inbound, outbound, social and mobile marketing channels.

Because we first approached the public market Fred and I have talked a lot about the major datacenter transition projects we had underway to improve responsiveness and long-term cost efficiency of our datacenter operations. I am happy, really thrilled to report that we successfully completed this program in Q4. This project has already yielded some great benefits for our customers and was a key contributor to how we improved our gross margins for subscription and service to 76% in Q4, up from 57% just one year ago. This two year effort was completed basically flawlessly and was truly a tour de force by our amazing operations team.

Our entire organization grew nicely in 2013 and we finished the year with 519 employees at year end. We added a number of key new executives across the business in 2015, including in sales leadership, finance, legal, business and corporate development and in our customer success and services organization. Our abilities to attract this kind of talent is essential as we continue to scale up the business and we expect to continue to in our global team and executive leadership in 2014.

Looking forward this year we are already in the countdown to our Marketo Marketing Nation User Summit to be held April 7 to 9 in Moscone Center in San Francisco, where our theme this year is Innovation in the Nation. I look forward my keynote where I will unveil our own next new wave of innovation for our marketing solutions. And I will be joined by our customer Beth Comstock, CMO of GE and one of the best known and most innovative CMOs in the world. And as you may have heard our other big news is that Hillary Rodham Clinton will also be joining me on stage to deliver a keynote speech, touching on how innovation is essential for a nation and for the whole world stage. We are expecting more than 5000 attendees to join us this year.

To conclude, in summary, this was just another excellent quarter and wrapped up a great year for Marketo.

With that I will turn the call over to Fred Ball for his financial review of the quarter and the year and the outlook for the first quarter and first year and the full year 2014. Fred?

Fred Ball - Chief Financial Officer

Thank you, Phil. As Phil stated we had a very strong Q4 to close out an excellent 2013. Throughout my remarks all financial results will be stated on a non-GAAP basis unless I indicate otherwise. You can find a reconciliation of GAAP to non-GAAP results in the financial tables we provided to you today as part of our earnings release. The non-GAAP amounts exclude the impact of stock-based compensation expense, the settlement of litigation in the fourth quarter, acquisition-related costs for Insightera, and the amortization of acquired intangibles.

Now for the numbers, total revenue in Q4 was $28.2 million, up 67% year-over-year and 10% sequentially. For the year ended December 31, 2013, total revenue was $95.9 million, up 64% over the prior year. Our revenue performance continued to reflect the success we have had this year adding new customers, our strong customer retention rates and the growth in our cross sell and usage rights expansion into our existing base. Subscription dollar retention rates continued to average approximately 100% over the past four quarters. Professional services and other revenue in Q4 was $3 million, up 94% year-over-year. For the year ended December 31, 2013, professional services and other revenue was $10.8 million, up 91% over the prior year. This strong revenue growth was primarily attributed to increasing customer demand for professional services associated with new business bookings.

In Q4, total gross margins increased to 65.3% as compared to 63.1% in Q3 and 56.5% in Q4 a year ago. Subscription and support gross margins were 76.1%, in Q4, an increase of 3% from Q3 and up from 67.3% in Q4 a year ago. As Phil discussed we have been engaged in a long-term effort to upgrade our datacenter operations. In Q4 we completed this effort a quarter ahead of our original plan and delivered on the promised margin expansion. Looking forward, I see smaller incremental improvements in subscription and support gross margins throughout 2014 as we track towards our long-term model.

Professional services gross margins were negative 24%, an improvement from negative 50% a year ago, but a decline from negative 12% last quarter. This was due to expansion of staff capacity in the quarter as we set the stage for continued growth in 2014 and also due to the use of outside services to support short-term customer demand. We expect 2014 professional services gross margins to be in the same range as Q4 of 2013 as we continued to invest in staff to support increasing customer demand for our specialized marketing expertise.

Turning to operating expenses, sales and marketing expenses were $19 million or 68% of total revenue in Q4, as compared to 54% a year ago and 57% last quarter. Sales and marketing expenses were higher in the quarter due in part to Q4 being our seasonally strongest booking quarter and booking overachievement relative to plan. This resulted in higher variable sales compensation expenses in the period. We also had an increase in marketing spend in the quarter related to Dreamforce.

