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Rightnow Technologies (NASDAQ:RNOW)

Q2 2010 Earnings Call

July 28, 2010 4:30 pm ET

Executives

Greg Gianforte - Founder, Chairman, Chief Executive Officer and President

Michael Myer - Chief Technology Officer and Vice President of Product Development

Jeffrey Davison - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Stacie Bosinoff - Director

Analysts

Keith Weiss - Morgan Stanley

Ajay Kasargod - Morgan Keegan

Laura Lederman - William Blair & Company L.L.C.

Chaitanya Yaramada

J. Derrick Wood - Wedbush Securities Inc.

Nathan Schneiderman - Roth Capital Partners, LLC

Terrell Tillman - Raymond James & Associates

Ross MacMillan - Jefferies & Company, Inc.

Michael Huang - ThinkEquity

Brendon Barnicle - Pacific Crest Securities, Inc.

Tom Roderick - Stifel, Nicolaus & Co., Inc.

Philip Dionisio - Friedman, Billings, Ramsey

Operator

Good day, ladies and gentlemen, and welcome to RightNow Technologies' Second Quarter 2010 Conference Call. [Operator Instructions] I would now like to turn the conference over to Stacie Bosinoff. You may begin.

Stacie Bosinoff

Good afternoon, everyone, and thank you for joining us on RightNow's Second Quarter 2010 Conference Call. Joining me on the call today is CEO and Founder, Greg Gianforte; and Chief Financial Officer, Jeff Davison.

Before turning the call over to the company, I'll read our Safe Harbor statement. During the course of this call, we may make projections of forward-looking statements regarding future conditions or events which may drive our future business, current and new products and services and their performance, the size and strength of our market and our future financial performance and outlook for the company. These forward-looking statements may include, but are not limited to statements about revenue growth and profitability, our future strategic plans and perceived growth opportunities, perceived opportunities related to the social platform, market acceptance of our products and other statements relating to our operating results.

These forward-looking statements speak only as of today and are based upon the information currently available to us. This information will likely change over time. By discussing our current perception of our market and the future performance of the company and our products with you today, we are not undertaking an obligation to provide updates in the future. We caution you that such statements are just projections and actual events and results may differ materially from what we discuss today. Please refer to the documents we file with the SEC, specifically our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

As a reminder, we are providing a supplemental data sheet for easy reference on our Investor Relations section of our website that contains historical information and other key metrics that we'll be discussing on the call today. In addition, an updated Investor Presentation has also been posted to the site. During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliations of GAAP, which can be found in our company’s earnings release, which is posted on the Investor Relations portion of our website. And with that, I'll turn the call over to Greg.

Greg Gianforte

Thank you, Stacie, and good afternoon, everyone. We had a very strong second quarter with continued growth in revenue, recurring revenue and EPS. There are four primary points that I'd like to cover on our call today.

First, financials. Recurring revenue grew 27%, which we believe is among the highest of the SaaS vendors. Based on the rapid growth in our highly predictable recurring revenue, we are raising our growth estimate for recurring revenue to 22% for the full year, up from 20%.

In addition, revenue and EPS were at the high end of our guidance.

Secondly, business fundamentals. The core drivers of the business are showing solid momentum, which we believe will drive continued growth in revenue, recurring revenue and EPS, as we march towards our target operating model exiting 2011.

Third, the market opportunity. We continue to see a very large opportunity in the rapidly emerging CX market, which we are uniquely positioned to serve. Customers choose RightNow because we deliver our very differentiated solution that is driving momentum in our land and expand strategy, as well as our addition of new large B-to-C customers and government agencies.

And fourth, the business outlook. We're not only confident in our outlook for the rest of the year, but also in reaching our target operating model by the end of next year.

Let me start with some of the key financial metrics. As I said, recurring revenue, which is the key measure of our growth, increased 27% over Q2 of last year. To give you some perspective, over the past six quarters, recurring revenue has grown 6% then 8%, then 15%, then 21% and now, 27% for each of the last two quarters. So you can clearly see how we're gaining leverage and momentum in the model.

Both revenue and EPS were at the high end of our guidance, despite the FX headwind. Revenue for the quarter was $43.5 million and non-GAAP EPS was $0.09.

The second key point is our strong business fundamentals. We see great momentum in our core business as customers grow their RightNow deployments, adopting more of a CX solutions across product lines, geographies and channels. We continue to broaden our solutions set across the entire CX platform by improving and adding more capabilities in the web, contact center and social channels.

In our May release, we expanded our reach too with mobile devices. We see mobile as a very large opportunity. It weaves across all of the key-customer-interaction channels and is becoming the preferred device for many consumers.

