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Rightnow Technologies (NASDAQ:RNOW)

Q1 2011 Earnings Call

April 27, 2011 4:30 pm ET

Executives

Wayne Huyard - President and Chief Operating Officer

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

Greg Gianforte - Founder, Chairman and Chief Executive Officer

Michael Johns -

Analysts

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

Justin Furby

Brian Schwartz - ThinkEquity LLC

Thomas Ernst - Deutsche Bank AG

Nathan Schneiderman - Roth Capital Partners, LLC

Philip Dionisio - FBR Capital Markets & Co.

Mark Murphy - Piper Jaffray Companies

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

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated

Terrell Tillman - Raymond James & Associates, Inc.

Gregory Dunham - Crédit Suisse AG

Operator

Good day, ladies and gentlemen, and welcome to the RightNow Technologies First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Michael Johns, Director of Financial Reporting. You may begin, sir.

Michael Johns

Thank you. Good afternoon, everyone, and thank you for joining us on RightNow's first quarter 2011 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 or 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 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 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 will 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 will turn the call over to Greg.

Greg Gianforte

Thank you, Michael, and good afternoon, everyone. 2011 is off to a good start. I'm really excited to see our team carry the momentum from last year into 2011, and I believe we are squarely positioned to continue that momentum throughout this year. Our message is resonating with customers and our success in ridding the world of bad experiences. And more importantly, providing measurable returns to our customers is gaining notice at higher executive levels. And our financial results and strong balance sheet are enabling us to ramp up our investments in sales and marketing to drive more profitable growth. So overall, as you can tell, we're pleased with how the year started.

To quickly recap the financial results for Q1 recurring revenue, the key measure of our growth increased 27% over Q1 a year ago. Total revenue for the quarter was $52.3 million, and non-GAAP EPS was $0.10. Current software backlog, the best indicator of future recurring revenue growth, was up 38% year-over-year and 27% on a trailing 12-month basis.

During the quarter, we added new customers and renewed and expanded relationships with customers like Activision, Arbor Networks, CARFAX, Cabela's, The Container Store, CyberDefender, Electronic Arts, Ellie Mae, Equifax, KLM/AirFrance and Logitech. We believe these relationships are expanding for a number of reasons. On one hand, our solutions meet the need to deliver exceptional customer experiences better than any other competitor.

At the same time, those needs are constantly evolving based on the 4 key mega trends that we've described to you previously. Combined, this is creating a very large market opportunity for RightNow CX. Those 4 key mega trends are: one, the growing empowerment of the consumer; two, the increasing acceptance and need for cloud-based solutions; three, the rise in the number of consumer interactions that happen on the Internet and social networks and on mobile devices; and fourth, the wave of continence that's occurring in large enterprises as they recognize that their legacy call center solution simply can't handle their current needs.

Another factor we believe is driving our growth is the addition of Wayne Huyard as our President and Chief Operating Officer. Overall, his objective has been to drive higher productivity across all of our sales teams, direct our increased sales and marketing spend and increase our focus on new customer acquisition. As we look out at the rest of 2011 and beyond, our sales and marketing teams will continue to push harder and become more aggressive as they spread the RightNow message in our target markets.

With the addition of Q-go, our team has yet another solution to help customers deploy the CX strategy. You'll recall that Q-go brought cutting-edge, natural language search technology that takes RightNow from the support page to the home page, growing the number of sessions available to us and increasing our market opportunity significantly. In the first quarter, we expanded the Q-go pilot with a large U.S. air carrier by signing a 3-year, 7-figure deal. This is a pilot where we stood the customer up in 4 weeks, showed a 10% reduction in call center volume within 2 months and based on these results, the customer estimated a $10 million annual cost reduction from the use of our technology.

We're also very encouraged by the preliminary meetings we're having with our existing customers and new prospects around the Q-go Intent Guide capability. This is a solution in technology that we believe has far-reaching impact to our customers, who will help bring more executives to the table, especially within e-commerce and marketing departments. We're very pleased with Q-go -- what Q-go has brought to our CX solution, and we continue to look for additional M&A opportunities that are complementary to our core business and will drive continued profitable growth.

Lastly, I want to talk for a minute about the market and what we're hearing from customers. As I mentioned earlier in my remarks, our CX messaging is resonating with our customers and prospects. I've been able to hear this first-hand as I've done more than 90 one-on-one meetings with customers and prospects so far this year. We've been leading the market for some time now in talking about the mission-critical need of large B2C organizations.

These firms recognize that if they're going to effectively serve their customers they need to have an integrated approach to delivering exceptional and consistent experiences across the web, social and contact center channels. Our greatest validation comes from working with companies who have tried many methods of serving their customers from old, traditional on-premise solutions to newer cloud-based offerings. And we take great pride when those customers, after trying other solutions, turn to RightNow for an enterprise-wide deployment of RightNow CX.

