Marketo's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Marketo (MKTO)

Marketo Inc (NASDAQ:MKTO)

Q1 2014 Earnings Conference Call

April 24, 2014 05:00 PM ET

Executives

Erica Abrams – Co-Founder and Managing Director, The Blueshirt Group

Phillip M. Fernandez – Chairman, President and Chief Executive Officer

Frederick A. Ball – Chief Financial Officer

Analyst

Greg Dunham – Goldman Sachs

Philip Winslow – Credit Suisse

Terry Tillman – Raymond James

John Byun – UBS Securities

Jason Maynard – Wells Fargo Securities

Patrick Walravens – JMP Securities

David Hynes – Canaccord Genuity

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Marketo’s First Quarter 2014 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, Thursday, April 24, 2014.

I’d now like to turn the conference over to Ms. Erica Abrams. Please go ahead, ma’am?

Erica Abrams

Thank you, Damien. Thank you all for joining us today for the Marketo first quarter 2014 financial results conference call. Joining me on the call today are Phil Fernandez, Chairman and 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. Our website can be accessed at investors.marketo.com.

On this call today, we will provide you with details about our performance in Q1 2014, including certain non-GAAP financial measures. Numbers discussed on this call will be non-GAAP, unless stated otherwise. We provide non-GAAP financial measures because we believe that they are the most valuable way to review our core operating results.

We have provided a reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 8-K with the SEC today.

Some of our comments today 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 on forward-looking statements in our earnings release, and read the risk factors included in our filings with the SEC, most recently, our 10-K was filed on March 3, 2014.

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. Please go ahead?

Phillip M. Fernandez

Thanks, Erica. And thanks everyone for joining us today as we report first quarter results. In brief, we are very pleased with our results in the quarter; and we feel like the year is off to a great start for Marketo.

Revenue for Q1 was $32.3 million, and that was up 64% year-over-year and 15% sequentially. And other key metrics were in line or better than our expectations. As soon as we finished Q1, we rolled right into our signature annual customer event; Marketo’s Marketing Nation Summit, which we hosted in Moscone Center in San Francisco.

The vibe at the summit was just nothing short of electric. We were joined by 6,000 marketing professionals who came together to learn from each other, to meet many of our partners, to get an update on our innovative new product offering.

I know a number of you on the call had a chance to join us for the Analyst Day that we held in conjunction with the conference, and I think you’d agree it was a pretty good event. I’ve to admit that I and my team are still basking in the afterglow.

But starting today with the discussion of the summit, my goal is not just to ramble on about what a great event it was. But to make really clear that this was a watershed moment for Marketo on our journey to build a great company.

For many people in the industry, I believe this summit really crystallized the big picture of what we’re trying to accomplish at Marketo. And for that it was a huge proof point that we have really stepped up into a true leadership position in our category.

For example, right after summit, the well-known marketing commentators Scott Brinker wrote on his Chief Marketing Technologist blog, “My fellow marketing technology enthusiasts, mark this week in your journals. Here at their Marketing Nation Summit, Marketo just triggered a major inflection point in our industry.”

At summit, we announced and demonstrated a series of new and innovative products that were incredibly well-received by our customers, prompting one to tweet, “Marketo, take my money, please.” Again, industry voices agreed, Ann Balboa who writes the influential blog on the influential MediaPost site wrote about our product introduction, “I’ve been in a marketer for over 20 years, and I can tell you that this is one of the most authentically slick presentations I have ever seen, not one, not two, but three major product rollouts that each in their own right could make for an industry disruption.”

Specifically, we announced our new Marketo real-time personalization application that’s super easy to use and tightly integrated search engine optimization application, and our eagerly anticipated calendaring and planning application.

More than series of just new applications, at summit, we introduced our customer engagement platform. A foundation for marketers in every company, in every industry to build more personal and valuable relationship with their customers.

Our customer engagement engine has been a central piece of our vision and our strategy. And I’m thrilled to see that these are so well-accepted by the marketplace. What’s most important about our customer engagement platform is not what we could do with it, but that it’s quickly being adopted as a standard in the marketing industry.

We now have more than 250 third-party solutions in our LaunchPoint partner ecosystem. And at summit, we announced a strategic partnership with Axiom to integrate the new audience operating system with our product.

