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WebSideStory, Inc. (WSSI)
Q4 2006 Earnings Call
February 26, 2007 4:30 pm ET

Executives

Claire Long - Chief Financial Officer
James MacIntyre - President, Chief Executive Officer, Director

Analysts

David Hilal - Friedman, Billings, Ramsey Group
Kyle Evans - Stephens, Inc.
Michael Kern - Canaccord Adams
Michael Wong - ThinkEquity Partners
Richard Baldry - First Albany Capital
Brad Whitt - RBC Capital Markets
Mark May - Needham & Company
Chad Bartley - Pacific Crest Securities
Pete Schleider - Peninsula Capital Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the WebSideStory Incorporated 2006 fourth quarter earnings conference call. My name is Cammie and it will be my pleasure to be your coordinator today. (Operator Instructions)

I would now like to turn the presentation over to the Chief Financial Officer, Ms. Claire Long. Please proceed, Madam.

Claire Long

Thank you and good afternoon. My name is Claire Long, Chief Financial Officer of WebSideStory. Welcome to WebSideStory's fourth quarter and year-end 2006 earnings conference call. Following the live call, an audio archive of this call will be available on the investor relations section of our website at www.websidestory.com.

Today’s call contains forward-looking statements that are not a description of historical facts. For example, statements about future results of operation, growth opportunities, the anticipated synergies of WebSideStory, Visual Sciences and Adams businesses, and about the projected future financial performances of those businesses, are all forward-looking statements.

You should not regard any forward-looking statement as a representation by WebSideStory that any of its plans will be achieved. Actual results may differ materially from those discussed during this conference call due to the risks and uncertainties inherent in WebSideStory’s business. Such risks include, without limitation: the company’s reliance on its web analytics services for the majority of its revenue; the company’s limited experience with marketing applications beyond web analytics; the risks associated with the company’s indebtedness; the risks associated with integrating the operations and products of Visual Sciences and Adams with those of WebSideStory; the highly competitive markets in which we operate that could make it difficult for WebSideStory to acquire and retain customers; the risk that WebSideStory's customers fail to renew their agreements; the risks that the company’s services may become obsolete in a market with rapidly changing technology and industry standards; blocking or erasing of cookies or limitations on our abilities to use cookies; privacy concerns and laws of other domestic or foreign regulations that may subject the company to litigation or limit our ability to collect and use Internet user information; WebSideStory’s ability to defend itself against claims of patent infringement alleged by NetRatings, Inc.; WebSideStory’s ongoing ability to protect its own intellectual property rights and to avoid violating the intellectual property rights of third parties; and the other risks described in WebSideStory’s filings with the Securities and Exchange Commission filings, including WebSideStory’s annual report on Form 10-K for the year ended December 31, 2005 and quarterly reports on Form 10-Q.

Do not place undue reliance on these forward-looking statements which speak only as of the date of this call. WebSideStory undertakes no obligation to revise or update the information or forward-looking statements in this call to reflect subsequent events or circumstances.

Our presentation today includes information presented on a non-GAAP basis. We believe that this presentation of non-GAAP results provides useful information to both management and investors by excluding specific items that we believe are not indicative of our core operating results. The presentation of this additional information should not be considered in isolation or the substitute for results prepared in accordance with generally accepted accounting principles.

We refer you to the press release we issued earlier this afternoon which is available on the investor relations portion of our website for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP-based measures.

During this call, you will hear us discussing the WebSideStory division and the Visual Sciences division in connection with our Q4 and full year 2006 results. The WebSideStory division is the reporting segment comprised of our HBX analytics, search, publish and bid solutions and all of the related services.

The Visual Sciences division is the reporting segment comprised of Visual Sciences LLC, the company we merged with on February 1, 2006. As previously announced, we merged our sales services and marketing groups in these divisions in early 2007 and therefore we will no longer be operating as two divisions going forward. We anticipate having one reporting segment and therefore we will provide consolidated results for the company as a whole in future calls.

Now, I would like to turn the call over to Jim MacIntyre, the CEO of WebSideStory.