This past quarter, one of those customers was DeVry. You've heard us talk about DeVry before as they've been a RightNow customer for many years. DeVry, like many companies, has tried a number of different solutions to see how they can best maximize their investment and deliver the best experience. I'm very pleased that this past quarter DeVry signed a multi-year, enterprise-wide subscription for RightNow CX for their over 10,000 employees across 96 campuses. This is a great example of a customer that continues to expand their deployment and recognizes the need and importance of a full multi-channel CX solution across their entire organization.

Our ability to continue to lead the market will come from our focus and deep expertise in customer experience, while continuing to push the envelope on the product side and getting more aggressive on the sales and marketing side. We're pleased to be ranked as a leader once again by Gartner in the new Contact Center Magic Quadrant and to see our position improve over last year, moving ahead of a number of larger firms on the ability to execute access. We will continue to expand our solution both through internal development and through acquisitions like Q-go. And we'll continue to promote the success of our customers, as was evident again, at the recent Gartner 360 Summit where RightNow customers took home a large number of awards recognizing their tremendous success with our solutions.

Before turning the call over to Jeff, I'll reiterate our key 2011 initiative that I laid out for you last quarter. First, we are aggressively growing the number of quota reps to build more capacity on our sales team. Second, we're adding more business development staff to feed the pipeline and find more opportunities. Third, we're putting more emphasis on our indirect partners, both to help identify new opportunities and expand our sales capacity. Fourth, we'll be giving our sales team 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.

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

Jeffrey Davison

Thanks, Greg. Good afternoon, everyone. Revenue in the first quarter was $52.3 million, 24% higher than Q1 of 2010. Recurring revenue was $41.9 million, a 27% increase over the first quarter of last year. Professional service revenue was approximately $10.4 million for the quarter. The software portion of current backlog at the end of the quarter was $142 million, which is $0.38 greater than Q1 2010 and 27% greater on a trailing 12-month basis.

We reported total backlog of $317 million, a 61% increase over Q1 of last year.

We added 71 new customers as we continued to target new high-quality large customers, while expanding relationships with existing customers. Q-go also brought 51 additional customers. The mix of revenue across geographies for the quarter was 65% Americas, 20% EMEA and 15% Asia Pac. On margins and expenses, note that my comments exclude our non-GAAP reconciling items, which are stock-based compensation, acquisition costs and amortization of acquired intangibles.

Total gross margin was 70%. The margin on recurring revenue was 84% this quarter, and professional services gross margin was 13%. Total operating expenses were $31.5 million for the first quarter. We reported an operating margin of $5.2 million or 10% of revenue compared to 6% in the first quarter of 2010. Non-GAAP other expense for the quarter was $797,000, which excluded $255,000 of amortization of debt issuance costs and a $1.8 million foreign currency gain related to our acquisition of Q-go.

On the bottom line, we recorded GAAP net income of approximately $1.4 million or $0.04 per share. Excluding non-GAAP reconciling items, our non-GAAP net income was $3.7 million or $0.10 per share. Headcount at the end of the quarter was 1,035, up from 920 at the end of the year.

Now moving to the cash flow statement. Cash generated from operations this quarter was $3.5 million. Capital expenditures for the quarter were $4.6 million. We ended the quarter with total cash and investments of approximately $250 million.

Now turning to guidance. We're pleased to be raising revenue and earnings guidance for the year. First, I'll provide the reconciling elements that are excluded in our non-GAAP guidance. First, stock-based compensation for 2011 is expected to be approximately $3.6 million in Q2 and $14.5 million for the year. Second, acquisition costs and amortization of acquired intangibles is expected to be approximately $950,000 in the second quarter and $4 million for the year. Third, amortization of debt issuance costs is expected to be $250,000 per quarter and $1 million for the year. And lastly, for the full year, we exclude the $1.8 million foreign currency gain related to the Q-go acquisition.

For the second quarter of 2011, we expect revenue to be approximately $54 million. We expect non-GAAP earnings per share for the second quarter to be approximately $0.12, and GAAP earnings per share to be a loss of approximately $0.02. For the full year, we are raising total revenue guidance to be approximately $226 million. We now expect annual recurring revenue growth to be approximately 24%. We are also increasing our non-GAAP earnings per share guidance. For the full year, we now expect non-GAAP earnings per share to be approximately $0.55, and GAAP earnings per share to be approximately $0.06.