As a quick reminder, we expense commissions in the quarter of a booking, which resulted in an increased spending in the current period, followed by increased revenue occurring in future periods, as we recognized the related revenue ratably over the contractual subscription period. We expect Q1 expenses for sales and marketing to be relatively flat with Q4 2013. As expected reductions in variable compensation expenses are offset by addition to sales and marketing capacities required to support our growth rates in 2014. For 2014, we expect sales and marketing expenses to increase in absolute dollars and to remain our largest expense in absolute dollars and as a percentage of total revenues.

R&D expenses were $5.9 million for the quarter. That represented 21% of total revenue in Q4 as compared to 28% a year ago and 21% last quarter. We expect R&D spending to increase in absolute dollars as we continue to drive innovation, but to decline modestly as a percentage of revenue throughout 2014.

G&A expenses were $4.4 million or 16% of revenue in Q4 as compared to 16% a year ago and 14% last quarter. G&A expenses increased sequentially driven by variable compensation expenses attributed to the Q4 sales over performance and legal expenses related to settlement of litigation. We expect that general and administrative expenses will increase in 2014 in absolute dollars as we continue to expand our business and infrastructure to support our growth but to decline over time as a percentage of total revenues.

Our operating loss in the fourth quarter was $10.9 million or 39% of total revenue as we drove strong growth and continue to invest and scale our business. We expect that investment rate to continue in 2014 as we take advantage of the marketing opportunity in front of us to drive top-line growth. Net loss in Q4 was $11.2 million and net loss per share was $0.29, based on 38.3 million weighted average common shares outstanding. Net loss in 2013 was $37.1 million and net loss per share was $1.50 based on 24.7 million weighted average common shares outstanding.

Now to the balance sheet, we closed the quarter with deferred revenue of $41.4 million up 100% year-over-year and increasing from $30.6 million at September 30, 2013. We expect the deferred revenue growth to be significant in Q4 as it has historically been and was our seasonally strongest sales quarter of the year. The balance was also impacted by change in our billing policy that now provide for import – invoicing upon contract signature versus upon contract start date. The mix of quarterly and annual billings had a more modest effect on the deferred in the quarter. Given the effects of these items year-over-year calculated billings growth for Q4 would have been about 65%.

As we have discussed in the past, predicting deferred revenue is challenging, as we experienced seasonality in our sales, customer mix shifts and related impact on annual versus quarterly billing frequency. Looking into Q1 2014 which is typically a seasonally slower quarter, I expect to see deferred revenues flat for Q4 of 2013. To close the quarter with $128.3 million in cash and cash equivalents representing a decrease of $12.6 million compared to September 30, 2013. The decrease was primarily due to cash of $6.2 million used in connection with the acquisition of Insightera and $4.9 million used in operations.

CapEx for the quarter was $3.2 million, reflecting equipment purchase in connection with our co-lo transition, and leasehold improvements associated with facilities expansion completed in the quarter. We expect CapEx to be in the range of $11 million to $12 million for 2014 as we add incremental capacity to support our growth. As we have highlighted in the past, cash flows can vary significantly from quarter-to-quarter due to the seasonality of our business and the timing of many factors including the timing of payments under variable compensations plans as well as capital expenditures. Similar to Q1 of last year, we expect cash flows used in operations to be significant in Q1 of 2014 due to payments associated with sales commission and other variable compensation plans that were accrued for throughout 2013.

Turning to our outlook for the first quarter, we expect revenue in the range of $29.5 million to $30.5 million, and non-GAAP net loss per share in the range of $0.28 to $0.30. This assumes approximately $39.6 million weighted average common shares outstanding. For the full year 2014, we expect revenue in the range of $130 million to $135 million and non-GAAP net loss per share in the range of $1.09 to $1.15 assuming approximately $41 million weighted average common shares outstanding.

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

Phil Fernandez - Chairman and Chief Executive Officer

Good. Thank you, Fred. Well I’m sure you can tell we are very pleased with our accomplishments and our results to-date and even more excited about the future ahead. As we continue our journey to build a great company and the iconic brand in this Marketing First World.

So, with that we’ll open the line to your questions. And operator, please go ahead with the first question.

Question-and-Answer Session

Operator

Ladies and gentlemen, we’ll 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

Hi, yes. Thanks for taking my question. Given - you gave the metric, I thought I’d start with the 12% of new bookings that were B2C. Can you elaborate I guess in terms of what’s really driving that? Is that more focused on your part to go after some of those opportunities? Is that the lead flow that you see? Or is it something related to the products, that you can handle it more? And how should we think about that mix going forward, recognizing the fact that I don’t think you’re going to be giving it every quarter? Thanks.