Ultimately, what I think we showed the world at our Marketing Nation Summit was clear evidence of the powerful network effect we are achieving with customers, our partners, and industry influencers begin to rally around our leadership vision. And this is exactly what we mean when we use that term Marketing Nation. As you can probably tell, I’m really pleased with what we achieved in this summit, but I’m equally pleased with our Q1 results.

So, let me turn to that topic. In Q1, we continue to see really solid performance from all parts of our business, enterprise and SMB, new customer acquisition and installed based expansion, B2B and B2C, and sales in the multiple geographies we do business.

As you may recall from our recent Q4 earnings announcement, B2C sales, and that is sale to marketers in a variety of consumer industries, have become a material part of our business.

In Q1, the key growth initiative continue to perform very well. And we had customers like Isuzu, MyFitnessPal, George Washington University and Hunter Douglas. This shows the range of companies that we believe need a better way to engage to their customers; from automakers to app makers, from higher education to home decoration. Our new customer engagement platform is giving these marketers exactly what they need to build more valuable customer relationships.

Of course, our core B2B market was strong as well. During the quarter, we added new customers like Sprint, Akamai, Sallie Mae and Goldman Sachs, and many more. At the end of Q1, total customer count reached 3,215, up from 3,001 at the end of Q4.

It is now almost one year since we took Marketo public. Fred and I both talked a good bit about the importance of expansion within our ever growing install base. In Q1, we made a particular effort to build our organizational muscle around the install-based sales. I’m really quite happy with the results.

From large expansions to companies like Autodesk and Microsoft to many of the smaller deals involving product cross-sell and/or use of direct expansion, we are increasingly demonstrating our ability to earn more share of wallet from customers, at the same time we deepen our strategic relationships with them.

To that end, specifically, one of the metrics we have articulated for the business is subscription dollar retention rate, which takes into account both churn and an expansion within the installed base.

Historically, we’ve said that this number has tracked at almost exactly 100%, but I’m happy to report that we are announcing this metric came solidly above 100% on a consistent basis.

Moving on, another key milestone in Q1, we announced a major international expansion into Japan, as we have previously signaled our intent to do so. I had the pleasure of making several visits to Tokyo during the quarter. And I’ve been struck by the degree to which the Japanese market is eagerly anticipating the arrival of a new generation of car-based marketing technology there.

I was even more struck that the Japanese market is very specifically anticipating the arrival of Marketo. It was amazing for me to see that even with no prior presence in the territory, Marketo has already established the premium brand position for marketing software in Japan.

We believe the opportunity in Japan is a big one, and we wanted to jump into the region in a big way. And to that end, we announced the joint venture partnership with Dentsu eMarketing One and Sunbridge Corporation, and each of those companies took a minority investment stake in Marketo’s new operating entity in Japan.

Dentsu is one of the world’s largest advertising and digital media networks, and it’s actually the single largest in Japan. And therefore, I believe this JV will be really a great accelerator for our success as we enter this key new market.

And then finally, I’d also like to make a few comments about how we are doing with the integration of Insightera, the technology company that we acquired right at the end of Q4 of last year.

Success of the Insightera acquisition is, of course, important in its own right. It also serves as a template for future acquisitions as we play out our strategy to deliver the industry’s most capable customer engagement platform.

In short, I couldn’t be more pleased with how the integration of Insightera has gone, and we now consider that effort complete. As I mentioned earlier, at Summit, we announced our new Marketo Real-Time Personalization application, which is the result of that full integration of Insightera technology with Marketo’s platform. We completed that engineering task in Q1 with the kind of high-velocity execution excellence that Marketo is known for.

We also established dedicated sales capabilities for the applications since our excellent early traction where we’ve come to call here RTP first deal, in fact the deals where customers choose our personalization application rather than our marketing automation application as their first entry point under Marketo’s platform, and our integrated family of application.

We also saw good success with the cross-sell of real-time personalization into our installed base, and with an attachment together with marketing automation as part of new customer deal.

I believe that if we continue to achieve this kind of success with this multi-application strategy, we will redefine the competitive landscape in our favor, and help us continue to show excellent revenue growth rates.

So with that, let me now turn the call over to Fred for a detailed review of the quarter. Fred?

Frederick A. Ball

Thank you, Phil. As Phil stated, we started off 2014 with a great first quarter continuing on the momentum we experienced in the business during 2013. Total revenue in Q1 was $32.3 million, up 64% year-over-year and 15% sequentially.