For 2011, we're forecasting an effective tax rate of 40%, calculated on GAAP net earnings. This equals income tax expense of approximately $1.1 million for the year and a tax benefit of about $500,000 in the second quarter. We're forecasting approximately 36 million fully diluted shares outstanding for the second quarter and for the full year. We expect capital expenditures for the year to be approximately $14 million.

In summary, we've had a good start to the year and we look forward to our planned growth in the coming quarters.

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

Question-and-Answer Session

Operator

[Operator Instructions] Okay, I'm showing no questions in the queue at this time. I'll turn the call back over to management.

Greg Gianforte

Are you sure?

Operator

[Operator Instructions] Okay, I'm showing a question from Thomas Ernst of Deutsche Bank.

Thomas Ernst - Deutsche Bank AG

So big picture question for me, it looks like from the results and your commentary that you've got all the hallmarks and your business continues to accelerate, big acceleration of subscription backlog, even some of the other metrics, your services margin looks depressed with growth in the services business, which I assume is for anticipated growth along with an increasing CapEx, but only a modest increase in the guidance looking forward. Is this conservatism on your part? Or are we really seeing an acceleration...

[Technical Difficulty]

Jeffrey Davison

To answer your question, yes, we've seen great metrics in the business and I agree with your comments there. I would direct you on the software backlog, current software backlog, which we look at as a primary metric. It's great at 38% this quarter. For an annual revenue growth, I'd look at the trailing 12-month, which is around 27%, and our guidance for the year is 24% now. So we have a little bit of conservatism in there, but we look at the business growing around that 27% right now.

Thomas Ernst - Deutsche Bank AG

Okay, I missed the first part of your answer because the operator pulled me out of the listen mode, but I think I got the point. You mentioned in the press release that Q-go is not in the guidance. How big is Q-go? How much will it contribute once it comes in?

Jeffrey Davison

I think that something is mistaken there. The Q-go is in the guidance; what is excluded is the acquisition cost of Q-go. The only other piece that's not in the number is the gain that we recognized on the currency with the Q-go acquisition.

Thomas Ernst - Deutsche Bank AG

That is helpful. And how big is Q-go in terms of its contribution expected this year?

Jeffrey Davison

Well, our original guidance when we acquired Q-go was approximately $8 million in revenue and about $3.5 million per quarter in expense. That's what we guided for the full year. We did -- we just say on Q-go, it closed just a little bit later in the quarter than we initially had planned, so we had a little bit of benefit in the margins in Q1. So we didn't have the full quarter there.

Operator

[Operator Instructions]

[Technical Difficulty]

Okay, I'm showing no questions in the queue at this time.

[Technical Difficulty]

[Operator Instructions]

[Technical Difficulty]

You have a question from Philip Dionoro (sic) [Philip Dionisio]. [FBR Capital Markets]

[Technical Difficulty]

Okay, we'll go on to the next question. We have a question from Nathan Schneiderman of Roth Capital Partners.

[Technical Difficulty]

Greg Gianforte

So we are currently still live on the call, if anyone wants to email me the question, I'll read it aloud and I'll respond until we get this fixed.

Jeffrey Davison

You could direct those e-mails to Jeff Davison, jdavison@rightnow.com, and we can work through the questions that way.

Greg Gianforte

So we have a question from Michael Huang. [Needham & Company] The question is, the 71 customers added in Q1 that excludes Q-go, correct? And yes, the answer to that question is 71 customers excludes Q-go, so Q-go added an additional 51. And second question is large deals were down, could you help us understand it. Is this Wayne's effort or something else?

Wayne Huyard

Yes, and I can address that. The large deals is dependent on a couple of things. We saw some seasonality in the number just to be in a Q1. Also, it is made up somewhat of available renewals in the quarter, which was a little lighter. But I wouldn't read anymore into that than just a little seasonality in the available renewals. We have a strong pipeline with a good mix of deals going into Q2 here. That's the color on that number.

Operator

We do have a question from Laura Lederman. [William Blair]

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

Can you talk a little bit about how you're doing on the sale headcount addition, do you have aggressive plans? If you could give us a sense of where you are today? Then the hiring, have you been hiring as much as you wanted to hire? And also, if you could talk a little bit about competition, who you're seeing more of, who you're seeing less of, particularly on the call center side?

Greg Gianforte

Sure, Laura. So we laid out, we said last quarter we're going to hire between 20% and 30% more quota-carrying reps this year. We're well into that. As you know, we tend to front-end load our hiring in the year, that's part of the reason why we want to get a jump on it. So we're well into that hiring. We've been successful in filling spots and still have some open. I mean, the hiring continues but we've been pleased with the progress. That's been a big focus for Wayne and his leaders. On the competitive side, no real change. I do think that this new Magic Quadrant that I've mentioned in the call for Gartner just came out here in the last 2 weeks. It significantly moved us up on ability to execute access, moved us up ahead of a number of much larger firms. I think that's going to help us competitively, but we're still seeing the same mix of characters in the competitive landscape, no real change, no new entrants, no real changes there.