Phil Fernandez

Yes, yes. So, Greg it’s – we really been talking since we approached the public markets about how this is one of the most critical growth engines for Marketo. Our observation is that our core technology platform one that lets our customers really build these personal, relevant, ongoing dialogues with customers across inbound, outbound, social, mobile channels is broadly applicable to every industries, every market whether it’s the lead acquisition like B2B or other kinds of applications like driving customer lifetime value and various kinds of B2C businesses. So, we continue to scale, we’ve increasingly been putting energy and momentum into driving demand in that sector. Our Marketo Dialog Edition, which I referenced in Q4 is a packaging of our products specifically designed to appeal to B2C customers. And just broadly speaking, we’re reaching a scale and awareness in the market where B2C customers are coming to us and we expect to lean into that. And we’re not in anyway backing away from the B2B business but we’ll continue to expect to see increasing growth and traction in B2C.

Greg Dunham - Goldman Sachs

Okay, that makes sense. I guess one follow-up to Fred on the metrics question. In terms of the switching from signing – I guess point of contract signing versus, as a point - in terms of actually when the invoice goes out, how much did that actually contribute to deferred this quarter, specifically?

Fred Ball

It was about $4 million and what we found as we were tightening up our process, we saw that there was a set of customers that had early January and mid-January start dates. And we felt like – gosh, we should invoice them right away, and we checked with the bunch of folks and they said yes we’ll do that as well. So, we just thought it was a tightening up process that we did one time, and we’ll do it every quarter.

Greg Dunham - Goldman Sachs

Okay. And…

Fred Ball

That’s how I got to the calculated number that I gave up, right.

Greg Dunham - Goldman Sachs

So when we think I mean if I look at the cash flow this year, in terms of that $20 million kind of contribution from deferred was inflated by about $4 million. Is that fair?

Fred Ball

That’s correct.

Greg Dunham - Goldman Sachs

Okay. Alright. That’s helpful. Thanks, guys.

Phil Fernandez

Thanks, Greg.

Fred Ball

Thanks.

Operator

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

Phil Winslow - Credit Suisse

Hello. Thanks, guys. I just want to echo my congratulations on a great quarter.

Phil Fernandez

Thanks, Phil.

Phil Winslow - Credit Suisse

I just had a question on the competitive environments, and maybe if you could sparse those between B2B and, obviously, the newer B2C business. But it’s just - what are you seeing out there, particularly from sort of pricing environment, especially after all the consolidation we saw over the past couple of quarters here? And then also, in the B2C world, you’ve been - you mostly been going up against, and sort of what’s been your competitive differentiator in terms of the wins you’re seeing?

Phil Fernandez

Sure. Well, this is always been a very competitive market and continues to be a very competitive market in light of the various consolidations we’ve seen. The great news is, we’ve been the fastest growing player in the space and continue to win more than we lose. I would have to say that overall the competitive market has been quite unchanged and sometimes we have not seen any significant shifts in buying patterns and we continue to win more than our share of deals. In the B2B space, this is almost entirely a greenfields market. There is – there are various kinds of technologies installed but this is the first time that customers are changing any kind of a strategic marketing tool.

And so, the dynamic there is a competitive battle for share of mind. In B2C, there is almost always an incumbent e-mail tool that’s being replaced as part of the purchase. And our point of view on B2C is that the world needs to move from treating e-mail as a channel standing alone to be an integral part of an ongoing relevant personal inbound and outbound discussion. And so what we see in B2C is companies moving really from using e-mail as their strategic marketing tool to using a more complete multi-channel platform like Marketo. So that tends to be a shift in purchase where there is a move from an e-mail product to Marketo.

Phil Winslow - Credit Suisse

Got it. Thanks, guys.

Operator

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

Terry Tillman - Raymond James

Hey guys, maybe this is a broken record, but also great job in the quarter. But Phil I guess just the first question relates to just following up on the B2C side because you gave us a nugget in terms of the contribution from B2C. Also I’m curious about an average size of a B2C customer, did they tend to be bigger because maybe if it’s a consumer market, there was more potential customers or leads that would be priced in that database?