Continuing our schedule of innovating every quarter, on August 10, live from our Developers Conference at Big Sky, we'll be announcing our August 2010 product release, which will feature important new platform functionality. I invite you to join the live web stream to hear the announcement first hand.

One other note on upcoming events. We'll be hosting our Annual Summit in Colorado Springs at the Broadmoor from October 12 to the 15th. In conjunction with that, we'll be hosting an Analyst Day, so please mark your calendars and keep an eye out for more information.

A good land-and-expand story from the quarter is AMP, one of the leading financial services firms in Australia. AMP implemented the Web Experience in late 2009 for the retail customers, financial planners and customer service agents. In Q2, they expanded to the Social Experience which will give priority customers a place to collaborate and help serve each other. By expanding in the social, AMP is showing how the customer service experience, and the Social Experience are merging in company's overall CX strategies.

One other notable new customer story from the quarter was CyberDefender. They currently have a few hundred call center agents but are looking to grow that number to more than 1,000 agents. They wanted a solution that can provide a 360-degree view in its call centers, allowing agents to track and analyze all customer interactions.

In addition, CyberDefender wants to integrate all of its customer experience channels, including web self service, knowledge base, incident tracking and cloud monitoring for customer communications via social media channels such as Facebook, YouTube and many others. Notably, they plan to have the systemwide by the end of Q3. These are great examples of what we're seeing across our customer base and why we're confident, that we will continue to grow revenue, recurring revenue and EPS throughout the year. We've had terrific performance so far this year, and we've increased our expectations for recurring revenue growth to be around 22% for the full year, which I noted is higher than our original 20% guidance.

The third key point is the market opportunity we see developing on a number of fronts. We believe there's a very large $15 billion market emerging to serve the CX needs of B-to-C companies and government agencies. We are the only company that we know of who is exclusively focused on this mission-critical business opportunity. As I said, I see the opportunity on a number of fronts.

First, we see significant opportunity at a macro level as consumers gain more and more power and companies have to create strategies to serve and satisfy these increasingly more particular consumers. In response to this trend, we're seeing a growing number of B-to-C companies funding new customer experience initiatives.

Secondly, we see growing opportunity in the social channel, as brands evolve to incorporate consumer-to-consumer interactions into their core customer service business processes.

Thirdly, we see opportunity within our customer base as we use our land-and-expand strategy to grow our existing deployments by both small and large steps. Specifically, we're seeing strong interest in newer products like social, chat and full contact center agent desktop. In fact, nearly half of our business now comes from the contact center.

And lastly, we see opportunity to lead a large-scale call center replacement wave, as legacy call centers become inefficient from a cost perspective and a competitive burden as companies try to compete on customer experience. Within large enterprises, we've seen a completely different level of acceptance over the last few years for cloud solutions in the call center. Because of this, we think that Siebel replacements represent a significant opportunity for us as well.

Our strong results this quarter, in particular, the growth in recurring revenue, are supported by these significant market opportunities that we're just starting to monetize. I'll wrap up with a comment about my last key point, which is our outlook. We believe our business today is stronger than any time in our history, whether it's our solutions set, our customer base, our balance sheet or our competitive position, our business is operating at a higher level than ever before. We're on track for our strongest full year recurring revenue growth in three years, which is the clearest indication of the overall strength throughout the business, and we're excited about the breadth and depth of the opportunities in front of it. With that, I'll turn the call over to Jeff.

Jeffrey Davison

Thanks, Greg. Good afternoon, everyone. Revenue in the second quarter was $43.5 million, and at the high end of our guidance, including approximate $500,000 negative impact from FX. On a constant currency basis from Q1, Q2 revenue exceeded our guidance.

Recurring revenue was $34.7 million, a 5% sequential increase over last quarter and a 27% increase over the second quarter of last year. This was our second consecutive quarter of 27% growth in recurring revenue.

Professional service revenue was $8.7 million for the quarter. Bookings for the quarter were approximately $64 million in total contract value. This drove record total backlog of $212 million, an increase of 8% over Q1 and a 39% increase over Q2 of last year. The average contract term this quarter was 31 months.

We added 38 new customers as we continue to target new high-quality large customers, while expanding relationships with existing customers. New, Expansion and Renewal business came from customers including T-Mobile, Husqvarna, Epson America, Toyota, PayPal, Yahoo Japan, Veterans Affairs, Gree, Live Nation and New Balance. We also added a number of great household brands through our partners like Sitel. The mix of revenue across geographies for the quarter was 70% Americas, 19% EMEA and 11% Asia Pac.

Turning to ASPs for Q2, the average first year contract value was approximately $95,000.

We continue to have good balance across transaction sizes. We had 11 deals over $1 million, 106 deals between $100,000 and $1 million and 436 deals less than $100,000. On expenses, note that my comments are before stock-based compensation.