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James MacIntyre

Thanks, Claire. WebSideStory is a high-growth analytics company in a healthy market. We are well-positioned with competitive offerings to continue our expansion in 2007 and beyond. It has been a pleasure taking over as CEO of WebSideStory since November 20th of 2006 and I remain excited about our company and our prospects.

In the macro environment around our business, we see growing waves of data that our clients need to analyze. The continued rapid expansion of the amount of customer activity data that requires analysis is being driven by consumer broadband penetration and the mainstream use of Internet video, led by companies like our new client, YouTube.

In the telecommunications industry, where our clients now make up over 85% of U.S. revenue, telecommunications industry revenue, we see rapid expansion to next-generation interactive multimedia data services that require new analysis capabilities that we are uniquely prepared to serve.

We also see the ongoing deployment of new customer interaction systems, such as advanced point-of-sale systems and customer-facing kiosks, by our clients for their customers, driving new volumes of data that require analysis.

WebSideStory is well-positioned to provide its clients with solutions for analyzing these large and growing streams of real-time data.

Q4 2006 was a quarter of record sales bookings for WebSideStory. In Q4, we generated $6 million in cash and short-term investments. Q4 also saw us attain non-GAAP EPS of $0.17, which was above the high-end of our guidance. We were able to achieve these earnings in Q4, even though revenue came in at the low-end of our revenue guidance. In Q4, we attained non-GAAP revenue of $19.2 million. This was an increase of 63% from our Q4 2005 results.

As expected, we enjoyed strong revenue performance from both the WebSideStory and Visual Sciences divisions in Q4. Our search groups’ revenue came in light, as in Q4 we were unable to keep up with an unexpected shift in demand from our base search product to our higher end guided search product, which requires more implementation consulting. We are actively building capacity so that we can deliver to the new demand around our higher-end guided search product in the coming months.

The number of new clients that we directly acquired in Q4 increased significantly over the number we acquired in Q3, as we directly added 115 new clients across all product lines in Q4, including major analytics and analytics-driven application wins head-to-head against our usual competitors in impressive accounts such as YouTube, Best Western, NVIDIA, Auto Trader, Hershey, Kayak, Samsung, tailor-made Adidas Golf, Carlson Travel, France 24, Look Smart, CTV, the New York Post, John Hancock, Lifetime and Commonwealth Financial.

Our efforts in building new distribution channels for our analytics products took a significant step forward in Q4 with the launch of our distribution relationship with Digital Insight. This relationship led to more than 150 new financial institutions implementing HBX analytics over and above the 115 directly acquired new enterprise clients that we gained through our direct sales efforts.

Our strong up-sell and renewal track record continued with strong retention rates in the quarter with the anticipated proportion of our growth coming from up-sells to our existing clients.

We completed more than 345 sales transactions in Q4 2006, not including renewal transactions. Our average one-year customer relationship size held steady at approximately $45,000 per year and our enterprise client base now exceeds 1,540, not including clients gained through distribution relationships.

Visual Sciences was a significant factor in our overall Q4 performance. We are pleased that this division performed so well, showing year-over-year revenue growth of 78%. We experienced continued strong growth of this division’s pipeline in the quarter and continued to train additional sales and consulting resources on its innovative applications and high-performance technology platform, preparing for our expanded Visual Sciences distribution in 2007.

In the WebSideStory division, we enjoyed increased cross sale activity between our search, publish and HBX analytics clients, as the market in our client base is recognizing the behavioral targeting and marketing execution power of driving these products with analytics data.

As I mentioned earlier, we saw a significant increase in demand for our guided search product. Site Search is the application most conducive to analytics based behavioral targeting and marketing optimization. We are pleased to see this acceleration in the high-end of this part of our product line and encouraged about the future market for this type of capability, as we see other vendors now starting to make investments in such integrated, closed loop optimization offerings.

On this front, we are pleased and excited today to announce the signing of a distribution relationship with Interwoven, a leader in content management solutions. This distribution arrangement will allow Interwoven’s base of more than 2,300 enterprise customers to purchase WebSideStory and Visual Sciences products pre-integrated with Interwoven’s web content management solutions. This will allow joint customers to execute on their behavioral targeting and customer experience improvement initiative based on our analytic results. By combining these technologies, customers will benefit from a powerful, closed loop optimization cycle for delivering targeted content at the right time, in the right context, and to the right customer.

