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Executives

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

Greg Gianforte - Founder, Chairman and Chief Executive Officer

Michael Johns -

Analysts

Brendan Barnicle - Pacific Crest Securities, Inc.

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

Chaitanya Yaramada

Michael Huang - Needham & Company, LLC

Sonya Banerjee

Jobin Mathew

Jennifer Swanson - Morgan Stanley

Terrell Tillman - Raymond James & Associates

AjayKumar Kasargod

Mark Murphy - Piper Jaffray Companies

Philip Dionisio - Friedman, Billings, Ramsey

Rightnow Technologies (RNOW) Q4 2010 Earnings Call February 2, 2011 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the RightNow Technologies Fourth Quarter and Full Year 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Michael Johns, Director of Financial Reporting. Sir, you may begin.

Michael Johns

Thank you. Good afternoon, everyone, and thank you for joining us on RightNow's fourth quarter and year end 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 Greg, 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, potential mergers or acquisitions, 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, 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 the obligation to provide updates in the future. We caution you that such statements are just projections in actual results, and results may differ materially from what we discuss today. Please refer to the documents we filed 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 also will be discussing certain non-GAAP financial measures. 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 will turn the call over to Greg.

Greg Gianforte

Thank you, Michael, and good afternoon, everyone. As you saw a couple of weeks ago from our announcement, we had an outstanding close to 2010, with growth across all areas of our business. We also announced the acquisition of Q-go, as we begin to put our balance sheet to work, adding incremental revenue streams and leading-edge technology to give us another layer of momentum to accelerate our organic growth.

I'm going to break my remarks into two sections today. First, I'll give you a quick recap of 2010. In the 13 years since we started this business, we've never had a year like this past once, measured both by the energy and excitement at RightNow and in the value our customers are realizing from the RightNow solutions. And secondly, I want to talk about 2011, and our key goals and objectives, so you can watch to measure our success. We held our annual sales kick off a couple weeks ago and the energy was incredible. The focus on the customer experience is creating momentum in our business and opens up the market to new opportunities.

Let me start with a quick recap of the financial results for Q4 and the year to set the tone. Simply put, Q4 was a strong close to a very strong year. Recurring revenue, the key measure of our growth, increased 27% over Q4 a year ago, which we believe continues to be among the highest in the SaaS vendors. Both revenue and EPS were above guidance.

Revenue for the quarter was $51.4 million, and non-GAAP EPS was $0.17. Also, we had 18 deals over $1 million in the quarter, another record. While the fourth quarter results are noteworthy for the way they illustrate our continuing momentum, they are most notable for the way they capped an incredible year for the company.

Quickly looking at just the financial highlights for 2010, total revenue grew 22% to $185.5 million. Recurring revenue grew 28% to $147 million. We signed 60 deals greater than $1 million, more than double any previous year. Non-GAAP operating margin was 11%, up 300 basis points, and headcount grew by 15% to more than 900 employees.

While we take great pride in our financial results, it is the strategic accomplishments from 2010 that provide such a great platform for growth in 2011 and beyond. During the year, we added new customers and renewed and expanded relationships with customers like AMP, Barclaycard U.S., Cabela's, Devry, Epson, Gree, Home Shopping Network, Hunter Douglas, Live Nation, Macy's, Match.com, Meijer, Nikon, PayPal, Scholastic, several divisions of Sony, T-Mobile, Toyota, the U.S. Air Force, Veterans Affairs, Western Union and Yahoo!. With our proven land and expand sales model, these customers will help form the foundation of future growth.

Our customers continue to rely on RightNow to help improve their customer experiences. For our part, we remain committed to delivering new solutions that push the customer experience to new levels. We added new features for mobile and social interactions to the experiences where companies are seeing more and more activity within their customer bases that are just now beginning to address the challenge.