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

You're not seeing sales force in any B2C call centers or any larger call centers?

Greg Gianforte

I mean we see salesforce.com. Our competitive win rate in B2C is extremely high, we win every deal, but we win more than our fair share. But I wouldn't say that there's been any significant change there from prior quarters.

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

Okay. Final question for me, then I'll pass it on. And hopefully, there actually be somebody there on the other line. You talked about seasonality for the big deal sign, following up on Michael's question, and it was 9 in the quarter, down from a second week of Wall trends,m 11 last year. So seasonally, did you have an unusually good Q1 last year? And I realized '09 was difficult because of the economy, so could that last Q1 be more of an outliner?

Greg Gianforte

Well, I would just point, it has more to do with availability of renewals. I mean, if you have a big renewal coming up it's going to close as a big deal. If you have less than those big renewals coming up, you're going to have less. So again, I think this is why we really point people to current software backlog as an indicator of future recurring revenue growth. Because it nets out any kind of customer churn, it nets out term length, it nets out all the things that you'd have to do the calculations on and it just gives you a pure number, what's going to come onto the P&L over the next 12 months and it really kind of makes it a lot simpler. But on the deals, I'd say really I wouldn't read anything into that, where the number ended up.

Operator

[Operator Instructions] We have a question from Greg Dunham of Crédit Suisse.

Gregory Dunham - Crédit Suisse AG

So I'm going to go back to the new customer add number. You actually mentioned in your comments, you characterized it as high-quality customers. Because that number does jump out at me, 71 is probably higher than you've done on an organic basis, probably since early '08. What do you mean by high-quality customers? Was the ASP consistent with kind of the typical customer? What specifically was driving that?

Greg Gianforte

Yes, when we talk about high quality, we're really focused on our target market, which is high-volume business-to-consumer organizations and government agencies, universities. So I look at the names that we're adding and these are really land opportunities that we know we can go back and do expansion sales to. That's what we mean by high quality. They're in our target market.

Gregory Dunham - Crédit Suisse AG

Okay. So not going down market, although the deal size may be a little smaller just because it's an early stage of customer life, kind of thing. Okay. Two other questions, how much did Q-go contribute to backlog, number 1? And number 2, you mentioned looking to do more acquisitions. What specifically are your customers asking you for? What kind of capabilities do you think will be most effective in plugging in that sales channel?

Jeffrey Davison

I'll answer the first part of that. Without giving a specific number on the Q-go backlog addition, excluding the backlog, the Q1 current software, current portion of -- software portion of the current backlog was well over 30% above last year. So the Q-go obviously added to that, but we saw a well over 30% increase over last year. And as I referred earlier, I think when you look at the annual revenue, you want to look at the trailing 12-month growth in that, and we've seen good numbers. We continue to see numbers in Q-go adds on top, which is great.

Greg Gianforte

Yes, and in terms of M&A in terms of what customers are asking for. I mean, they trust us with helping them deliver better experiences. Historically, we focus on better experiences and reduced operating costs, particularly in post-sale customer care. More and more as our systems become system of record in businesses for all the client interactions, both inbound and outbound, they're realizing that the RightNow CX system has better customer intelligence than probably any other system within the business. And it's a logical extension to go from better customer experience for cost reduction to better customer experience for revenue generation. This is why moving from support page to the home page with Q-go was so important, why more and more clients are using our chat for proactive in a pre-sale to increase shopping cart sizes. There are other opportunities in that area. But broaden the question a little bit to, okay, what else do we need to look at on the M&A side? I'd say, certainly, this theme around revenue generation is a core theme. There are some consolidation opportunities and there are some geographic expansion opportunities. So there's a number of criteria, It happens with Q-go we checked a number of those boxes with a single acquisition. If we can do that, all the better.

Gregory Dunham - Crédit Suisse AG

One follow up if you permit. How do you -- what's your sense of the valuation expectations within the private community and some of these kind of more interesting areas?

Greg Gianforte

We look at each deal individually. There are some ridiculously high prices being paid for assets right now. We're probably -- our keel's a little deeper in the water, I'd say. We're not -- these assets are not so precious to us that we pay any price.

Operator

Our next question will come from Philip Diosono (sic) [Dionisio] from FBR Capital.

[Technical Difficulty]

Philip Dionisio - FBR Capital Markets & Co.

All right. To start with, have you talked about average first year deal size already and average term length?