Total gross margin was 70% compared to 69% in Q1. The margin on recurring revenue was 83% this quarter, consistent with last quarter. Professional Services gross margin was down this quarter at 17% due to the mix of projects.

Total operating expenses were $26.4 million this quarter. We reported an operating profit of $4 million or 9% of revenue. On the bottom line, we recorded GAAP net income of approximately $1.4 million or $0.04 per share. Excluding stock-based compensation, our non-GAAP net income was $3.2 million or $0.09 per share at the high end of our guidance. Headcount at the end of the quarter was 871, up from 836 at the end of Q1. Now moving to the cash-flow statement.

Cash generated from operations this quarter was $4 million. Capital expenditures for the quarter were $3.5 million. We ended the quarter with total cash and investments of approximately $100 million. We also announced today that our Board of Directors has authorized a $10 million stock repurchase program which goes into effect on August 2, and will stay in place for the next two years. Now turning to guidance.

We're comfortable with the current range of analyst estimates. For the third quarter of 2010, we expect revenue to be approximately $45 million. We expect non-GAAP EPS, which excludes stock-based compensation, to be approximately $0.12 and GAAP earnings per share to be approximately $0.05. For the full year, we're maintaining guidance for total revenue to be in the range of $175 million to $180 million. We are raising our expectations for annual recurring revenues of 22%, which is above our previous guidance of 20%.

For the year, we expect non-GAAP earnings per share to be in the range of $0.40 to $0.45, and GAAP earnings per share to be in the range of $0.18 to $0.22. We expect stock-based compensation to be approximately $2.2 million for Q3 and $7.7 million for the year. We are forecasting approximately 34 million fully-diluted shares outstanding for the third quarter and for the full year. We expect capital expenditures for the full year to be approximately $12 million.

In summary, we had solid performance across key metrics, and the business fundamentals are strong. With that, I'd like to turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Terry Tillman. [Raymond James & Associates]

Terrell Tillman - Raymond James & Associates

I guess the first question just relates to over the last couple of years, could you maybe give us a trend line on -- I know this is a necessarily a big new-customer story each quarter, but how has the trend been in terms of deal sizes for new customers each quarter, maybe now compared to last couple of years? Particularly, as the CX platform has been expanding?

Greg Gianforte

I'll take that Terry. As we've said in past quarters, we continue to be encouraged by the quality of customers we're adding. In fact, in the 11 big deals we did this quarter, two of those big deals were new customer transactions. So we're clearly seeing an increase in the quality of the base in the new customer adds.

Terrell Tillman - Raymond James & Associates

And maybe just another question, relates to the public sector. We're entering with typically a big quarter on the federal side. I mean, do you see anything different because of the macro noise? Or do you fully expect that to be very strong contribution in the third quarter?

Greg Gianforte

As you're well aware, Q3 at the end of the fiscal year for the federal government, that's 15% to 20% of our total business. And there was some concern on our part about demand there but I can say, having Q2 behind us, two data points I'll share with you. One, Public Sector was our number two sector in Q2, so we're continuing to see demand there and bigger transactions are getting done. Again, two of our larger deals last quarter came out of the Public Sector. The pipeline's holding up and all indications are, we should expect what we normally see in Q3, which is a little bit of surge in the Public Sector area.

Terrell Tillman - Raymond James & Associates

Jeff, relates to -- any help at all on cash? I know there's been kind of a transition and an impact in terms of our customers pay you and just the fluidity on that front. But anything at all that we can hang our hat on, or at least think about seasonality or anything in the back half of the year on the cash flow side?

Jeffrey Davison

Sure, Terry. On the cash flow, we haven't issued any formal guidance on the cash flow for the year and we're not really doing that yet. But I would kind of reiterate that I've talked about before is, we expect the cash flow to be around operating margin or slightly better. This year, we're in the -- if you think about the slide I presented at the Analyst Day, we're in the trough this year of that transition on the cash flow, so it's around operating margins for this year.

Operator

Our next question comes from Tom Roderick. [Stifel, Nicolaus]

Tom Roderick - Stifel, Nicolaus & Co., Inc.

I wanted to focus on the bookings here just a little bit and how it sort of translate or how we should think about them translating towards the next year's recurring revenue. And if I do the math on sort of a normalized first-year bookings number for the first half of the year, I get a 29% year-on-year growth for the first half of this year versus last year, and then you've got 27% recurring revenue growth for the first half. So I guess the question here is, number one on the bookings, do you feel confident you can sustain these levels? And number two, as you look at that 22% guidance, what's incorporated into that, why we should think that, that 27% we've seen in the first half and 29% bookings growth in the first half slows down such that the full year is 22%?