On the capital front, we ended Q4 with approximately $25.3 million in cash and short-term investments, having generated a record $6 million in the quarter. We repaid $15 million of notes outstanding from the Visual Sciences merger and will repay the remaining $5 million over the next two weeks. We also secured a two-year $15 million revolving credit facility with Silicon Valley Bank. Claire will provide more detail on this higher-than-expected cash generation, our new credit facility, and the repayment of the Visual Sciences notes.

We ended 2006 well-positioned, with strong products and strong distribution in a healthy and exciting market. We are pleased with our sales performance this quarter and optimistic that the work that we are doing to better leverage our whole field organization in selling and servicing our full range of analytics products will lead to further growth.

I would now like to pass the call to Claire for a description of some of the key financial details.

Claire Long

Thanks, Jim. The fourth quarter of 2006 was our 13th consecutive quarter of positive cash generation and non-GAAP profitability. We achieved non-GAAP revenue of $19.2 million, achieving year-over-year growth of 63% on an as-reported basis, and 34% on an organic basis. GAAP revenue was $18.2 million.

As Jim discussed, we had an increase in the number of guided search bookings at our search group. These types of bookings require a greater amount of implementation work, thus preventing us from converting those bookings to revenue as quickly as other types of search bookings.

The WebSideStory division contributed 76% of consolidated non-GAAP revenue with the Visual Sciences division contributing the remainder. On a consolidated basis, revenue derived from subscription and hosting services represented 77% of revenues in Q4, while standalone professional services represented 8% in the same period.

Licensed revenue, excluding non-GAAP revenue, accounted for 8% of our total consolidated revenues for the quarter. On an annual basis, we achieved non-GAAP revenue of $69.4 million and GAAP revenue of $64.3 million. The WebSideStory division contributed 79% of consolidated non-GAAP revenue for 2006, with the Visual Sciences division contributing the remainder.

On a consolidated basis, revenue derived from subscription and hosting services represented 77% of revenues for 2006 while standalone professional services represented 7% for the same period. License revenue excluding non-GAAP revenue accounted for 5% of the total 2006 consolidated revenue.

For the quarter, $968,000 of the recognized revenue was non-GAAP revenue, which represents revenue that would have been recognized in the quarter had we not merged with Visual Sciences. We add that amount back into our non-GAAP revenue to show the performance of the company under the pro forma P&L we are managing it by.

Our gross margin, calculated on non-GAAP revenue and excluding stock-based compensation and amortization of intangibles, was 80% for both Q4 and for the full year 2006. There was no change in our gross margin from Q3. The quarterly gross margin excludes approximately $1.3 million of amortization of intangibles and stock-based compensation, which is equivalent to the amount in the prior quarter. We continue to expect our ongoing gross margins to be in the 78% to 80% range.

Operating expenses before stock-based compensation and amortization of intangibles as a percentage of non-GAAP revenue decreased from 63% of revenue to 62% of revenue. We saw improved leverage in sales and marketing. Legal costs related to our ongoing patent litigation were $550,000 in Q4, as compared to $530,000 in Q3. We expect our costs related to this litigation to increase in 2007 as we get through discovery and closer to trial. We expect our quarterly costs related to this litigation to be at the high-end of our $500,000 to $750,000 quarterly range for the first-half of 2007 and reach closer to $1 million a quarter for the second-half of 2007.

We generated $30,000 in net cash interest income for the quarter as compared to net cash expense of $77,000 for Q3, due to our increased cash and investment balances. GAAP taxes resulted in a non-cash benefit of $700,000 while cash tax expenses were an expense of $35,000. We expect to remain at a cash tax rate of approximately 2% to 5% for 2007. We expect our GAAP tax rate for the full year 2007 to be between 30% and 40%.

Non-GAAP net income was approximately $3.5 million, or 18% of total non-GAAP revenue in the fourth quarter, compared to $3.2 million, or 17%, in the previous quarter. The increase from third quarter is due to a 1% decrease in operating expenses.

Non-GAAP earnings per share was $0.17 on a fully diluted basis for the fourth quarter. On a GAAP basis, we had a net loss of $1.4 million, or a loss of $0.07 per share for Q4.