Jeffrey Davison

No, we have not had that question yet. Average term length this quarter, excluding one outline deal was around 32 months, so it's consistent with what we've seen. And average selling price transactions is also consistent with what we've been seeing around $100,000. Those haven't changed much at all in the last few quarters, and we expect them probably to remain there going forward.

Philip Dionisio - FBR Capital Markets & Co.

Okay. And then going back to the competitive front, how much did you compete against Radian6 in the past? And how does the salesforce's acquisition of Radian6 change the competitive landscape in your view?

Greg Gianforte

Radian6 and salesforce as we, from what we understand have been partners for a number of years already. So I'm not sure a whole lot changes. We historically have not seen Radian6 competitively. They've primarily gone to market through PR agencies, which is not a target for us. And honestly, what the analysts tell us and our belief as well for some time, you've seen a number of assets in that space get combined. We really don't believe that social media monitoring is a stand-alone business on a long-term basis. So in that sense, as we look at that combination, it looks like a really good deal for Radian6.

Operator

Our next question will come from Justin Furby of William Blair.

[Technical Difficulty]

Justin Furby

You talked about the outlier deal in the quarter, was that upwardly or downwardly skewing the duration from that 32 month?

Greg Gianforte

That would upwardly have skewed up. And we had one contract that was with a longer-term unusual type of deal.

Justin Furby

Okay, was it very -- and was it a very large deal or just. . .

Greg Gianforte

It was, yes, it was of size. It was a 7-figure deal.

Justin Furby

Okay. So again, going back to the bookings it's more of a seasonal renewal type of an issue versus anything else to begin to.

Greg Gianforte

What specifically is your questions on that?

Justin Furby

So if you can -- if you just look at the bookings growth, I think it's something like 16% versus the current software is much larger in the plus 30% range. So just trying to work out the delta between those 2 numbers.

Greg Gianforte

Okay. So we'll go through the bookings conversation. The bookings, as we've said, time and time again is quarter-to-quarter going to fluctuate based on what we have available in renewals and what we find in professional services. And so all the gymnastics we do around the metrics on that, turning into annual contract value and using that contract, the average term length. It's just not the accurate number to look at, and so that's why we've been providing the current software backlog metric because that metric gives you what we're adding to the base of business, what's going to turn into revenue in the next 12 months and it really nets out the impact of professional services, term lengths, renewal cycles, it's a very clean number. And so that's where why we point you to that and you probably can't get the bookings, your calculated bookings number in that to reconcile. It's just is a really difficult thing to do. So point you to the software backlog and the current portion of the software backlog.

Operator

[Operator Instructions] Our next question will come from Nathan Schneiderman of Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners, LLC

I want to go back to the growth in current software backlog, which are highlighted as the most important metric to pay attention to. So this was up $8 million sequentially. Last year in Q1 it was down about $2 million. My understanding was this is kind of a seasonally soft metric in Q1. I'm not sure if that's actually the case though, so I was wondering if you could talk about the typical Q1 kind of seasonality you'd expect for this line item. Was this an unusual quarter? And if so, what drove that unusual pattern?

Jeffrey Davison

Nathan, I think you're right, there -- we definitely have seasonality from Q4 to Q1 and you'd expect to see some of that number. However, what we are seeing in that and this helps you with the revenue is by looking at the current software backlog, we're getting the impact of any delayed starts as well. So bookings or sales that would have occurred in Q4 and if their revenue starts to ramp up a little bit, you're going to get the full impact of that this quarter when you see it. That's why I referred in looking at the trailing 12 months, it's probably the best metric. Because quarter-to-quarter, you're going to have your quarterly skewing effects on what you fell and what flows into the revenue. But a trailing 12 month is a better metric and so that's I think what you're seeing there, and we're getting some benefit from some sales at the end of Q4. The other thing that you get in just a pure number there is just exchange rate impact, so you need to consider that as well. And we do have a little bit of favorable exchange rates with the balance sheet date at the end of this quarter versus last year.

Nathan Schneiderman - Roth Capital Partners, LLC

I guess maybe to try to interpret what you're saying, are you suggesting then it's not really that unusual to see this sequential increase?

Jeffrey Davison

I think as we've seen the growth we've seen over the last 5 quarters, no. I think that it's a reasonable thing to see that come up like it did this quarter.

Nathan Schneiderman - Roth Capital Partners, LLC

Okay. And maybe this is the same kind of question I'm not exactly positive, so I'll ask it anyway. The current deferred revenue was up a lot sequentially and last year, again, it was down sequentially. Does this -- is it the same dynamic going on there? Is this a new pattern that you expect?