Jeffrey Davison

Tom, I'm going to have the last part of that first. On just the deceleration in the growth rate. Really, that's about the comp last year. So our comp for Q3 and Q4 is just a little more difficult to last year's, given the acceleration we saw in the growth sequentially last year. That being said, on a sequential basis this year, we've seen 4% to 5% and I still expect to see that growth in the recurring revenue of Q3 and Q4. Now when you equate the math you've done on the bookings of 29% to our guidance and where we are, this year, we expect recurring revenue to be 22% growth, and I think the bookings that we're piling away this year are in support of our general trends we've talked about, which is we expect to grow our recurring revenue long term, greater than 20%. And so that would be in support of that as well. So hopefully that answers your question.

Tom Roderick - Stifel, Nicolaus & Co., Inc.

It does, and maybe just turning to the last part of that question, which is this is another record-bookings quarter. Is this a level that we should think about as being sustainable? And are these terms in a spot that are relatively steady going forward?

Jeffrey Davison

You're right, it's record again and definitely pleased to see it. The thing I would say about bookings, as I've always said is, you do need to keep in mind every quarter, it consists of renewals that were available and Professional Services and new business and timing of renewals. So quarter-to-quarter, it can tick up or down just on what's available to be renewed or if we do some renewals early. So keep that in mind but I expect us to continue to help the booking space.

Tom Roderick - Stifel, Nicolaus & Co., Inc.

Greg, I think you reiterated the target here that the goal to hit the target market it modeled by the end of next year, which is, I believe, 18% to 22% operating margins. So you've come 200 basis points year-on-year but to move another double from here, another 900 to even more than that at the high end of the range, 900 basis points, which line should we focus on to get on that leverage?

Greg Gianforte

Jeff, they want to time it, I'll give you the initial answer. But we're counting, we have good strong recurring revenue growth with it being up 20% year-over-year. We're counting on the top line growing and growing expenses slower. If you look at the major operational areas in the business, whether it be sales, marketing, customer operations, G&A, you look at the five major areas, it's a point or two in each one of those areas. Some will be a little more, some will be a little less, but that's how it's done.

Jeffrey Davison

The only thing I'd add there is just through the mix of the revenue as we pile in the recurring revenue, that becomes a greater portion of the mix. The recurring revenue is a greater portion of the mix, and so that's going to add to the operating margin as well.

Operator

Our next question comes from Laura Lederman. [William Blair & Company]

Laura Lederman - William Blair & Company L.L.C.

Can you give us a little sense of how well Social did in the quarter and what ASPs are looking like there? And also for you Jeff which is, can you give us a sense of the billings growth just for like a 12-month basis? With duration as they are, can you give us a sense of just the growth over 12-month period?

Greg Gianforte

I'll take the first half of that, Laura. And sure, on Social, I'm not going to get into a lot of detail on individual product lines. I think it is well, then given we've done the acquisition the last year to say that we continue to see very strong demand for Social across the board. I talked about AMP's deployment of it in Australia. I would say that we're on track, we're ahead of our expectations for the business plan we put together when we did the acquisition last fall. So we've been pleased. There's certainly a pent-up demand in our install base and we're starting to monetize that.

Laura Lederman - William Blair & Company L.L.C.

And Jeff on the one-year billings growth?

Jeffrey Davison

On the bookings in the billings, so if you did the annualization on the bookings, the year-over-year growth is 14%. Sequentially, it's a 9%. When you look at just what was billed, 40% of the total bookings this quarter were billed. That 40% is a consistent metric to what we saw last quarter. And if you keep in mind, that was the percentage that was trending with our contract-term change. So good growth in annualized bookings and if you want the total bookings growth, you've got 31% there.

Laura Lederman - William Blair & Company L.L.C.

Competition on the call center side, where do you see Salesforce? Is it should still in the B-to-C side, just kind of an update and do you also see Parature at all?

Greg Gianforte

I mean generally, on competition, we didn't really see any changes this quarter. If anything, given our quarterly releases, it's continuing to deepen the solution set. We're seeing an improvement in our competitive position. But I think the thing to keep in mind, and I've read a number of the various analyst reports that are clearly now, drawing a distinction between what we do and what other firms do. And with our exclusive focus on customer experience and CX, it really puts us in a different category in terms of who we're selling to and what we're selling. And I appreciate the fact that many of you recognize that and been writing about it. We're brining to market an integrated suite that includes Web Experience, Social Experience and Contact Center Experience built on a platform that allows people to engage. And it's designed for a large B-to-C organization and government agencies, and it's a clear differentiator for us and with the latest Gartner Magic Quadrants, the Social Magic Quadrant coming out. You look at Social Magic Quadrant, their E-Service Magic Quadrant and our call center, we are the only firm that's in a strong position on all three slides. And it's really one plus one plus one here, is more than three. And we're using that to our advantage in the market place. So I see our competitive position getting stronger.