On an annual basis, non-GAAP net income was $10.9 million, or $0.55 per share, as compared to the prior year of $8.8 million or $0.46 per share. A GAAP to non-GAAP reconciliation is provided in our earnings press release.

Turning to the balance sheet, we generated $6 million in cash and short-term investments for the quarter. This record cash generation was a result of a significant increase in deferred revenue and, to a lesser extent, changes in other working capital balances, higher pro forma income, and slightly lower capital expenditures. Capital expenditures were $1.1 million for the quarter and are expected to be between $1.5 million and $2.5 million per quarter, or about $8 million for 2007.

Our working capital increased from a negative $6.3 million in Q3 to a negative $5.4 million in Q4. Included in current liabilities at year-end are $19.7 million in notes issued in conjunction with the Visual Sciences merger. Late last week, we repaid $15 million of these notes with cash on hand. We are also drawing down $5 million from our new two-year revolving credit facility and plan to repay the remaining notes over the next two weeks.

Our accounts receivable balance grew to $15.7 million with days sales outstanding increasing to 75. The increase is due to both the timing of cash receipts and to a lesser extent the growth in deferred revenue. Accrued liabilities grew in line with the business.

Our deferred revenue balance grew from $17.6 million to $20.9 million during the quarter, an increase of $3.3 million, or 19%.

I would now like to pass the call back to Jim.

James MacIntyre

Thanks, Claire. It has been a pleasure to be the CEO of WebSideStory for the last part of 2006 and the first part of 2007. I remain excited about our prospects as we look out into 2007. Our products are leading our industry. We have been flattered to see our competitors imitating our directions in behavioral targeting and high-end analytics. More significantly, we are pleased with the rapid progress our new management team is making as they integrate our major analytics division and set the stage for our next generation technologies and services. Our integration plan has been aggressive and consuming and I was very pleased that our sales execution was strong in Q4 as we undertook this work.

For Q1, we are guiding to a revenue range of $19.5 million to $20 million, the midpoint of which represents 36% growth from Q1 of 2006. We are targeting a non-GAAP earnings range of $0.13 to $0.14 per share for Q1. We are reaffirming our 2007 non-GAAP revenue and earnings guidance today of $89.5 million to $91.5 million and $0.69 to $0.74 per share, respectively. We believe this profitability level represents the right mix of growth and margin for the company next year.

As I told you in last quarter’s call, I believe in disciplined, profitable growth, a continuation of the principals the company has been managed under over the last years. As you are building your models, I want you to remember the three factors that we mentioned in our last call: one, our Visual Sciences platform has substantial upside in markets we are not even addressing yet. We are investing in the appropriate product management, sales, and consulting skills to exploit these opportunities. We expect that these investments will begin to pay off in the second-half of 2007 and will further differentiate us as both a market participant and an investment opportunity from our point solution competitors.

Two, our Visual Sciences pipeline is populated with some large opportunities that you and we certainly want to be pursuing because they provide us with anchor relationships in large global accounts which lead to ongoing up-sells as we further penetrate those accounts. This means you may see more quarter-to-quarter variability in our numbers than you have seen in the past.

And three, every year we experience increased expenses at the beginning of Q1, both as a result of higher payroll taxes as well as costs associated with new sales and marketing initiatives. In addition, we award merit pay increase raises at the beginning of Q2. These two practices mean you will generally see more back-end loaded years with respect to earnings generation. 2006 shaped up to be just such a year, where we generated approximately 40% of our earnings in the first-half and 60% of our earnings in the second-half.

I am looking forward to working with you over the coming years as we continue to grow the company. As a near-term update, our Q1 pipeline is healthy, client engagement is at record levels, partner participation is strong, and our overall market place is healthy and growing.

At this point, we would be happy to take any questions you might have. Operator, over to you for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

The first question comes from the line of David Hilal with FBR. Please proceed.

David Hilal - Friedman, Billings, Ramsey Group

I wanted to discuss some of the cross-sell opportunities that you were able to realize in the quarter. Maybe you can comment on the average number of modules your customers have versus the last quarter, any comment on the Visual Sciences success in the quarter, how much of that might have bit into the installed base of HBX guys and vice versa?