Our revenue performance reflects the continued success we’ve had adding new customers and our solid customer retention rate. Growth in cross-sell and usage right expansion into our existing customer base has resulted in improvements in our subscription dollar retention rate that over the past four quarters now averages approximately 103%. As a reminder, this metric does not include new divisional sales at enterprise customers that were treated as new customers.

Professional services and other revenue in Q1 was $3.7 million, up 69% year-over-year and 22% sequentially. This strong revenue growth was primarily attributed to increasing customer demand for professional services associated with new business bookings. In Q1, total gross margins increased to 69.2%. That’s compared to 65.3% in Q4 2013 and 58.3% in Q1 a year ago.

Subscription and support gross margins were 80.5% in Q1, an increase from 76.1% in Q4 and up from 67.5% in Q1 a year ago. During Q4, we completed a long-term effort to update our data center operations, and we’re seeing a full quarter of that benefit in Q1.

It is terrific to see the gross margin leverage that this business can produce. Looking forward, we will continue to invest to support growth. Among other things, this will include establishing a new data center operation in Asia-Pac.

You should expect this to result in a modest decline in subscription gross margins from Q1 levels for the balance of the year as we expect to bring this capacity online this summer, and expand our infrastructure to be ready for future growth.

Professional services gross margins were negative 19.4%, a decline from negative 15.8% a year ago, and an improvement from negative 24.1% last quarter. The biggest factor affecting professional services gross margins continues to be our effort to grow this part of our business factor than our already fast-growing subscription business.

We’re doing this in order to meet clear increasing demand for our specialized marketing expertise. As a result, we see variable quarter-to-quarter drag on gross margins as we hire new staffs who are not yet fully billable.

As our professional services business approaches our long-term target of 15% of total revenue, a slower relative hiring ramp will naturally result in an improved services gross margin. Looking forward, we expect professional services gross margin to improve modestly as they move through 2014.

Turning to operating expenses. Sales and marketing expenses were $18.4 million or 57% of total revenue in Q1, as compared to 61% year-ago and largely flat from $19 million or 68% of total revenue last quarter.

Unpacking the flat spends from Q4 to Q1, we saw a natural decline in sales commission expenses due to lower effective commission rates at the start of a new quote a year, offset by adding incremental sales and marketing head count to support our growth.

We expect Q2 expenses for sales and marketing to increase both in absolute dollars, and as a percentage of revenue due to ongoing investments required to support our growth in 2014 as well as expansion into Japan, and costs associated with our Marketo Marketing Nation Summit held this month. R&D expenses were $6.1 million for the quarter, and represented 19% of total revenue in Q1, as compared to 24% a year ago, and 21% last quarter.

We expect R&D spending to increase in absolute dollars as we continue to drive innovation, including the efforts around the real-time personalization and calendaring and planning applications as well as our customer engagement platform, but to decline modestly as a percentage of revenue throughout 2014.

G&A expenses were $4.8 million or 15% of total revenue in Q1 as compared to 15% a year ago, and 16% last quarter. G&A expenses increased in absolute dollars to support key initiatives, such as the integration of Insightera, opening of our joint venture in Japan, and investments in both resources and systems to scale, to support our growth.

We expect the G&A expenses will increase in 2014 in absolute dollars, as we continue to expand our business and infrastructure to support our growth. But it declined slightly as a percentage of total revenue by the end of 2014.

Our operating loss in the first quarter was $7 million or 22% of total revenue. As we drove strong growth and continued to invest and scale our business. We expect that investment rate to continue in 2014 as we take advantage of the market opportunity in front of us to drive top line growth.

Net loss in Q1 was $7 million, and net loss per share was $0.18 based on $39.4 million weighted shares outstanding.

Now to the balance sheet. We closed the quarter with deferred revenue of $45.6 million up 86% year-over-year, an increase from $41.4 million at the end of Q4. As we’ve discussed in the past, predicting deferred revenue is challenging as we experienced seasonality and timing in our sales, customer mix shifts, and the impact of annual versus quarterly billing frequency.

Also, and as you may recall, last quarter we changed our billing policy which now provides for invoicing upon contract signature versus upon contract start date. Given the effects of these items, year-over-year calculated billings growth for Q1 was 56%.

Looking into Q2 2014, which is typically a seasonally stronger quarter for us, we expect to see a more significant sequential dollar increase in deferred revenue as compared to Q1.