Operator

[Operator Instructions] Our next question comes from David Hilal. [FBR Capital Markets]

Philip Dionisio - Friedman, Billings, Ramsey

This is Philip Dionisio for David. What drove the current of mid-sized deals in the quarter that looks to be the highest number you've had in a quarter? Is it like a shift in the focus in your selling?

Jeffrey Davison

Phil, you're right, that is the highest number we've seen in that here, which I think is very encouraging. I think it's really just a culmination of what we've been seeing driving the larger deals and just to view himself below the million dollar line. So it's also executing on getting contact center across these companies through our expansion strategy and just finding larger deals. Nothing specific that we've done selling-wise. We're continuing to execute.

Philip Dionisio - Friedman, Billings, Ramsey

And then Jeff, since the 1Q call, we've had a lot of movement on FX. When you think about your 2010 guidance, perhaps in EPS, how much -- what impact has FX had since the 1Q call?

Jeffrey Davison

If you think about the FX and you think about the first two quarters of this year, you've been on a big roller coaster because it's been up and it's been down and it's kind of hard to follow. Mid-quarter this quarter, we had a pretty sizable FX impact. Rates recently in July have actually come back up to where I'm kind of evening out or getting pretty close to where we were at the time we issued guidance last quarter. Obviously, we've taken into effects the FX impact that we saw both in Q1 and Q2. Those are already realized in our numbers, and my guidance today considers where we are with rates today and looks out forward for the rest of the year at today's rates.

Philip Dionisio - Friedman, Billings, Ramsey

And can you say what impact FX had on EPS in the quarter?

Jeffrey Davison

Yes. For the quarter, the revenue, I think I made the comments in the script were $500,000. And the expense impact was a few hundred thousand so it was, I think, it was a couple of hundred thousand at the bottom line for the quarter.

Operator

Our next question comes from Nathan Schneiderman. [Roth Capital Partners]

Nathan Schneiderman - Roth Capital Partners, LLC

Greg, you spoke about the business model and your confidence and that is, and if we drill down to your 18%-plus operating-margin target in Q4 2011, do you have more confidence you can hit that target now than you had three or six months ago? And if that's the case, why?

Greg Gianforte

Well, I think as we get closer to it, our confidence goes up so I'd say yes, we do have more confidence, particularly now as we're kind of lining out specific business plans through next year. So I think the increased confidence honestly comes from the progress we've made in the last six months and the continued top-line growth that we've been seeing again, it's in really best-of-class in the SaaS industry today. Those are the factors that give me increased confidence.

Nathan Schneiderman - Roth Capital Partners, LLC

And then Greg, you had mentioned that half of your business right now is coming from agent desktop. I was curious if you could share with us what that would have been in the year-ago period?

Greg Gianforte

Less, I don't mean to be flippant. It has been increasing. Particularly with -- so I don't have a specific figure for you for the year ago but again, with Gartner putting us in the most visionary position on their Magic Quadrant the farthest to the right in their call center, and the increased adoption of cloud in these contact centers and our exclusive focus on large enterprise, just all those facts in, people's increasing frustration with outdated systems that just don't work very well and are very expensive. All those factors together are driving that.

Nathan Schneiderman - Roth Capital Partners, LLC

When you look competitively at the last competitor standing, what percent of that time is it now Salesforce.com, and what would that have been a year ago?

Greg Gianforte

I'm not sure I can go in there. We have it as good of competitive intelligence as we get all the wins we look at, the deals we do occasionally lose. But it's a mix. I mean, we're still seeing homegrown systems in the call-center environment where people are still looking at green screens. So I wouldn't say that there's been a dramatic change here over the last few quarters.

Operator

Our next question comes from Brendon Barnicle. [Pacific Crest Securities]

Brendon Barnicle - Pacific Crest Securities, Inc.

Jeff, you alluded in your comments to cash flow being sort of in a trough right now and at the Analyst Day, you sort of walked through how that starts to trend. Can you just review with us how that starts to trend and when we might really start to see the inflection point from the move to CSAs, and this increase that we're seeing in recurring revenue?

Jeffrey Davison

Sure. So the trough that I referred to in the slide at Analyst Day, we were talking about, as our contract terms sit around 36 months in annual payments, you'll see an increase in cash beginning next year, and then a significant jump in 2012. And just to take you a little further into the slide in the model, it was pretty much a math exercise to simply show how that turns. But you could make any assumptions you want on bookings and revenue growth, build the model out, accumulate your billings then figure out your total expenses, subtract it from the total billings and you've got a cash flow number. Now it's a pretty rough estimation but that's what it was for, for demonstration purposes and again, I have to say I was kind of demonstrating the math. But you should see cash coming back in 2011 and then even stronger in 2012.