RightNow CX for Facebook. Facebook takes the customer experience to a different level, allowing our customers to provide the same high-quality customer experience regardless of where the customer wants to interact. We pushed out new tools to make it easier for our customers to update, customize and modify their customer experience, so they can have greater influence on how consumers experience their brands. We expanded our sales and marketing capacity, growing the number of quota reps and sales support, adding a crew solely focused on new business development, and hiring Wayne Huyard as our President and Chief Operating Officer, who brings invaluable experience in building a sales organization prepared to grow revenue from a couple of $100 million towards $1 billion.

We deployed our government cloud, the only purpose-built data center that we know of that's solely focused on meeting the strict security requirements of the federal government. And through our free cash flow and convertible note offering, we added over $180 million to our balance sheet to drive additional revenue growth through M&A.

Notably, we accomplished all of this while staying focused on the one key objective I spelled out for you a year ago, investing in profitable growth. We grew our investment in the business substantially this past year, but still raised our non-GAAP operating margin from 8% in 2009 to 11% in 2010, exiting the year at 14% in the fourth quarter on our way to our target of 18%.

As we said in our conference call announcing Q-go two weeks ago, we're still focused on achieving our target model. While any SaaS acquisition is going to have some near-term dilutive effect, we expect to work through that integration and keep marching towards that operating margin target.

I'll give you one great example of a Q4 win that I think exemplifies why 2010 was such a strong year and why we believe we are so strongly positioned for 2011. In the fourth quarter, we added Yahoo! as a new customer. This was a highly competitive win that involved a detailed and exhaustive evaluation. Yahoo! will be deploying RightNow for a 1,200-seat contact center displacing several other systems. While Yahoo! was notable for the competitive process, what is really telling are the reasons why they selected RightNow in the end.

During the product evaluation process, we were able to produce a fully functional prototype of the end solution. That really speaks about the power and the flexibility of RightNow CX. While most companies would show a canned demo or a PowerPoint presentation, we were able to pull together in short order a live demonstration of how their solution would actually work in production. In particular, our Dynamic Agent Desktop, workflow, process management and contextual workspaces were key factors behind us adding Yahoo! as a blue-chip account and beating salesforce.com and Siebel.

So as you can see, we feel very confident about the momentum we carry into 2011. Here are the key initiatives. As you heard us present in our Analyst Day back in October, it's all about profitable growth. You'll recall the four key megatrends that we described as providing a tailwind: Consumer empowerment, widespread adoption of cloud computing, the proliferation of online interactions fueled by the growth in mobile and social channels, and contact center replacement. These megatrends continue to drive our business, and we are shifting the weight of investment from product development to distribution expansion.

This means a number of things: First, we plan to aggressively grow the number of quota reps to build more capacity in the sales force. Second, we're adding more business development staff to feed the pipeline and find more opportunities. As we've always said, when we're in a deal, we win most of the time. One of the things that Wayne and I are most focused on is making sure we're in all the deals. Third, we're putting more emphasis on our indirect partners, both to help identify new opportunities and expand our sales capacity. In fact, we had a number of key partners participate in our sales kickoff in January. Fourth, we'll be giving our sales force more solutions to sell, both from internal development and through acquisitions. And lastly, we're expanding our international presence to take advantage of emerging opportunities around the globe.

The acquisition of Q-go is a perfect example of this focus. Q-go does a number of things for RightNow. First and foremost, it brings cutting-edge natural language search technology that takes RightNow from the support page to the home page, growing a number of sessions available to us and increasing our market opportunity significantly. Q-go also adds nearly 70 employees based in Amsterdam, so we get additional critical mass on the continent. And Q-go serves approximately 60 customers, with a focus on financial services, telco and travel, so we get additional traction in these key verticals. The Q-go team was also at our sales kickoff, and they are already working hand and glove with our sales teams to identify new opportunities for both solutions.

We continue to look for additional M&A opportunities that are complementary to our core business and will drive profitable growth. I believe our time is now. Our customers view us in a new light, our employees see our success and they're energized and motivated to drive to new heights, and our management team is focused on taking advantage of this large CX market opportunity that we are squarely positioned to capture. It was truly a great year in 2010, but I believe the best is yet to come.