Jeffrey Davison

Slightly different dynamic with the current deferred. The current deferred is because we're in the CSA and we're billing 1 year, and so we've anniversaried on that 1 year and so that should start to climb now. The long-term deferred is declining because we're not doing the second and third year, and so that's why the total is probably down, but the current is coming up. So there's a little bit of a separate issue there, but when you look at it in whole, there are similarities between the 2 because -- I'm probably not the guy that go into detail on the numbers here. But the distinction there is current software backlog have both on-balance sheet and off-balance sheet components to it that you don't see in the current deferred.

Nathan Schneiderman - Roth Capital Partners, LLC

Okay, great. That's helpful. Final question for you, you saw market acceleration in smaller deals this quarter, booking nearly 500 and that was up, I guess, near -- more than 15% year-over-year, almost 20%, I guess. And also, along with that a lot more new customers. And so I was wondering, to what extent do you feel like this is really the benefit of Wayne's efforts and just the momentum of the business? Do you think you sort of stepped function up here and we're now at a higher level for these particular metrics going forward?

Greg Gianforte

I think the answer is yes. One of the focus areas that Wayne has really been paying attention to is new customer acquisition. Quite a few of our hires through Q4 and Q1, particularly in North America, are dedicated to new customer acquisition and that group, over performed in Q1 and that's why the new customer acquisition number is higher. We expect that performance to continue.

Operator

Our next question will come from Terry Tillman of Raymond James.

Terrell Tillman - Raymond James & Associates, Inc.

So in terms of -- as it relates to the last question and Wayne and what kind of magic he can work, in terms of on-boarding of reps and just earlier productivity than not. I mean, what do you bake into either your internal projections for new business being signed and/or just like the recurring revenue that you're guiding to now 24%. I mean, are you giving much way to potentially new sales reps with these new kind of elephant hunter, kind of reps being productive in 2011? Or are you really not baking much in there and thus that could be a potential upside driver?

Jeffrey Davison

It's a potential upside driver. The hiring for 2011 primarily we look for that to really contribute to growth rates in '12 and '13. Upside for this year will be getting productivity out of those reps sooner. But historically, it takes 6, 9, 12 months to get reps up to productivity. So that's how we guide it anyway.

Terrell Tillman - Raymond James & Associates, Inc.

Okay. And then Jeff, while you're active there, maybe I can keep you going. In terms of, every quarter there's a different dynamic in terms of the year-over-year situation, in terms of renewal business. I mean, you said there was just a -- the calendar was lighter for I guess larger renewals this quarter if I have that interpretation right. Could you give us any sense into 2Q? Is there any dynamics we should be aware of as it relates to anniversary-ing any large renewal deals, or just anything that could be outlier like for us to keep in mind while we look at those comparisons?

Jeffrey Davison

Q2 this year to last year, I think what I'd say about the renewals for this year versus 2010, it's probably about equal. We do have a practice which you'll see this because we do this expansion type of business where renewals may come out of, like Q1 of next year and get pulled into a quarter this year because you're expanding the business and the renewals out there is like, well, let's just get this contract done and run it altogether. So that happens when -- so that will cause a renewal, which is what we call an early renewal and that's what we refer to in the bookings caution that we always give. But I wouldn't say there's anything that's an anomaly in Q2 that we're expecting on the renewal side.

Terrell Tillman - Raymond James & Associates, Inc.

Okay. And Greg, if you're still there, in terms of, you guys have a lot on your plate, you're investing in sales and marketing and you had a very strong quarter. Could you maybe help us though, in terms of -- on a go-forward basis, how do we think in maybe let's say over the next 2 years relative growth rates or web experience, contact center and the social platform? And in particular on that social platform, it's been a while since the acquisition there and you haven't talked about it as much. I'm sure that doesn't mean that it's not doing well, but maybe just an update specifically on that and then the 3 respective growth rates in those segments.

Greg Gianforte

Yes. I would say, you're right. I mean we are very pleased with the progress we're making in social. That business continues to grow for us. I would say though that as we're having this more general customer experience discussion, we don't run these 3 areas except for businesses and it's very common that individual customers will be using components across all 3 areas. We've gotten particular encouragement from clients around CX for Facebook, a number of clients have gone live on that capability. That's exciting because it drives sessions for us. Actually, in our web business, even though we categorize it in social. In the contact center, I was out with a client last week and they were explaining that, believe or not, to get Siebel to work to open 2 incidents at once, they had to buy 2 PCs for every agent's desktop. Clearly, we can do better than that. So the contact center replacements is driving that marketplace. And by and large, we see greenfield on the web experience side and the big driver there is really around move the mobile. We made a big push around that at the user conference, customers are embracing that. We're helping them implement their mobile strategies. So we're seeing good growth across all 3 areas. So there's some color on it. It's really hard for me to break out individual growth rates, primarily because so many of the deals are blended.