James MacIntyre

The cross selling is doing very well. We have said in the past that we had approximately 1.1 products per customer and we have a number of add-on products, such as active segmentation, visual reports, visual workstation, up-sells, visual load and report builder. Looking at our customer base now, we have a good bit of adoption of those products and are about 1.8 products per customer. We do see cross sell in the company between the previously separate divisions. Now though, as we put those together, it is a little bit -- we are not thinking about it quite the same way, but for HBX customers, we are seeing a number look at different Visual Sciences products.

Operator

Your next question comes from the line of Kyle Evans with Stephens. Please proceed.

Kyle Evans - Stephens, Inc.

Can you tell us, are you guys, do you have something mass market available for both Visual Site and for Bid today?

James MacIntyre

With Visual Site, Visual Site has been mass market available and we are doing some additional things with Visual Site today. We offer Visual Site on a subscription, on-demand basis now, which is relatively new for us. Bid has been available in its first version. We are spending a significant amount of time on Bid this year and expect to do more with it this year than we did last.

Kyle Evans - Stephens, Inc.

Okay, so the answer was yes on both fronts?

James MacIntyre

Yes.

Kyle Evans - Stephens, Inc.

Could I sneak one more in there? The $8 million in 2007 CapEx, that is a pretty significant jump. What are the uses of that capital?

Claire Long

We are purchasing servers, increasing servers to support the capacity and the increased revenue, and then we also have just general CapEx due to our increased headcounts that we expect, sales people, et cetera.

Kyle Evans - Stephens, Inc.

Okay, great. I will get back in queue. Thanks.

Operator

Your next question comes from the line of Michael Kern with Canaccord Adams. Please go ahead.

Michael Kern - Canaccord Adams

Could you give a little more color on exactly how much of the revenue was deferred due to the lack of the technical expertise on the advanced search in content?

James MacIntyre

About $500,000.

Michael Kern - Canaccord Adams

Okay. Thank you very much.

Operator

Your next question comes from the line of Michael Wong with ThinkEquity. Please go ahead.

Michael Wong - ThinkEquity Partners

Thank you very much. When you are looking at the sales organization and I guess the major tweaks that you have made to sales comp or the go-to-market strategy versus last year, what would these be and have you seen any early evidence that these are tweaks that are making a positive difference? Thanks.

James MacIntyre

Sure. We are, Michael. One of the major tweaks that we have made is, probably the primary one is to get our external enterprise sales force focused on new sales and new accounts, and so that has been positive and the year is off to a good start in that regard. We are pleased and we are very pleased that now the sales force has all of our enterprise products to sell. Last year, we had two sales organizations really, and a very small one at Visual Sciences, which was the only team that could represent the Visual Sciences products. Today, the entire sales force across the company can represent the Visual Sciences products, in addition to our WebSideStory division products.

Operator

Your next question comes from the line of Richard Baldry with First Albany Capital. Please proceed.

Richard Baldry - First Albany Capital

It looks like clearly the disproportionate upside to the cash generation was on the deferred revenue line. I was wondering if you could talk a little more specifically about that, whether there is any change in the structure of terms, things that you are asking from the clients up front as new clients are won, to what extent that is sustainable, and/or maybe that would influence sort of a cash flow model on an ’07 to be fairly significantly above what your pro forma guidance would be. Thanks.

Claire Long

Sure. At the end of the year, we had really good cash generation but we also had a number of deals that are not recognized as revenue yet but we do require cash up front for a number of our larger license deals, so we received the cash on those deals, which increased the deferred revenue. In addition, we had about $500,000 of guided search implementations which for the most part have been paid for but which we could not recognize the revenue on yet.

So our deferred revenue will be a little bit lumpier because of the license deals, so I would not say that this is a sustainable, let’s say this is going to be higher in all the future quarters. We still expect good cash generation going forward but this was a pretty extraordinary quarter when it came to cash generation and the amount of revenue that was sitting in deferred revenue.

Operator

Your next question comes from the line of Brad Whitt with RBC Capital Markets. Please proceed.