And with that, I'll turn the call over to Jeff.

Jeffrey Davison

Thanks, Greg. Good afternoon, everyone. Revenue in the fourth quarter was $51.4 million, 24% higher than Q4 of 2009. Recurring revenue was $41 million, a 6% sequential increase over last quarter and a 27% increase over the fourth quarter of last year. We saw a positive impact from foreign exchange of approximately $700,000 in the fourth quarter when compared to Q3. Professional service revenue was approximately $10.4 million for the quarter. The software portion of current backlog at the end of the quarter was $134 million, which is 28% greater than Q4 2009. We reported total backlog of $296 million, a 64% increase over Q4 of last year. Current backlog at the end of the quarter was $149 million.

Bookings for the quarter were approximately $96 million. Average term length in the quarter was 32 months. We added 53 new customers as we continue to target new high quality, large customers while expanding relationships with existing customers. The mix of revenue across geographies for the quarter was 66% Americas, 20% EMEA and 14% Asia Pac. On expenses, note that my comments are before stock-based compensation.

Total gross margin was 73%. The margin on recurring revenue was 86% this quarter, and professional services' gross margin was 21%. Total operating expenses were $30.2 million for the fourth quarter. We reported an operating profit of $7.2 million or 14% of revenue compared to 8% in the fourth quarter 2009. Other expense for the quarter was approximately $300,000, consisting of net interest expense and amortization of debt cost of $400,000, offset by foreign exchange gains.

When you look at our tax line, you will see a GAAP tax benefit for the quarter of approximately $18.7 million. In the fourth quarter, we reversed $19.7 million of our valuation allowance reserve on deferred tax assets as we expect to realize the benefit of these tax assets in the future. Excluding this one-time benefit, tax expense was $1 million for the quarter.

On the bottom line, we reported GAAP net income of approximately $23.5 million or $0.64 per share. Excluding stock-based compensation and the tax benefit, our non-GAAP net income was $5.9 million or $0.17 per share. Headcount at the end of the quarter was 920, which was up 15% from one year ago, consistent with our expectations at the beginning of the year.

Now moving to the cash flow statement. Cash generated from operations this quarter was $5 million. Capital expenditures for the quarter were $2.3 million. We received net proceeds of $170 million in the fourth quarter through our convertible debt offerings. Through the end of the year, we used approximately $14 million to repurchase stock under our stock repurchase program. We ended the quarter with total cash and investments of approximately $277 million.

Now turning to guidance. Note that this guidance includes the impact of the Q-go acquisition, which we closed last week. With the acquisition of Q-go and the costs related to our convertible debt offering, there are some changes in our non-GAAP reconciliation for guidance. The elements that are excluded in our 2011 non-GAAP guidance are as follows: Stock-based compensation for 2011 is expected to be approximately $2.6 million in Q1 and $12 million for the year. Acquisition costs and amortization of acquired intangibles is expected to be $1 million in the first quarter and $3.7 million for the year. Please note, we're still finalizing the valuation of the Q-go intangibles, which could impact our GAAP results. And amortization of issuance costs from the convertible note offering, which are $250,000 per quarter or $1 million for the year. For the first quarter of 2011, we expect revenue to be approximately $52 million. We expect non-GAAP earnings per share for the first quarter to be approximately $0.08 and GAAP earnings per share to be a loss of approximately $0.03.

For the full year, we expect total revenue to be approximately $225 million. We expect annual recurring revenue growth to be approximately 23%. For the full year, we expect non-GAAP earnings per share to be approximately $0.52 and GAAP earnings per share to be approximately $0.06. For 2011, we are forecasting an effective tax rate of 40%, calculated on GAAP net earnings. For the year, this equals income tax expense of approximately $1.3 million and a tax benefit of approximately $800,000 in the first quarter. We do not expect to pay cash taxes in 2011 due to our NOLs.