Operator

Okay, our next question comes from Chaitanya Yaramada of Robert Baird.

[Technical Difficulty]

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated

Can you provide some color on the government Cloud First mandate that you had mentioned last quarter? Are you seeing any increased interest from public sector and is that helping your customer acquisition number?

Jeffrey Davison

Yes, okay. So there's 2 sides to the story. One is we didn't have a budget in federal government in Q1. We did get one as everybody followed the drama in Washington. That did push deals in our public sector business out of Q1 in large part because people didn't have money yet, that's the negative side. I don't think those deals went away. They're still there. On the positive side, the Cloud First policy that's adopted by the administration in December. Since then, the federal CIO, Vivek Kundra, has earmarked $20 billion for adoption for IT purchase in the cloud for next year's federal budget, which I think will help. So I think the combination of fiscal constraint, budgets being tighter, emphasis on the cloud benefits us. We didn't see a show up in Q1. And I wouldn't say that was the source of our large customer add number, it came from other sectors. Although we do have very, very -- a lot of interest and activity in the public sector. The last point I'll just make is I did get asked by the administration to serve on a commission to help the government adopt policies to move to the cloud more quickly. We think this work, this kind of emphasizes the importance of this. And I did accept that appointment and am serving on the commission.

Chaitanya Yaramada - Robert W. Baird & Co. Incorporated

Also sort of on a different topic, if you can provide some color on the international growth initiatives, with geographies you're focusing on and if you have any color on the go-to-market strategy for those?

Greg Gianforte

So I think Q-go was certainly part of our international expansion putting a much bigger footprint increased our headcount in EMEA by 50%, so that was really the movement forward in Q1. We've seen great growth in Asia Pacific, both in Japan and Australia, which honestly for our products, this was the bulk of the opportunity within Asia. 2/3 of it is in Japan, Australia and New Zealand, and we have -- we're building out markets coverage there. There was a low hanging fruit for us as to continue develop a direct presence. The last point I'd mention is just really an increased emphasis on partners in EMEA in regions where we don't have direct selling partners and that would be the third one. So those are the initiatives that are underway.

Operator

Our next question comes from Brian Schwartz of ThinkEquity.

Brian Schwartz - ThinkEquity LLC

Just wanted to drill down again on the new customer account, I know you've answered a couple of questions here. But this is a clear inflection and had been a concern in the past on the company and the stock. And from my calculations, it looks like this is the highest you've ever had in the past 6 quarters and the most for Q1 in the past 5 years. Is it possible to break out from a contribution standpoint or just your opinion from a percentage, what really is driving that between the smaller customers? Is this a sign that replacement cycle momentum has increased? Is it just good execution on what you guys are doing and Wayne's doing on his part? Or is there something else because this is clearly a noticeable inflection for the business?

Greg Gianforte

I would say it's primarily better execution. We've always known there's great opportunity in the marketplace. And going back to our Analyst Day last fall, we did not have enough coverage from a go-to-market perspective. We've added significant staff in new customer acquisition, particularly in North America and they're off to the races. They're not at full capacity yet. We're still ramping them up, but they are starting to contribute and you're seeing that show up in the number.

Brian Schwartz - ThinkEquity LLC

Great. Then just one quick follow up here for Jeff. And again, just kind of building upon Tom's question actually earlier from the start. If you look at that current software backlog number, I guess on the trailing 12 months, it's 27% growth, it certainly puts you in the upper echelon of companies that at least I follow here in my universe. But you're only guiding for 24% growth on the year. Again, is that just an element of conservatism and just trying not to get ahead of yourself here?

Jeffrey Davison

I think that's fair to say. We still got 3 more quarters to complete. We're pleased with the growth we -- is on Q1, and we're pleased to increase the guidance to the 24% this quarter. We hope the exchange rates and everything stay neutral, and we can realize that and go beyond it later in the year.

Operator

Our next question comes from Tom Roderick of Stifel, Nicolaus.

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

So I wanted to just dig in a little bit on this notion of bookings, Jeff, and renewals. And as we sort of get through the end of the year, I'm wondering if that bookings metric has even much relevance as we end 2011 get into 2012. Can you just help us again, maybe remind us about the impact of the terms in 2010 going to 2-year deals and the impact as that relates to bookings and whatnot, should we even be thinking about that as a relevant metric as we get through this year?