Brad Whitt - RBC Capital Markets

Could you comment a little bit about how you think -- going forward, how you think the Visual Sciences deals will play out as far as what percentage will be on-premise versus hosted situations? What drives that? What is in the customer base?

James MacIntyre

In terms of what percentage will be on-premise versus which will be run as subscription or managed service, in the past, we have counted on about 40% of our Visual Sciences deals being subscription or managed service. Over the last little while, we are working to shift that and we hope in the future we are able to move it more in the inverse, but that said, the influence on which is chosen has more to do with which part of the market we are selling into. There are certain parts of the market, like the government market, the financial services market, and the telecommunications market where we have very strong presence that most often require in-house implementation. The other, as we are now broadening out the availability of Visual Site on a subscription basis to the broader marketplace, we do expect to see more Visual Site subscription-based sales than we have in the past.

But that is because we are focusing more effort on other markets outside of that government, financial services and telco set.

Brad Whitt - RBC Capital Markets

Okay, and just a quick follow-up; could we get an update on the patent litigation? I think there were a couple of hearings scheduled.

James MacIntyre

Sure. As I know you understand, I am not able to discuss the specifics of this or any other ongoing litigation matter. However, I will say that we continue to believe that we don’t infringe the patents asserted against us by NetRatings and NetRatings does infringe the patents that we have asserted against them. As you know, we have been through the basic hearings and we continue on the same path, looking at our cases. There is no new news at this point in regard to the litigation.

Operator

Your next question comes from the line of Mark May with Needham & Company. Please proceed.

Mark May - Needham & Company

Thanks for taking my questions. I dialed in a little late so I’m sorry, I apologize if you have already gone over these. Could you tell us the number of sales people, I guess quota-carrying reps that you had at the end of the year and what your plans are in terms of additions, or what you expect that number will be at the end of this year?

A second question would have to do with in terms of the investments and the priorities for this year, to what extent does international play a part in that?

James MacIntyre

Sure. At the end of the year, we had 43 quota-carrying reps. We added some, we removed some. We have been optimizing our sales force at the end of the year and the beginning of this year. We are expanding our sales force and we are expanding internationally. We have spent a good bit of our energy focusing in the European market over the last couple of months and we do expect to see further expansion in other parts of the international market, so there is a good deal of effort here on various international markets.

Mark May - Needham & Company

Could you give us a sense in terms of the number that you expect you will end the year at, roughly?

James MacIntyre

We will have to follow-up with that. We do not have a number handy in terms of the final on the year and we are not providing that at this point.

Mark May - Needham & Company

In terms of the Visual Sciences modules or products, not necessarily the launch number but the number of new -- did you sign up any new partners during the fourth quarter and how many?

James MacIntyre

New partners -- the major new partner addition that we announced here today was the partnership with Interwoven, which was initially driven by the Visual Sciences products but also wraps in our HBX products. So Interwoven, we are very pleased about, as Interwoven has a strong vision and understanding around closed loop optimization and will be making our products available in the Interwoven suite of web content management solutions through 2007 and beyond, so we are very pleased about that and that is our big new partner addition as of right now.

Mark May - Needham & Company

Sorry, Jim, I meant to say customers, not partners.

James MacIntyre

We didn’t in Q4. For Q4, we did not split out the number of new customer adds between our products. We had 115 total new customer adds from our direct sales efforts, and then through our Digital Insight relationship, which is the first -- we haven’t in the past incorporated in our new customer adds numbers new customer adds through our distribution relationships like some of our competitors do. I think we will probably start doing more of that in the future and adding those in, but there were 150 new adds through the Digital Insight relationship as well.

Operator

Your next question comes from the line of Chad Bartley with Pacific Crest. Please proceed.

Chad Bartley - Pacific Crest Securities

A quick follow-up on the revenue number. It looks like even if you adjust for that $500,000 amount, it is still at the low-end. I am curious if there were any other factors driving that. And then, perhaps related, on the competitive landscape, can you just talk about why you feel like you are better positioned or already in things like behavioral targeting? Just help us understand the competitive landscape a bit better.

Claire Long

Well, as far as the revenue goes, we were at the low-end of our range, which is 19 --

[Technical Difficulties]

Operator

Ladies and gentlemen, please stand by. Please go ahead.