We are forecasting approximately 35.5 million fully diluted shares outstanding for the first quarter and 36 million for the full year. Please note, accounting rules for convertible debt state that you calculate shares outstanding based on both an if converted and not converted method, and then use the more conservative result. The 36 million share forecast for the full year is based on the not converted method. We expect capital expenditures for the year to be approximately $14 million.

In summary, we had a great fourth quarter to wrap up what we consider to be a terrific full year 2010. We look forward to the growth opportunity in front of us in 2011, and we plan to continue to execute on the path we've laid out.

With that, I'll turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Laura Lederman from William Blair.

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

The first one is, can you talk a little bit more broadly about competition in the call center space? As you know, salesforce has been talking more about that market. Also, switching to social, in terms of the pipeline for HiveLive and what type of uptake you're seeing at the existing base. And finally, last but not least, large deal pipeline.

Greg Gianforte

Sure. Competition, we've really not seen any change in the competitive landscape. We continue to get invited more and more. We're getting more referrals from the analyst community, and we compete very, very effectively in the contact space. As I said, we win more than our fair share, and we're very pleased with our competitive position there. No real changes from prior periods. In terms of social, the integration has been complete for some time with HiveLive. It's an integral part of our solution, and it gets presented in every presentation we do. As we talk about the broader sweep, we said we'd be accretive with that deal within a year. We reached that, and we continue to see progress. So it's an exciting area. As you know, it's an emerging area, so it's still early, but very pleased with the progress. And then third question you had?

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

The state deal pipeline.

Greg Gianforte

Yes, large deal. As you can see from the numbers, we had a fantastic quarter in Q4. We typically take a seasonal step down in Q1. I wouldn't attribute that to anything except seasonality, but we have plenty of big deals in the pipeline. To answer the question behind the question, no, we didn't drain the pipeline. There's plenty of stuff there for us to go work on.

Operator

[Operator Instructions] Our next question comes from the line of Terry Tillman from Raymond James.

Terrell Tillman - Raymond James & Associates

The first question I guess, Greg, just relates to on the mobile front. At the Analyst Day and the User Conference, we talked about some early adopters of the mobile side. How has it been though in terms of the idea it would drive more sessions or more usage, which then could actually just drive more revenue from that activity? Are you seeing any early benefits from that? Is it too early, and how do you see that playing out in terms of 2011?

Greg Gianforte

Sure. And as you're well aware, I mean, mobile devices are becoming the primary internet access device. And by 2013, there'll be more internet mobile devices than there will be PCs with browsers on them. So most of our clients are seeing an uptick in session traffic through mobile devices. Some as high as 90% of their traffic is coming from mobile devices. We introduced mobile capabilities last May. Every customer just got the capability as part of their standard offering. And how we monetize that is as they see more traffic over those mobile devices, they have to expand the capacity of their contracts under the session-based pricing. So the net of all that is, this is one of the megatrends. It's a rising tide. As we renew contracts with customers, they need more sessions. We don't bill mobile sessions separately from PC browser sessions. So it's kind of hard to break out unless you go back and look at web logs the customers. It's a macro trend, a tide that's going to raise our boat.

Terrell Tillman - Raymond James & Associates

And, Jeff, I guess just any help at all on cash flow and how should we think about it for 2011, whether that's -- well, I mean, you've given us the CapEx, so any sense on how we think about operating cash flow?

Jeffrey Davison

Sure. From an operating cash flow perspective, it's pretty consistent with what we've said before, it should be towards operating margin, is what we look for. Now with the convertible debt, you have to factor in the interest expense along with that. But otherwise, it's consistent with what we said in the past.

Operator

Our next question comes from the line of Mark Murphy from Piper Jaffray.

Mark Murphy - Piper Jaffray Companies

Greg, as we try to back into your software bookings growth for Q4, it looks to be possibly the strongest in the whole on-demand sector among the publicly traded companies. I'm just wondering maybe what areas of strength surprised you towards the end of the quarter? And as we look for it in the Q1, does that look like an unusually tough comp year-over-year where that growth might slow a little?