Jeffrey Davison

That's a good question, Tom. Yes, the change from the 2-year contract to the 3-year contract last year definitely caused a spike in the bookings and made a really good comparison for us. But I mean you needed to look at it and go term length is having a big impact here. So that's why we talked about term length. Now that we've anniversaried on the CSA and our term lengths have settled down around 32 months, you don't need to go through this calculation of annual contract value, bookings is not the important metric to look at, and we're going to be pulling back more and more of those booking types of metrics from our disclosures as the year goes on. So yes, I think you're hearing us loud and clear to look at that current portion of software backlog. As we move farther into the CSA transformation, actually the deferred revenue on the balance sheet will become even more important. But for this year, we really want to be looking at the current portion of software backlog, it's a really good number.

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

Okay, great. And maybe just one follow up on that, so you talked about the deferred revenue and deferred backlog numbers becoming more important. So as we get into the end of this year and again, into next year and thinking about the cash flow impact and that's something you've talked -- you both talked about for a while that we'll see sort of a waterfall compounding effect from these multiyear deals contributing more effectively in 2012. It's a 2-part question, number 1, do you still see that happening and how should we think about what level those cash flows can look like in 2012? And then the second part, Greg, maybe I'll aim this one at you, is as this market evolves and perhaps more positively evolves for you, do you have a desire to grow faster and take your foot off the operating margin leverage pedal just a little bit there and grow faster this year?

Jeffrey Davison

Okay. First, on the cash flow, so really no change in our discussion on the cash flow for 2012. It remains to be that inflection year as we get into 2012 and we're on the third year, we start to be at that -- I describe it as the normalized year under this model. And so we would look for the cash from operations to be above the operating margin. As we progress through 2011, that's not the case. We're still working out of the transitional period on the contracts. And so we're still working towards operating margins for the year, and then you factor in the interest expense for 2011. And Greg will answer the second part.

Greg Gianforte

Yes, on the question about, would we sacrifice margins to grow faster? Honestly, I don't think it's an either/or question, we need to do both. We believe we can grow faster. The core business is growing 27%. We're forecasting for the year 24%. A company at our size, we should be profitable, that's why the watch word for us is profitable growth. We're going to work towards the targets we've communicated with the street. The only thing that would set us back would be potential additional acquisitions if they were diluted in the first year. But we kind of have a metric for ourselves that we need to have them contributing within the year. So we need to -- it's a balance. It's not an either/or. We should be profitable. We should be expanding our margin, but there's no reason why we can't be growing faster too. It's just a matter of us making prudent investment decisions, looking at the ROI of those investments and doubling down when we're getting good return and backing off when we're not.

Operator

Our final question comes from Mark Murphy of Piper Jaffray.

Mark Murphy - Piper Jaffray Companies

Jeff, what caused you to sign that outlier deal with the much longer terms, I guess rather than sticking with the CSA. I know that you do this from time to time and I guess I'm just wondering, is it an organization that demanded it or required it in some way?

Jeffrey Davison

It was a request on the customer's part to do it. I think -- I don't have full visibility into their needs, but I think they wanted visibility. The full contract wasn't fully committed. The first portion of it was committed, but I think they were just trying to control their budget and their long-range planning and that's what they wanted to do.

Greg Gianforte

And Mark, I would just add that sometimes we do projects through some of our partners, about 15% of our business is indirect. If someone like IBM has won an 8-year contract with a federal agency, they're trying to lock down their pricing as the prime contractor over that entire period. And I should say, this deal was not through IBM, although we've done business through IBM. That's another example where there is a customer requested desire for a longer-term contract, which honestly we're happy to accommodate. But they tend to be outliers, it's not our standard agreement.

Mark Murphy - Piper Jaffray Companies

Okay. And then, Greg, just as a follow up on the contact center replacements. How would you characterize the pace of the increase that you're getting from customers they want to replace, a Siebel call center or some other legacy call center app? I'm just wondering, is that still increasing through Q1 and maybe how frequently do you receive those type of inquiries?

Greg Gianforte

I mean we're having those discussions all the time. They tend to be very large projects. I would say the interest continues to grow.

Mark Murphy - Piper Jaffray Companies

Okay. And then one final one, is there anything new or different in your SMB strategy or your SMB sales structure here for 2011?

Greg Gianforte

No, there's not. I know there was some discussion around, if we had an increased focus. We have some partners that are focused on a little further down the marketplace. We encourage that, it gives us leverage. We do have an inside group that focuses on our target market and may move down into the middle market a little bit. It's not a big investment for us. The primary investment we have is in the large B2C organizations, and that's where we're putting the wood behind the ball.

Operator

Okay, no further questions. I'll hand the call back over to management.

Greg Gianforte

Okay. Well, sorry for the technical difficulty today. I appreciate your willingness to persist with us. And again, we're thrilled with the results in Q1, and we look forward to follow-up discussions over the course of this quarter. Thanks.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.

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