We closed the quarter with $119.6 million in cash and cash equivalents, representing a decrease of $8.7 million when compared to Q4 2013. The decrease was primarily due to $13.2 million of cash used in operations, and $2.6 million of CapEx. This was offset by $5.9 million of proceeds from stock option exercises, and our employee stock purchase plan, and $2 million received from our Japan joint venture partners.

Cash flows used in operations were significant in Q1 2014 as compared to prior periods due to payments associated with sales commissions and other variable compensation plan that were accrued for throughout 2013.

As we’ve 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 compensation plans, as well as CapEx. We expect CapEx to be in the range of $11 million to $12 million for the full year of 2014.

Turning to our outlook for the second quarter, we expect revenue in the range of $33 million to $34 million, and non-GAAP net loss per share in the range of $0.30 to $0.32 assuming approximately 40.7 million weighted shares outstanding.

For the full-year 2014, we expect revenue in the range of $138 million to $141 million and non-GAAP net loss per share in the range of $1 to $1.06. This assumes 41 million weighted common shares outstanding.

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

Phillip M. Fernandez

Thanks, Fred. So, in summary, as I look across everything we’re doing here in Marketo, our innovation engine, our ability to attract partners to our platform, the story of success that our customers are achieving, our goal in the manager operations with discipline and precision, and of course, our result in revenue performance, I feel really good about the start we’ve had in 2014.

What I feel best about is our vision is really connecting so strongly with individual marketers. Those are marketers that realized that our solution is essential to their success in today’s marketing first world.

So, with that, I now like to open the call to questions. And operator, you can please go ahead?

Question-And-Answer Session

Operator

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

Greg Dunham – Goldman Sachs

Hi. Thanks for taking my question. Two questions. First on sales force productivity. If I do the math, it looks like your sales force productivity actually is improving over the course of the year. And so, the question is, is that the case? And if so, what specifically is driving that? Is it 10 year blips, bigger deals, the time to ramp? When you look underneath the covers, what do you see from a productivity perspective?

Frederick A. Ball

Hi, Greg. It’s Brad. It is improving as we go through the year and part of that is just the dynamic that we do a regional amount of hiring in Q1 to support the back half of the year on the enterprise side. And so, we do some enterprise hiring into the six to nine-month ramp.

We typically exit Q4 with enough folks to kind of manage the quota for Q1 because seasonally it’s still our quarter overall. But we do take advantage of that opportunity to hire in reps and then ramp them to support the growth rate in the back half.

Greg Dunham – Goldman Sachs & Co.

Okay. Great. And then, maybe one for Phil, the bigger question. You quoted a number of comments from the user conference. We’ve read and our discussion with customers talked about how you’re focusing on trying to be an open platform. Can you perhaps talk about that? How are you positioning Marketo relative to something your competitors and what makes you the better-positioned platform going forward?

Phillip M. Fernandez

Great question, Greg. Thanks. Well, first and foremost, our platform as I said, I believe that the industry’s most capable in broad platform. And by that, I mean it’s served more of the different functions in the team sport that is really is the marketing department.

So we have different people that collaborates to build great marketing campaigns. We address more and more of the jobs than really anybody else competitively. But because it’s such a complex world of all the different pieces in the marketing organization, running campaigns, getting e-mails out the door, building relationships, writing compelling content, planning the finances, giving great PR and social media and marketing, all the things that go on together.

We can’t do it all, and it’s essential in this world to have a foundational platform that orchestrates the customer interaction, but that lets many other firms fill in pieces of the puzzle in this – the very complex world of the marketing department.

And so we’re committed to this open platform and attracting partners to it and really being able to meet our customer needs by being able to show them that by buying Marketo, they can get their core customer system or record built. They can build their core relationship with customers and then fill in lots of other pieces with lots of best-of-breed partners.

And I think just as we show more and more attraction in the marketplace, we’re attracting more and more of the other players in the market to come build on top of our platform, and as I said, a network effect that just is something key to our success.

Greg Dunham – Goldman Sachs & Co.

All right. Thanks, guys.

Operator

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

Philip Winslow – Credit Suisse

Hi. Great, guys, and thanks, and congrats on a really fantastic quarter. I just have a question on the competitive dynamics that you’re seeing out there just in terms of win rates, just pricing environment. I mean, obviously, with the billings growth you put up, it has to be pretty strong still, and then just one follow-up question on that.