Greg Gianforte

We are very pleased with the results we had in Q4. I mean, it was again a record bookings quarter. The only caution I'd put on that is that number does fluctuate quarter-to-quarter. That's why we point people to current backlog software only, because that's just to incorporate stuff that's going to come on to the P&L in the next 12 months. But to answer the question, I mean, it was combination of things. We saw good strong acceptance. We've been talking about the momentum that's been building the marketplace, and it's bearing fruit. We had good strong performance across all regions in the world in Q4. Just to put some color on it, of the 18 deals over $1 million, three of them were in Europe, three of them were in Asia Pac, and the remainder in North America. So we had good results across the board, and that momentum continues to build. We haven't seen anything that would indicate that it's not going to continue here into 2011. I would not expect to exceed. In fact, I would not expect Q1 bookings to be higher than Q4 but, only due to seasonality. I mean, no software company typically has higher sales in Q1 than they do in Q4.

Mark Murphy - Piper Jaffray Companies

Jeff, I just wanted to touch on the topic of cash flow in the year 2012, and maybe your updated thoughts on that as a potential inflection point. Just since the acquisition of Q-go, I'm just wondering if that changes anything, and maybe how will it progress, and when we will be see the signs of that?

Jeffrey Davison

Sure. Pretty similar to my answer to Terry's question. There's not really a change in how we'd look at the cash flow from the current perspective of the model would drive the operating margin and cash flow similar to that. The introduction of the convertible debt obviously adds to interest expense, so that's a change from our last call, I suppose. But the addition of Q-go, the cash draw that will be there will be the margin impact that we'll see this year, which we talked about on our last call, which we're expecting that to be a couple of percentage point hit on the operating margin in Q4 this year. So it's going to be a drag for the year on the total. But otherwise, I'd still direct you to when you look at your models, look and make sure that your cash flow for 2012 is somewhere around the operating margin and then take into consideration the cash interest expense. The other piece that will be something we'll realize out there in the future years is someday we will pay cash taxes. That's not going to be in 2011, and it may start to occur in the second half of 2012.

Operator

Our next question comes from the line of Ajay Kasargod from Morgan Keegan.

AjayKumar Kasargod

Greg and Jeff, I noticed that the annualized contract value for Q4 was growing 35%, and then looking at your recurring revenue guidance of 23%, do we just line up the current backlog growth and the annualized contract value for the year to get to that 23%? What might drive some outperformance in that 23%?

Jeffrey Davison

Sure. I guess I'd answer that a couple of ways. The point on the 35%, it's a great bookings quarter, and we're really pleased with the results in Q4. But again, I'm going to caution you on the bookings metrics. So I'll take you back to the software. The current portion of the software backlog, which is a 28% growth rate similar to our revenue growth rate, which is a terrific number. So the way I would get from that to 23% for combined guidance for the year is one, we're growing on top of a little larger numbers this year; and two, I baked in a little bit of conservatism in our guidance since we're guiding for a full year. The way we achieved the upside to the 23% is we see sales early. We have good experience with revenue being generated in the quarter and execute above or to our higher growth target plans that we've laid out inside the company. That's how we'll achieve over the 23% guidance.

AjayKumar Kasargod

And actually one thing I should have mentioned was that the annual contract value for the full year was up 20%, so that's what kind of lines of as opposed to the Q4 number. The follow-up is on Q-go. Can you walk us through how Q-go should trend through the course of the year? I realized from the past conference call there's going to be a ramp on profitability. So can you just remind us of what the expectation of when it breaks even and how that ramps during the course of 2011?

Jeffrey Davison

Sure. So I think on our last call we indicated we expected to be about breakeven in the first quarter of 2012, so within a year. The coming out of the gates this first quarter, the message I gave on the last call was $1 million of revenue in the first quarter, about $3 million to $3.5 million of expense. That's about what we expect, so it's a 4% to 5% margin hit in the first quarter. We'll walk through that during the year with the impact in Q4 being about a 2% margin hit from what our target of 18% was. And then as it hits breakeven, we should return to our margin targets in the first half of 2012.