Phil Fernandez

The B2C will and has tended to be larger on a record basis certainly. We do have differentiated pricing that tries to take into account the value of a lead. So we work with companies like GE Power that will sell $50 million power system and we work with The World Poker Tour they might sell a $9 monthly subscription and obviously the value of their name and the database is different in that case and or different pricing schedules. I do think the B2C is going to represent comparable to my guess would be – this is only a guess as we get to the larger reaches some ability to reach pretty high in selling price.

Terry Tillman - Raymond James

Okay. And I guess with the Dialog product I mean that hasn’t been out that long. How much of the strength in the fourth quarter would you – and the 12% of the business now coming from B2C? Would you put on the Dialog product or is that still going to require some seasoning in the market and maybe it’s more of a future catalyst?

Phil Fernandez

No, I think the significant part of its success was the Dialog product in the marketing and go-to market activities that accompanied it. So we’re obviously huge believers in our strategy around marketing first to approach to the world. So really in Q4 we started marketing in earnest sending messages into the marketplace that would appeal to B2C buyers and those are messages not about any specific one of our product packages but about the value of a marketing solution like us to their segment. And as a result the Dialog Edition was a catalyst for doing that go-to market activity, the majority of the B2C deals worth of the Dialog Edition although in some cases ultimately at the end the customer chose another packaging because of the specific feature stat, but Dialog Edition is clearly the catalyst for that kind of growth. Okay.

Terry Tillman - Raymond James

Yes, it does. Thank you. And I guess I don’t know if this is for you Phil or for Fred but if I’m not mistaken in the recent past and maybe over the last couple of years, it’s really been about the focus of sales and marketing is on customer acquisition just signing up more customers and you haven’t really tapped into as much of the installed base opportunity I mean I know every quarter you’re getting customers to buy more product stickiness, it’s value-add. But in 2014, is there any shift at all maybe more towards harvesting of the installed base or is it still going to be primarily more focused on customer acquisition? Thank you.

Fred Ball

T’s a great question. We have that debate inside a lot, but I think at the end of the day this is a big market opportunity and we absolutely are primarily focused on customer acquisition. That said we’ve got – we’ve made some organizational changes internally and some structural changes to really focus on the cross-sell and the (usage) right expansion side of the business and working through the installed base. And we’re seeing some very good early signs of that producing some good results as I made a comment in my remarks. I want to see that play out a little bit longer so I give you guys a little bit more.

Terry Tillman - Raymond James

Alright. Thanks guys.

Phil Fernandez

Thanks, Terry.

Operator

Our next question is from the line of Richard Davis with Canaccord Genuity. Please go ahead.

Richard Davis - Canaccord Genuity

Thanks. With regard to Insightera and kind of website personalization when you talked about it kind of broadly, but what made you pick them versus there is a dozen other companies in this space Evergage, Monetize, (Optimize Lead) etcetera. Is there anything in particular that stood out that they do better or is it just like what these guys fit well and they’ll – we can really run with the ball here quickly here. What was your thought process behind that? Thanks.

Phil Fernandez

Well we looked at – we looked at all the opportunities and options in this space. And there are lots of intangibles and deals like just chemistry and social issues and everything they felt very good. I would say we very, very impressed with their technology headroom and some of the latent big data and data analytics technologies would say we’re working on. They had also done the deepest LaunchPoint integration with Marketo. So we had more common customer proof points of the products working together through our solution ecosystem than any of the other names out there. And then I would differentiate you said a bunch of names there along this personalization space, there are set of people like (Optimize Leads) that are first and foremost I think focus on testing and performance improvement of their site and then their product site in Insightera that are really around delivering part of a long-term personalized message to customers. And so we also differentiated between kinds of different flavors of the technology and then ultimately we just thought we had just an absolute killer technology team that had just a lot of headroom to do great future stuff.

Richard Davis - Canaccord Genuity

Yes. I think you’re right. A lot of those companies are just A-B testing companies.

Phil Fernandez

Which is a great thing. They’re just not…

Richard Davis - Canaccord Genuity

Yes.

Phil Fernandez

Is not what we were looking for.

Richard Davis - Canaccord Genuity

And then I guess Fred is there any commentary on with regard to kind of free cash flow breakeven timing or is there any change in your thought process or any thought process that you’d like to communicate to us?