Phillip M. Fernandez

Yeah. Well, I’ll give you the same answer I give every time I get asked that question, which is that it’s a really competitive environment with lots of players in it and a lot of activity around it. And we just, on very consistent basis, win more than we lose. And we continue to compete really favorably.

I think one of the things that I’m just really proud of is the way, I do feel like we’re stepping out in terms of being able to deliver products, vision and reality, where we see very, very little articulation of forward progress from the competitive suites. As a result, I think customers are increasingly figuring out that somebody is moving the ball down in the field that meets their needs. And so I feel, I feel very positive about the competitive environment.

Philip Winslow – Credit Suisse

Got it. Actually it’s going to lead to my follow-up question in terms of just expanding the portfolio and in terms of just leaving us or the technology forward. You had a lot of announcements, I should mentioned, out of Marketing Nation. I mean, if you had, I guess, your rank or them as far as the enthusiasm that you heard from customers. How would you kind of place that in terms of, I guess just sort of near term, I meant if anything you could say?

Frederick A. Ball

Well, I think the real time personalization app, it’s very early days and it’s a new idea. Many people, I would say at Summit for example, their reaction was, Wow! I never thought about that or Wow! I’ve always wanted to do that, but I didn’t know I could. And so the result it had a lot of energy around it. The nature of or I got to get my head around that but that’s certainly something I’m going to want and as a result, we’ve been, a lot of good early activities.

I would say that I refer to our calendar and planning up as eagerly anticipated and it’s one of those things that I think, in some ways, the market has been waiting. So one of the marketing automation vendors to really take the step because they realized that helping them plan this crazy complex world of modern online marketing is important to us to have that people where, where do I buy it, how do I buy it, when I would buy it. I want that or call me.

And so it’s very interesting at less visionary but very, very relevant to their day-to-day needs and very different from anything that’s out in the market, as real-time personalization was sort of an eye-popping well. So, I think you’ll see both of those play out sort of on parallel track to a very different kind of...

Philip Winslow – Credit Suisse

Great. And congrats again, guys.

Phillip M. Fernandez

Thanks, Phil.

Operator

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

Terry Tillman – Raymond James

Hey, guys. Can you all hear me okay?

Frederick A. Ball

Yeah.

Phillip M. Fernandez

Yes, Terry.

Terry Tillman – Raymond James

Okay. Well, congratulations also from me on a great quarter. I guess, Phil, just a first question on the B2C business. I mean last call you did give us a juicy data point on just how you’ve done from nothing to something there and it’s now material part of the business. Could you give us an update on a relative basis what the deal sizes look like on B2C versus B2B? Maybe anything about how the sale cycles usually are in B2C versus B2B and then anything that’s more forward looking in terms of the pipeline actually kind of shifting more and more towards B2C?

Phillip M. Fernandez

I would say it is definitely meaningful part of the business. I would say that overall the kind of deal-size distributions that we saw on B2C and among the names I referenced there in the list and many, many more. Look, if you squirt your eyes they look exactly like B2B deals. Because we price based on size of the database and of course the specific feature set, the B2C dynamics are that databases are a little bigger and the unit price is a little smaller and the net result turns out to be pretty much the same.

So, I think – we think there’s probably ultimately more pricing headroom in the B2C because of the very large and very powerful effects it can have. But right now the best business looks an awful lot like B2B. I wouldn’t assume the business is shifting. What I would say is B2C is an interesting and important growth factor that will enable us to continue to grow at a really good rate into larger and larger numbers.

We’re not in any way pulling away from B2B. There isn’t any saturation or diminishment of that market, but I do think as we get our few legs under, I think they’re better and better B2C as just one great growth factor.

Terry Tillman – Raymond James

Okay. And on the LaunchPoint, I know Greg has asked this question. Maybe I could follow up too in terms of the issue, you have this open platform and you got a lot of press out for the conference related to what you’re doing there. It is really the ultimate goal here just to make you more and more the hub and creating even more stickiness in your platform, or is there also a revenue opportunity around LaunchPoint?

Phillip M. Fernandez

Well, first and foremost, is to deliver great business to our customers. We see fundamentally the platform does a few things. The platform is the fundamental customer system of record for who are our customers’ prospects and customers and more importantly what are they doing, what are their behaviors? What are their actions? What does it tell about how to build individual personal relationship to these customers? And where the orchestrations and why we create the journeys or the scenarios to actually have our customers communicate with their customers in a consistent way.