Operator

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

Chaitanya Yaramada

This is Chaitanya Yaramada for Steve Ashley. In regards to Q-go, you have mentioned that you're looking to integrate the touch functionality into your core products. I was just wondering if you could provide some details around this and maybe talk about the time frame that you're looking to for integrating such functionality.

Greg Gianforte

Let me address that. First, let me say, we're selling Q-go today. The beauty of the architecture that these guys have built is that the Q-go natural language capabilities, the Intent Guide as we've rebranded it, really layers on top of any content management system, whether that's our knowledgebase or a homegrown knowledgebase or other external systems. So we can sell the Intent Guide today without modification. There's no integration required. That being said, we do have an intermediate road map that allows us to bring those two technology stacks closer together and create additional value in our core base. But from how long is it going to take us to monetize the Q-go acquisition? Almost immediately. They had a pipeline they came over with. It's been great to see. There's very little -- actually, no overlap between their customer base and ours except that we're both at the same vertical. So their references work at our installed base. Our references work in their installed base, so we're expecting to get out of the gates here pretty quickly.

Operator

Our next question comes from the line of Brendan Barnicle from Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities, Inc.

Just on gross margin, should we expect any change through the year from what we've seen last year?

Jeffrey Davison

Yes. So the addition of Q-go will cause us to have a little step-down in the gross margins at the beginning of the year. Their business, it carries a little more managed services than our traditional core business, so that does impact the margin. However, as the leverage that and fold it into the core product that we're delivering, I expect it to come back to the 70% to above 70% rates by the end of the year.

Brendan Barnicle - Pacific Crest Securities, Inc.

Following up on that, should we be modeling that most of these new expenses in distribution to be sort of heavy in the first half of the year, have the big sort of step-up in the first half, and then more modest increases in the back half?

Jeffrey Davison

Yes. When you look at the year on the expense growth, the bulk of that comes in the first quarter, with that being probably in order would be the addition of Q-go, the addition of interest expense and our raises and hiring that we do at the beginning of year. So those are the three main things. So you're going to have a big step-up in Q1, and then a more gradual increase in expenses quarter-by-quarter.

Operator

Our next question comes from the line of Tom Ernst from Deutsche Bank.

Jobin Mathew

This is Jobin Mathew on behalf of Tom. A couple of questions on the deal metrics. The new client wins seems to be flat with respect to last year. Is it a function of larger ASPs? And secondly, you're hiring in the quarter seems to be higher than what it's been seasonally. How will you reconcile this with your plans for next year? And what's the expected increase in the quota sales reps? Should we think of it being in line with your backlog increase?

Greg Gianforte

The 53 customers added, we're very pleased with the quality of these customers, the brands that we're adding. And honestly, we've had the same customer number for a number of years. And honestly, during that time, we've massively increased revenue. So this is part of our focus on larger accounts. That being said, a significant portion of our investment this year in expanding distribution is on resources solely focused on new customer acquisition. We did a bunch of that hiring in Q4. We continue in Q1. It takes a little while to ramp those up, but that should impact and drive that number higher. In terms of the quota-bearing reps, I mean, we're significantly expanding. We've said at the Analyst Day, we said it again today, that we're shifting our weight a little bit from product development, now that we've gotten all the analyst accolades, top-ranking leadership, Magic Quadrant and all that stuff, we're focused more, we're shifting our weight towards sales and distribution expansion, particularly with Wayne Huyard coming on board. We will increase quota-bearing reps this year between 20% and 30%, and that is a number that is significantly higher increase than we've seen in recent years.

Operator

Our next question comes from the line of Jennifer Swanson from Morgan Stanley.