Brendon Barnicle - Pacific Crest Securities, Inc.

And on the Pro-Services (sic)[Professional Services] gross margin, you said project mix was the reason you saw the decline there. Should we be thinking about that level through the remainder of the year? Or you start to see some improvement in that in the back half?

Jeffrey Davison

I'm looking at about 20% PS margins the back half of the year.

Brendon Barnicle - Pacific Crest Securities, Inc.

Greg, ASPs made another nice tick-up again this quarter, a lot of things contributing to that. Is there any way you can kind of break out for us as you look at this other 15,000 step-up that we saw again, how much of that is sort of moved to CSAs versus land and expand versus social media or some of the other new products?

Greg Gianforte

So you're talking about the ASP which was at $95,000 ARR value, is that the figure you're referring to?

Brendon Barnicle - Pacific Crest Securities, Inc.

Exactly, and that was up I think, it was $75,000 last quarter.

Greg Gianforte

I think it was right around, do we have the number Michael?

Michael Myer

91,000.

Greg Gianforte

$91,000. So it's been hovering around $100,000 and there's a couple of underlying trends there. I mean, as we do more large call centers, that tends to drive it up. As we've mentioned in the past, social deals tend to be in the $75,000 range, so that maybe the number you're referring to. The blended across all the product lines was $95,000. And honestly, we don't spend -- if it hovers in that range, 20% higher, 20% lower, it's less of an issue for us because we recognize what the land-and-expand strategy customers do many transactions with us. And they take our solution set in digestible pieces. Sometimes they're bigger pieces and sometimes they're smaller pieces. We're more concerned about the total value of all the transactions, and that does show up in the bookings figure with the caveat that Jeff had mentioned earlier with the variability associated with renewals and these sorts of things. But hovering around $100,000 seems to be right. I don't see a big trend one way or the other.

Operator

Our next question comes from Ajay Kasargod [Morgan Keegan].

Ajay Kasargod - Morgan Keegan

The first question comes to you Greg, and it looks it's kind of the mix, just want to get a better understanding of mix of bookings between new customers and existing customers, and what story is kind of being told behind those numbers?

Greg Gianforte

Sure. Well, I mean, you can do the math, we put them all out there. If you add up all of our transactions for the quarter, something over 500 transactions, we did 38 transactions with new customers. So there, you can see a large portion of the transactions were with the install base. And this is something we see. I mean, we have a broad suite. This has been the strategy and as the quality of our installed base has improved in terms of the size of the organizations, there's a lot of low-hanging fruit in our install base. And that's reflected in the mix of revenue. That all being said, we are thrilled with the quality of customers. We'd always like to acquire more customers, but that's the color on that.

Ajay Kasargod - Morgan Keegan

And then one thing that I sure meant to ask, is not just on the actual count, but also on the dollar -- in terms of the mix of bookings, how much of it is coming from new customers, in terms of dollars versus existing?

Greg Gianforte

That's completely in line with our expectations. We laid out a plan at the beginning of the year internally for the mix of new versus expansion. And in particular, I think I mentioned earlier, a couple of those new deals were million-dollar-plus deals with new customers. And it speaks to the quality of the customers we're adding. But on a revenue basis, the split is basically what we expected.

Ajay Kasargod - Morgan Keegan

Now Greg, one of the things you focused on is the new products, and you've talked to us a lot of other different events. Like how can you kind of characterize and maybe even quantify new-product uptake. Because I think clearly, the opportunity with the ASPs which happened like you said consistently close to $100,000, a lot of it's spending based on new product uptakes. Can you give us more perspective there?

Greg Gianforte

Well I mentioned a couple of them. I mean, we continue to be best-in-class in the Web self-service knowledge management area. Chat, we're seeing good trends -- good increase in interest, Social was an adder, that's coming on. We're excited about the new mobile capability. Again, it's not a separate SKU but it drives volume through our Web self-service products. So transaction sizes are larger. So that is also tied back to revenue. So these are the areas where we're seeing the heat and light, really around chat, Social, mobile as well as the contact center.

Ajay Kasargod - Morgan Keegan

Just Greg, around the partner strategy and could you just remind us what again your kind of partner go-to-market strategy is? And what are you doing to possibly enhance that? Because clearly, there's a lot of opportunity out in the market, and there's a lot of different players on different sides of the call center, how are you addressing that to basically get to market quicker?