So that happens across a whole bunch of channels in terms of very many cases, the LaunchPoint partners are all about individual channels of communication, in and out mobile push or SMS or other things. They work on the data and many other pieces of level solution, social media, et cetera.

So they really do first and foremost complete the solution. I think from time to time we look at whether LaunchPoint could be monetized almost as a channel or an app store and we take a cut of the sales or something like that. I’m thinking an enterprise is absolutely seeing other than try that and haven’t necessarily succeeded. So that’s not our priority as much as really delivering compelling solutions and frankly, rallying the very best solution for our customers in the competitive environment.

Terry Tillman – Raymond James

Okay. And I guess just real quick in terms of – seasonality-wise, should we think 2Q is going to be an improvement from a cash flow perspective like an operating cash flow perspective? And then anything you can say for the full year on how to think about cash flow? Thanks.

Frederick A. Ball

Yeah. Q2 will be improvement an improvement on cash flow side. I think the pattern that you’ve seen in the past we think will play out again for Q2. And I do think that as we go through the year, as people move towards accelerator, as people move towards evaluating other variable compensation plans we tend to accrue into that. And so you’ll see some relative better cash flow performance I think as we go through the balance of the year, and then we’ll see Q1 next year will put back the other way as we make some payments against those accelerators and as going as planned. That’s probably the dynamic you’ll see again.

Terry Tillman – Raymond James

Okay. Great. Thanks.

Operator

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

John Byun – UBS Securities

Hi, this is John in for Brent Thill. Could you talk a little bit about the monthly linearity, I mean relatively whether – what was the customer tone throughout the quarter? Thank you.

Frederick A. Ball

We tend to be kind of 25-25-50 kind of pattern in the business from a timing perspective and that’s not linearity tends to play out in every quarter with obviously with the last little bit of quarter being a very important couple of weeks. And I think coming off Q4 tends to be a slow ramp from January up but the patterns are very typical from what we’ve seen in the past.

John Byun – UBS Securities

Okay. Great. Thank you.

Operator

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

Jason Maynard – Wells Fargo Securities

Hey, guys, good afternoon. Phil, I just have one question, actually and I – you’re kind of hearing it in some of the other questions and I think it’s something that a lot of investors ask as well, which is, how do you think the category plays out and what are the two or three things that Marketo has to do to win the category?

And the basis for the question is, now there’s consolidation in the space, every sales automation vendor is tackling on, marketing. You’re seeing sort of the amalgamation and consolidation in the space. ERP vendors are buying two of these type of systems for B2B and B2C, and so I think the big question is from your standpoint, what are those three things that are going to make Marketo the category winner and differentiate from what it looks like, sort of the tacking on or duct taping on at marketing automation to other systems? Thanks.

Phillip M. Fernandez

Great, question. That’s of course the central question, right? First is, I’ve been using the term marketing first to bunch, which is marketing is not just an adjunct to sales, it’s not just a thing to do. Marketers are the increasingly the storage of the customer journey, the storage of customer value and the owners of the channels of communication to the customer, which are digital media channels of all sorts, social and digital media.

So as a result, we just firmly believe at Marketo that, the category of the foundational platform for the marketing department is not a bolt-on to CRM or bolt-on to anything else. And because the category is moving faster than any other part of enterprise software, because it gets buffeted every time Mark Zuckerberg does something or every time Twitter does something or whatever else, that’s actually impacting this category because the social media channels are all also marketing channels and that’s their monetization et cetera.

So as a result, there’s this huge premium on agility and on moving fast. And I believe that only by being a specialist can we move as fast as the categories moving and continue to go to build a platform.

And then frankly, I think we just have – we’ve been doing this longer than anybody else in the business and we have a very coherent compelling vision for what we’re doing that is not – buy a bunch of companies and assemble a bunch of piece parts, but to really understand what the craft of marketing is and creating a purpose-built solution for it. So even though I talked about many apps, I just can’t emphasize enough that they’re all part of a team sport that all need to be played together and I think we get that.