Claire Long

Sorry about that. We got disconnected somehow, but we are back. My comment would be we came in at the low-end of the range because we were unable to recognize the revenues associated with the hosting of guided search until there are certain aspects of the guided search delivered from an implementation standpoint. So once those are delivered, that $500,000 is immediate revenue.

I think I will let Jim answer the second part. You might need to repeat it.

James MacIntyre

Yes, will you repeat the second part of the question?

Chad Bartley - Pacific Crest Securities

Sure. Just as it relates to the overall competitive landscape, one of your competitors has been very active in terms of acquiring companies, expanding internationally, expanding into [bid], targeting, so I think you had mentioned that you were flattered that they were emulating your move, so if you could elaborate a bit on that.

James MacIntyre

As you know, search is the most used on-site application for websites, and with our purchase of Adams over a year-and-a-half ago, the premise behind that acquisition was the ability to drive site search through our analytics data. That premise and thesis has played out for us. We have been very pleased with our ability to improve site search results through our analytics data and our published product out of that same division had the same premise, that the content on sites needed to be influenced for users in the right context at the right time on the sites based on analytics data. Again, that has also played out for us in a similar fashion.

Across our other -- now you see it playing out across our partner base as companies like Interwoven begin to use our analytics to drive their targeting for the sites that they serve. So that is what I was referring to.

Operator

Your next question comes from the line of Jeff [Seinberg] with JLS. Please proceed.

James MacIntyre

Jeff?

Operator

Jeff, please go ahead. Your next question comes from the line of Pete Schleider with Peninsula Capital Management. Please proceed.

Pete Schleider - Peninsula Capital Management

I am curious about Visual Sciences revenue in the fourth quarter, your outlook for that as a percent of revenue in ’07, the subscription revenue in aggregate in ’06 and ’07 in terms of your calculation. Also, the deferred revenue went up dramatically. Can you give us a sense if that was all subscription or is that some service business in there too?

Claire Long

Taking it one at a time, I think the first question was mainly about the percentage of revenue that came from Visual Sciences. From an ’07 standpoint, we are now operating these two divisions as one, so we do not anticipate having a Visual Sciences division and a WebSideStory division in 2007, so we will not be giving out numbers that way in ’07. We would have one segment, because we have sales people who are selling both HBX and the Visual Sciences platform.

From a fourth quarter perspective, about 76% of our total revenues came from WebSideStory and about 24% of our revenues came from the Visual Sciences division.

James MacIntyre

He wants to know the amount of Visual Sciences revenue in the fourth quarter. We will get that for you here, too, Pete.

Pete Schleider - Peninsula Capital Management

While you are doing that, what about the deferred revenue being up so dramatically quarter to quarter? That should give you pretty big visibility going into the first quarter. Is that the right way to look at that?

Claire Long

It gives us good visibility. There are licensed deals in there as well as subscription deals in there, so licensed deals, we still have to deliver on them. Sometimes there is acceptance, et cetera. So we have visibility, but it does not give us absolute. But it is very good news. It was a good quarter with deferred revenue up so much.

As far as the Visual Sciences, we had $3.6 million for GAAP revenue for the period and we had about another $1 million in deferred revenue, for a total of about $4.6 million for the quarter.

Pete Schleider - Peninsula Capital Management

Finally, just on the sales organization, if you went from a handful of people selling Visual Sciences last year to this year, roughly 43, it sounds to me like you got a pretty big coverage that is going to change the delta on that. Is that Visual Science business equal or less than or more than profitable than the analytics business?

James MacIntyre

Pete, that has been a big focus of our last month as we began the more intense training of our whole field sales force in the Visual Sciences products. We have proceeded well with that. We had a large sales kick-off at the beginning of the year where we did a lot of training, and then we have had really constant training going on over the last month so that our broader team knows how to represent the Visual Sciences products right. We are very excited about that.

The products are very profitable. They are equally or more profitable than our other products and so we are excited about the prospects for broader distribution for the Visual Sciences products over 2007, for sure.

Operator

Ladies and gentlemen, this is all the time we have for questions today. On behalf of WebSideStory, thank you for attending today’s conference. This concludes the presentation. You may now disconnect. Good day.


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