Greg Gianforte

So we continue to focus resources on partners. We have added some additional staff in that area this year. I think where we're seeing the overall strategy falls into a couple of categories. We do a lot of work with an increasing amount of work with outsourced call centers. As they look to differentiate their businesses, they need to bundle their labor with technology to create differentiated offerings. And we mentioned a couple of household names got added this quarter through Sitel . We've had similar early traction with Teleperformance, Convergys continues to be a good partner of ours, and that whole managed service provider or outsourcer market is one category of partners that continues to drive business for us. The second category is really technology partners. People like Interactive Intelligence and others that we are in adjacent spaces. And we recently did some trade shows jointly and that's added opportunities to the pipeline. So that's been encouraging. And then finally, the third is really geographic coverage in markets when we don't have direct presence, and that also is bringing business to the table.

Operator

Our next question comes from Michael Huang [ThinkEquity].

Michael Huang - ThinkEquity

First of all, Greg, could you talk about the trade-off between growth and margins, given the emerging CX opportunity that you're executing on and kind of your strength to competitive positioning. I mean if we were the slow-margin expansion through 2011 somewhat, would we be able to juice up either bookings growth or customer acquisitions somewhat? Or is there something that's naturally constrains that growth rate?

Greg Gianforte

I'll be really clear because I think we need to be clear on this topic. We are committed to reaching our target model, exiting 2011. That means, the range is 18% to 22%. We'll be entering that range in Q4 of 2011. That being said, we do see a lot of opportunity in front of us. And we're going to march towards that target operating model people. Any over-performance we see in the business that does not jeopardize our ability to get some target model, will be reinvested in the business because there's clear opportunity for us.

Michael Huang - ThinkEquity

And in terms of the renewal activity that you're seeing given CSA, I was wondering if you could talk about what's happening to some of your tier deals that are getting renewed? Are they getting renewed for three years? And what are you seeing in terms of unit pricing, given the long longer term that you're pushing on the customers?

Greg Gianforte

Well, I'd say we introduced CSA as a standard contract at the beginning of the year. At this point, the vast, vast majority of all deals are being done on CSAs. That's why you saw the uptick in terms like to 31 months or 32 months. Average deal sizes, we report average deal size on an annualized basis, and that really hasn't changed over that period and that reflects a mix of some larger deals that we're doing the contact center and some more smaller deals around social or smaller chat expansions and those of things. Did I address your question there, Michael?

Michael Huang - ThinkEquity

When you're actually getting customers that were previously on a two-year deal to renew for a three years, are you given any break on unit pricing? Or are you actually holding that firm?

Greg Gianforte

No, there's no firm. I mean again, under CSA, they have the ability, we're giving them price certainty, they have the ability to terminate for convenience. So there's no discount for that out year, but it is a contract. It means that we actually now can spread our selling effort out over a longer period of time. So there's a huge benefit to us and a great benefit to the customer because they get -- we know what the renewal rates are and they get the certainty around price.

Operator

Our next question comes from Keith Weiss. [Morgan Stanley]

Keith Weiss - Morgan Stanley

I just want to sort of ask you about sales capacity and in light of what seems to be a very strong focus on improving margins, particularly into 2011, how do you guys feel about your sales capacity as it stands right now and your sales capacity to enable kind of this kind growth into 2011?

Greg Gianforte

We are hiring people, and many of them are in the sales organization. So we're adding sales capacity.

Keith Weiss - Morgan Stanley

And then sort of a clean-up question. Am I mistaken that the accounting for long-term and short-term deferred just changed a little bit in this quarter that more stuff has gone into the current deferreds?

Jeffrey Davison

I'm glad you brought that up. For those of you who haven't noticed on the data sheets, you'll see an increase in the short-term deferred revenue from your historical numbers. And what we have was a reclassification on our balance sheet between long-term and short-term deferred revenue. Now all it really was, was a balance-sheet reclassification. So I'd point out, it didn't impact the total deferred or the mix in the short-term, long-term backlog that we reported in the past. So it's just the balance sheet, and really has no impact on our revenue or guidance. So if you pull the historical data sheet or pull the data sheet off the website, you'll find updated historical numbers there.

Operator

Our next question comes from Steve Ashley. [Robert W. Baird & Co.]

Chaitanya Yaramada

This is actually Chaitanya Yaramada for Steve Ashley. Just wondering what you see for the book but not billed proportion going forward, now that there's been a 60% for a couple of quarters? Do you kind of see it leveling off around this area or do you expect it to increase or decrease before stabilizing?

Jeffrey Davison

I expect that it should level off right around where it is. So I think the two quarters is pretty good evidence that what we've seen with the annual-payment terms and the CSA contract, that should be around the levels of that.

Chaitanya Yaramada

And then, how many of the deals or the large deals you saw this quarter were on the phone support side? I'm not sure if you've mentioned it before.

Jeffrey Davison

Every one of the large deals this quarter, except for one, included call-center components. We had one that was primarily an E-Service Web type of deal.