Fred Ball

No, it’s a good question. When we came to the IPO we had a certain arc I think I talked about in the middle of 2015 being that breakpoint. But we’ve also come through this year with a very strong growth rate and I think we’ve concluded that we have a unique opportunity to take advantage of that growth rate and our growth rate is 60 plus percent is a terrific place to spend time and so we’re leaning into spend. So I would push that out a few quarters, it’s still on the arc, we’re still making improvement in gross margins, R&D and G&A. And so we’re going to – and so you’re seeing us lean into sales and marketing. And as we’ve talked about a lot we will maintain and manage that throttle to ensure that it go – it works in tandem with the growth rate.

Richard Davis - Canaccord Genuity

Got it. That’s what I figured. I appreciate it. Thanks.

Fred Ball

It’s great. It’s an important message and understanding.

Operator

Our next question is from the line of Pat Walravens with JMP Securities. Please go ahead.

Pat Walravens - JMP Securities

Great. Thank you. So you guys - you promoted Bill Binch earlier in January and at the same time you created a Head of Worldwide Sales position, I don’t think you had one before. Do you mind just explaining the thinking behind that and what the key benefits are from that shift?

Phil Fernandez

Sure, yes. You even published a note on it which..

Pat Walravens - JMP Securities

I did.

Phil Fernandez

Delighted Bill. Well couple of things number one is as my own will continues to expand and change and as we’ve been looking at expanding additional international operations beyond EMEA and Australia. For example we’ve talked a lot about thinking about Japan coming up. It was clear to me that it wasn’t appropriate for me to have a collection of different international heads reporting to me that would miscue out being – out being a brand advocate for the company and a voice for marketing and a number of other things. So there was a very real issue there. And then second as we’re given global relationships with companies like General Electric or Samsung or Panasonic or many of the others that we talked about it’s clear that there is a lot of international selling going on in the business at this point and having one professional to look after that was important. And then frankly Bill just – he is a killer secret weapon. The guy knows how to find revenue and there is nobody had - rather have driving revenue in the company than the guy who has just done it for all these years and so it also leaving into just an amazing talent that we have that I think can offer more.

Pat Walravens - JMP Securities

Great. Thank you. And were there any other changes in your sales organization?

Fred Ball

(indiscernible) any major ones.

Phil Fernandez

No, nothing major.

Pat Walravens - JMP Securities

Okay, great. Thank you.

Operator

(Operator Instructions) Our next question is from the line of Karen Russillo with Wells Fargo. Please go ahead.

Karen Russillo - Wells Fargo

Alright. Thanks a lot. Yes. I had a question. You talked about some gaining momentum through the channel. Can you just kind of just remind us what - how should we think about the partner channel for you, is it on the application side, should we think of it more is on the service side and going forward what’s kind of the goal as to what you guys think the percentage of your business that should be coming through the channel versus direct sales business and then again, also on the services side, should we think about services coming in and being a bigger part so that would ideally I guess help margins on the services side down the road?

Phil Fernandez

Yes, so the specific comments I made were about our LaunchPoint solution ecosystem which is really our – the partners that have chosen to integrate within and extend our solution with a variety of other applications. And that doesn’t really – that’s not a channel per se, but it represents a larger solution footprint for customers. We do have an active channel business that represents both selling and international markets where we don’t have a direct presence for example in Latin America. As well as very important channel business with primarily with marketing agencies of various sorts that use Marketo return delivered services to other – to consumers they wish to consume our product that way. We did not break out, we don’t break out the specific numbers, but it’s a meaningful and growing part of our business and one that we’re investing into – investing into over time and I think can grow into the double-digit percentage over time. On U.S. (indiscernible) services as well, as we do more and more really large business with the Schneider Electrics of the world as I mentioned, there are some of the other names. They obviously want to consume a lot of services and the kinds of scale of transformation projects that marketing on a nation represents now are bringing in the lights of the Capgemini and Blue Worlds and others of the world. And at the same time we had unique expertise and how to turn this stuff loose and have it generate ROI. And so I think you’ll see increased presence with the large global integrators and others and at the same time our – the demand for our unique expertise will continue to drive growth in our (Proserv). But we stated kind of a long-term objective that we launch that to be about 15% of total revenue of the larger cap there and we continue to stand by that point of view.

Karen Russillo - Wells Fargo

Okay, great. Thanks a lot. Great quarter.

Operator

Thank you. There are no further questions at this time. Ladies and gentlemen this concludes Marketo’s fourth quarter and 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 with the access code of 4662008. We’d like to thank you for your participation. You may now disconnect.

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Source: Marketo's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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