Jennifer Swanson - Morgan Stanley

I just want to drill in a little bit more on the full year guidance. On the Q3 call, you talked about 20% recurring revenue growth. If you apply that to basically the number you did this quarter and add the $8 million from Q-go on top of that, that basically gets you to $225 million. Q4 came in better than we had thought. You beat us basically on every metric. I guess I was curious if there's something else we should be thinking about, or if it's just conservatism? Is there anything we should think about in terms of that number maybe not moving higher as much as I would've thought given the strength in Q4?

Jeffrey Davison

The only thing I would say you should think about it the full $8 million isn't recurring revenue. So the Q-go $8 million, I'd break down probably 60% of that to be recurring and 40% to be services.

Jennifer Swanson - Morgan Stanley

And I have another question on the large deals. If you look at the pattern of deal activity over the course of the year, there's clearly been a pretty big uptick in deals over $1 million, a big uptick in deals between $100,000 and $1 million. And then if you look at the deals at sort of the Flow business, the sub-$100,000 deals that's been a little bit more flattish. So I'm just curious what's causing the growth in larger deals to outpace the more flow-oriented business. Is it just the macroeconomic condition improving and people are more willing to commit to big deals? Or is it more of a more push thing where you're reconstructing your sales processes? How should we think about that? And then heading into next year, should we see that trend continue, or is that more sort of a one-time set up?

Greg Gianforte

I think it's actually very simple. What you're seeing is graduation. The smaller deals are becoming bigger deals, and we have an engine that produces a certain number of transactions, and they're graduating from one band to the next. As we add additional significantly ramp the quota-carrying reps and they come up to speed, you should see the total number expand.

Operator

Our next question comes from the line of David Hilal from FBR Capital Markets.

Philip Dionisio - Friedman, Billings, Ramsey

This is Philip Dionisio for David. Just more questions on Q-go. When you look at Q-go's customer wins, how much of their new customers are under displacement deals? And who typically are these incumbent vendors? And then lastly, what's the midpoint of the address that makes the customers replace what they have?

Greg Gianforte

Mostly it's a Greenfield opportunity. Honestly, if you go out, we're all consumers. Go to a website and type in a question on the homepage and see what you get back. A simple keyword search just doesn't cut it. I would point out another one of your associates, another analyst, did some work last week and actually picked six airlines and went in and typed in some questions like I want to travel with my violin and I left my BlackBerry on a plane kind of questions. It was interesting to note that of the six airlines, even ranked the quality of the responses in terms of appropriateness, and the three airlines KLM, Lufthansa and United, all scored at the very top, above all of the other three. It's interesting that those three are all Q-go customers or in pilot with the Q-go solution. So it's a great way to kind of make it real. Right now, people are mostly using some kind of shareware open-source keyword search technology that maybe came with their web server on the homepage to kind of index all the content, and it's just not effective. There are lots of revenue conversion opportunities that are lost. You just can't understand the intent of the visitor, and that's the problem that Q-go solved. So it's actually a pretty easy scenario in a sales situation to go into a client and say, "I searched on your home site on your website on how to buy products, and here are the searches I typed in." And the customer can verify them, and then you use a mockup or an actual trial implementation of the Intent Guide with the same questions and show them what the world could look like. And it's not hard to connect the dots for somebody responsible for online revenue to say I'd rather have that second experience.

Philip Dionisio - Friedman, Billings, Ramsey

So it's a plain keyword search, those are prime targets for displacement?

Greg Gianforte

Yes.

Operator

Our next question comes from the line of Sonya Banerjee from Jefferies.

Sonya Banerjee

I guess just looking at the top five industry sales during the last couple of quarters, it looks like public sector was particularly strong this year relative to the prior years. Can you speak to anything that's driving that, or how should we think about that going forward?