Chaitanya Yaramada

And when you say call center, is that phone or...

Jeffrey Davison

Yes.

Operator

Our next question comes from the Derrick Wood. [Wedbush Securities]

J. Derrick Wood - Wedbush Securities Inc.

First on CapEx, you guided for $12 million and it did jump up in Q2. Can you give us a sense for what's causing this to increase quite a bit from the last couple of years?

Jeffrey Davison

Sure. Our guidance originally at the year was 10, so it's come up a little bit to 12. The biggest increase from our historical trend which has been around seven is the software capitalization. And we talked a little bit about that in last two quarters that we're capitalizing software for internal use. And now I'm expecting it to be between $4 million and $5 million for the year.

J. Derrick Wood - Wedbush Securities Inc.

And I guess, Greg, back on the average deal size. I mean, I think the call-center market carries a lot higher deal sizes, and you guys have been moving, kind of more focused on the enterprise, less so on the midmarket. So I'm just trying to get a better sense to see why we're not seeing that number go up and what you could potentially do to help expand that ASP, if at all?

Greg Gianforte

So you're absolutely right, call-center deals are larger as reflected in what 10 of the 11 deals this past quarter that were over $1 million were call center deals. But we're not only introducing call-center products, we're introducing social-experience products, which as we've talked about in the past, tend to have an ASP around $75,000. If we're just adding chat, many of our retail and CPG customers are adding chat as a way to do upsell, cross-sell or do support, they tend not to be $100,000 transactions. So it's really -- what you're seeing is a blending of transactions across our entire product portfolio. And our customers want to be served in a way where we're helping them with all the interaction channels, not just the call center.

J. Derrick Wood - Wedbush Securities Inc.

Government, I know you touched on it. Can you go into anything just to make sure you guys are not seeing any material impacts on your pipeline? We've heard of things in the press around pullback in spend and maybe in the U.S. and Europe, that you guys are feeling comfortable still about your pipeline?

Greg Gianforte

We are, and in reference to government in particular, we had a very strong Q2 in our Public Sector business. As I've mentioned, two of the large deals were in Public Sector. There have been a lot of rumors about government slowdown in spending, this kind of stuff. We're not seeing it, but pipeline's holding up. And again, we had a very strong Q2 in Public Sector. That's the thing that gives me the most confidence that Q3 is going to be strong, as well in fact, stronger.

Operator

Our next question comes from Ross MacMillan. [Jefferies & Company]

Ross MacMillan - Jefferies & Company, Inc.

Jeff, when I look across the different metrics, total bookings 30% growth, annualized contract value, 14% growth and then when I look at current bookings where I look at the gross current deferred change, that was actually flat year-over-year. On that number I guess, the flat number and the lower growth on annualized contract value, are we getting extension of deals? Are customers renewing with longer durations of bookings are rising as a function of just longer duration? Or is there another explanation why the growth rates on annualized contract value or current bookings are lower than the aggregate bookings number? If you could add any color on that, that would be great.

Jeffrey Davison

Sure, definitely. Total bookings definitely are increasing, and a portion of that increase is due to contract term. However, the question you're asking about the current portion of the growth deferred, why that's flat, that's really related to, when you look under the hood, the mix of the revenue that's in there, so it's a mix between recurring revenue and professional services. The recurring revenue piece of that is growing, that gives us good visibility into next quarter and next year with this predictable model we have. The PS side, we've been signing more time and materials projects, so that doesn't get billed in advance, and that doesn't add to the backlog. So what you're seeing is staying flat, underneath the hood, there's a little change in the mix. And actually, I look at that as encouraging on the recurring-revenue side becoming a bigger portion of it.

Ross MacMillan - Jefferies & Company, Inc.

And then just on -- you guys had a really strong quarter last year in your third quarter. Just curious how we should be mindful of the strength of both the aggregate bookings and the annualized contract value number in Q3 of last year? Because it obviously stood out as an extremely strong quarter last year?

Jeffrey Davison

Last year, Q3 was strong, and if I recall, it was actually stronger than we anticipated. We had a couple of really nice government deals that were in that quarter. I'm going to remind you since you're talking about bookings that quarter-to-quarter, it's impacted by various different factors I mentioned earlier. Over time, our stronger bookings quarters are Q2 and Q4. And so that's why in the last two, we had expected Q3 to be actually be lower than where it was. All that being said, we look out into the pipeline for the quarter, Q3 of this year, the pipeline looks strong. It's got a lot of the consistent factors in it that we've seen in the last several quarters, where we strung together really good bookings. And so we're headed into Q3 feeling really, really good about the business.

Operator

[Operator Instructions] There appears to be no further questions on the phones.

Greg Gianforte

Okay. Well, thank you for joining us today.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

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