I’m giving you a very long answer, but the final piece is, I think the companies that are doing B2B and B2C just fundamentally don’t get it. People are people and the mission of the marketer is to build relationships with people. And whether you’re doing that in the B2B context or B2C context, just – it’s just missing the entire point. And I think our clarity of vision on that I think is going to win in the end and it’s going to serve us very well.

Jason Maynard – Wells Fargo Securities

Great. Now I appreciate the answer. Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question is from the line of Pat Walravens with JMP Group. Please go ahead.

Patrick Walravens – JMP Securities

Great. Thank you. Fred, maybe for you, how should we think about the longer-term growth rates that you aspire to and when should we think about you getting to cash flow positive on a sort of ongoing basis?

Frederick A. Ball

So I think – I’ve said a number of times that we’re in this period where we’re able to grow quite well. And I think we’re going to work hard to sustain that for as long as we possibly can but I also believe because of the size of the team and the vision we have, that we are – we can grow above 30% for a long, long time.

As with respect to cash flow, we’re going to have periods where we’re going to get two in a quarter or two where we have positive cash flow, just as a function or the nature of the business and then we’ll have periods like we want – would go the other way.

I think maybe if you took it on an annual basis, a lot of it depends on the ongoing growth rate which will continue to show very high. We’re probably two to three years out from that assuming we continue to stay in this quite strong growth rates. And that’s kind of where our modeling is. I think the more important piece of this from a management perspective and expectation perspective, is that we are just throwing money at this thing.

We’re managing the efficiency of our sales and marketing spend and to spend in other categories as you can see. And as our growth moves around over time, you’ll see us actively manage the business. And that’s what we’ll ultimately get us to cash flow because the year 2, year 3, year 4 of the life of a customer is a very positive, very high margin business along, a long-winded answer, Pat.

Patrick Walravens – JMP Securities

Great. Thank you.

Operator

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

David Hynes – Canaccord Genuity

Hey, guys. This is DJ on the line for Richard. Fred, maybe first for you, I don’t know if you said it in the call but can you give us a sense of the bookings mix, SMB versus enterprise?

Frederick A. Ball

Yeah. The enterprise revenue mix actually moved a little bit more towards enterprise in the quarter to 28%. I think it was 27% last quarter, so that was a buy part of the enterprise business in Q4. On the billing side, Q1 tends to be a little bit less enterprise and for those a little bit more SMB in the quarter from billings perspective.

David Hynes – Canaccord Genuity

Got it. And then – so you kind of talked – you touched on a lot of the investment initiatives this year from geography to your products and some real-time personalization. But maybe you could touch on kind of what you guys are doing from a verticalization perspective.

I know you mentioned healthcare at the user conference. Maybe what you guys are doing there and other areas where there’s an opportunity to pursue kind of a vertical strategy.

Phillip M. Fernandez

Yeah. I think that the macro long-term trend is we’re seeing a lot of activity around verticals in our own way. We obviously highlighted Kaiser Permanente at our user conference as one example of the many deals we’re doing, payer and provider healthcare, pharma and that’s a huge win area for us. We’re also winning in the financial services and the automotive and a couple of others. We’re seeing a lot of activity in insurance, a lot of activity in retail banking and some other areas. And it’s both a direct route to market.

Secondarily, all of our partnering and alliances activities as we start to think about forming alliances with anything from the big globalize to specialty is aligned along our vertical market focus and how we think about the alliances we’re developing.

And third, from a channel and OEM perspective, we see in the pharma industry in a couple of different areas, utilities industry and other active opportunities to literally partner with vertical application providers to be their embedded marketing engine.

And so, across all of those direct-to-market alliances to market and working with other vertical providers, it’s a super active area of focus for us. And I think as opposed to being what I would describe as a growth initiative, it is simply the dominant – increased on dominant go-to-market initiative for our business and many like us.

David Hynes – Canaccord Genuity

Yeah. Okay, great. Thanks for the color, guys.

Operator

Thank you. Ladies and gentlemen, if you would like to listen to a replay of today’s conference call please dial 1-800-406-7325 or 303-590-3030 and enter the access code 4677816 followed by the pound sign.

Once again, 1-800-406-7325 or 303-590-3030 and enter the access code 4677816 followed by the pound sign. This concludes the Marketo’s first quarter 2014 financial results conference call. Thank you for your participation. You may now disconnect.

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Marketo (MKTO): Q1 EPS of -$0.18 beats by $0.11. Revenue of $32.3M beats by $2.18M.