Greg Gianforte

Sure. We made a decision a couple years ago to kind of double down in public sector because we had a unique position where every executive cabinet-level agency were in most branches of DoD. We built out our government cloud specifically for government security. A couple things happened in Q4 that were significant. The Federal CIO came out and implemented a cloud-first policy, which said, if you're a federal agency and you're thinking about implementing a new system, if there is a cloud-based solution, you must consider it first. The second thing that happened in Q4, there was a congressional mandate that came out and said, every federal agency in the next 12 months must move an existing production system to the cloud in order to make IT delivery more efficient at the federal government level. We are uniquely positioned with our applications to take advantage of that opportunity, and we're seeing it show up in the results.

Sonya Banerjee

So I guess would you describe that as being kind of a continuing trend that we should expect to occur in 2011 as well?

Greg Gianforte

Yes, we're very positive on our public sector business, so the answer is yes.

Sonya Banerjee

At as it relates to the comments you guys made on the call about additional M&A, I guess, can you speak a bit more to that, just in terms of prioritizing your key growth initiatives?

Greg Gianforte

Sure. Look, we have a pipeline of things that we're looking at. We always look at them. I would say that the key areas we're thinking about is a, acquisitions will be overall for profitable growth in one or two categories, either growth opportunities where we are acquiring technology that we can monetize fairly quickly back into our installed base. Q-go is a great example, and then also consolidation, where again we can add profitable revenue to our business in markets that we've been serving for some time. And the third parameter just on criteria, we would expect these deals to be accretive within a year, and we're not going to pay like drunken sailors. So that's kind of the color on how we're approaching it.

Operator

[Operator Instructions] Our next question comes from the line of Michael Huang from Needham & Company.

Michael Huang - Needham & Company, LLC

Just given the strength of Q4 bookings and backlog and just the health of activity levels in the business, it seems like the sequential growth into Q1 is a little bit lighter than I would expect it. Can you just reconcile the strength of Q4 and what you're seeing out there in some of the conservatism in Q1?

Greg Gianforte

Sure. A couple things about Q4, we did have the $700,000 foreign exchange benefit from Q3 to Q4 which increased Q4, and I don't expect to see that to kind of benefit in Q1. The other piece is Q4 for us was a pretty strong renewals quarter. And with that came fair amount of kind of in-quarter compliance revenue, similar to what we saw in Q3. So we benefited again in Q4, and I don't forecast as much of that into Q1. So it's just not as big of a step up in the recurring or in total revenue from Q4 to Q1.

Michael Huang - Needham & Company, LLC

And then just kind of with respect to sales and kind of sales productivity and how you're thinking about go-to-market. So I assume that you already have your sales kick off this year. And given the heightened focus on distribution, I was wondering what you could help us understand is the biggest difference between go to market this year aside from just the expansion of sales capacity. Is there anything that you're doing differently? I know you had mentioned kind of working with partners, and maybe help me understand what are some of the things that you integrate with your sales team?

Greg Gianforte

A couple of things, Michael. One, the headline is we're adding 20% to 30% more reps. I mean, most of those are already on board. I mean we hired them in Q4 and we're still hiring through this year. So a big emphasis is bringing them up to speed. They're concentrated on new customer acquisition. So that is a new focus. The other thing is indirect partners. We're making some investments there. On that one, however, I'd say that's not so much. You're not going to see that show up in results so much in '11. That's more of a longer-term growth horizon for '12 and beyond. Those would be the major things I'd point to.

Operator

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

Chaitanya Yaramada

Again, this is Chaitanya for Steve. I'm just wondering how long it takes for a typical sales person to ramp up, and when we can expect to sort of see the benefit of the sales hiring in the last quarter and this quarter to benefit revenue growth and customer adds?

Greg Gianforte

So we're no different than other software companies. It takes, given our pipeline and lead times, six months for a rep to really start contributing, and they're at full capacity in a year.

Operator

I show no further questions in the queue and would like to turn the conference back to Greg Gianforte for closing remarks.

Greg Gianforte

Okay, thank you, and I appreciate everybody joining us, and thanks for your support. Again, we're really pleased with the results in Q4 and 2010, and are very excited about '11 and everything we have going forward. So thanks for joining us.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect at this time.

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