DemandTec F3Q08 (Qtr End 11/30/07) Earnings Call Transcript

DemandTec, Inc. (DMAN)

F3Q08 Earnings Call

January 10, 2008 5:00 pm ET

Executives

Tim Dolan – Investor Relations

Daniel Fishback – President, CEO

Mark Culhane - CFO

Analysts

Jason Maynard – Credit Suisse

Peter Kuper – Morgan Stanley

Brendan Barnicle – Pacific Crest Securities

Laura Lederman – William Blair

Patrick Walravens – JMP Securities

Todd Lukasik – Morningstar

Brian Schwartz – Montgomery & Co.

Presentation

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the DemandTec third quarter earnings conference call. During today’s presentation all parties will be ina listen only mode. Following the presentation, the conference will be open for questions. If you have a question please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by the two. If you’re using speaker equipment, please lift the handset before making your selection. This conference is being recorded today, Thursday, January 10, 2008. I would now like to turn the conference over to Mr. Tim Dolan, please go ahead sir.

Tim Dolan

Good afternoon, thank you for joining us on today’s conference call to discuss DemandTec’s third quarter fiscal 2008 results. This call is also being broadcast live over the web and can be accessed in the investor relations section of DemandTec’s website at www.demandtec.com. With me on today’s call are Dan Fishback, DemandTec’s president and CEO and Mark Culhane, DemandTec’s CFO.

After the market close today DemandTec issued a press release with results for its third fiscal quarter ended November 30, 2007. A copy of the release is available online at the company’s website. Please note that we will be discussing in this conference call non-GAAP costs and expenses in operating and net profitability numbers which excludes stock based compensation and amortization of intangible assets. We refer you to the press release for reconciliation of these non-GAAP amounts and their comparable GAAP amounts.

During the course of this conference call, DemandTec’s management may make forward looking statements regarding financial projects, plans and objections for future operations and managements beliefs about potential market size and growth as well as the company’s future performance, financial condition or results of operations. These forward looking statements are not historical facts but rather reflect DemandTec’s current expectations and beliefs based on currently available information. We undertake no obligation to provide updates on the future. DemandTec’s actual results may differ materially from those projected. The risk factors section of our form 10Q on file with the SEC discloses risks that could cause these differences. Please note that any future product, feature or specifications referenced in today’s call are informational only and are not commitments to deliver any technology or enhancement. DemandTec reserves the right to modify its product plans at any time.

With that said I’d now like to turn the call over to DemandTec’s President and CEO, Dan Fishback.

Daniel Fishback

Thank you Tim. Hello and thank everyone for joining us today. I’m going to start with a summary of our performance and other accomplishments during the quarter and then Mark will provide some details on our financial results for the quarter, after which we will take questions.

We are pleased with the company’s financial results for the quarter which were highlighted by strong revenue growth and non-GAAP operating profitability that were both above our guidance, along with continued strength in free cash flow. Solid execution of our three point growth strategy is driving our financial performance.

Taking a look at the financial highlights of the quarter, total revenue came inat $15.9 million, representing a 49% growth on a year-on-year basis, and 9% growth on a sequential basis. From a profitability perspective, better than expected revenue took the company to deliver non-GAAP operating income of $352,000 inthe quarter, which was also above our guidance. To re-iterate akey point on our last earnings call, we are inthe early stages of what we believe is a significant market opportunity and our top priorities continue to be revenue growth and market share gains.

With that said we are focused on expanding our margins and increasing our cash flow, atthe same time we invest in our growth strategy initiatives. For the first nine months of fiscal 2008 the company generated approximately $8.2 million in cash from operations and extended $2.9 million in capital expenditures, resulting in approximately $5.3 million in free cash flow.

We believe the old ways of determining price and building customer loyalty for retailers and consumer product manufacturers or CP companies such as simple cost plus pricing, following competitor’s pricing, one size fits all promotions are no longer sufficient in today’s ultra-competitive and dynamic market. DemandTec’s solutions are designed to optimize pricing, promotion, mark down and other merchandising and marketing decisions to help retailers and CP companies achieve their revenue, profitability, their sales volume objectives while reinforcing their banners and brand.

Our products use the science of synthesizing demand, consumer and market intelligence to understand, predict and influence consumer behavior. In addition, by using a SaaS business model to deploy our software, we enable our customers to respond more rapidly to changing consumer trends and preferences than they would be able to do with on premise software. We believe this is not only a differentiator for DemandTec today but also a significant competitive barrier for the long-term as well, given the SaaS business model benefits for consumer demand management or CDM.

I would like to provide a review of our three point growth strategy along with an update on how we are making progress in each area. The first component to our growth strategy is to continue to extend industry leadership position with the world’s largest retailers. We intend to continue to leverage our strong market position to pursue additional retail opportunities around the globe and leverage our investments in distribution, partnerships, multi-language product capabilities.

Our retail customers such as Wal-Mart, Best Buy, [Monopre], Safeway, [Cossino] and Target, among others, are influencing other retailers and CP companies by changing the dynamics of the way they compete in their respective markets every day. With a blue chip customer base and a proven track record of delivering business results, we continue to see additional customers around the world adopting DemandTec as we believe we are becoming recognized as the safe choice in consumer demand management market.

Last quarter we spoke about expanding our global presence, with our competitive selection at Conad, a large Italian retailer and we are pleased to share another example of this trend with you inthe third quarter when we added Pharmacia Amada or Fasa, the largest drugstore chain in Latin America, with more than 160 million shoppers per year.

Fasa purchased our flagship DemandTec Software as a Service application for use across their entire chain of stores spanning Chile, Peru and Mexico. Fasa selected DemandTec for multiple reasons, including our intuitive user interface which we discussed last call as part of our latest software release, our solid science platform, domain expertise and software as a service business model.

Second component to our growth strategy is to expand our retail relationships by delivering measurable results which drive the adoption of incremental solutions as well as renewals. Inthe third quarter we were pleased the successful implementation of the DemandTec price led directly to follow on sales of our promotion and markdown solutions. Both of these add on solutions have the ability to deliver significant ROI for our customers and they have the ability of generating meaningful revenue for DemandTec as well.

We are thrilled to expand our relationships to the largest retailers of the world in the third quarter, Target and Best Buy, both of whom signed multi-year multi-million dollar agreements for additional DemandTec solutions after successfully deploying our flagship DemandTec price solution.

We believe these add on sales are evidence of several factors. First, they show how leading retailers are making significant investments in technology to improve their pricing strategies to gain market share. Second, they further demonstrate DemandTec’s ability to deliver additional solutions that result in significant value adds to our customers. Finally, they show that our customer relationships can provide significant follow on opportunities for along term perspective.

In addition, we renewed our long term relationship with Brookshire Grocery Company. This was the third time that Brookshire has renewed their relationship with DemandTec and their current agreement includes our DemandTec price and DemandTec promotion solutions. Brookshires is entering their sixth year as DemandTec customer and they use our solutions to support pricing activities at over 150 stores. What is equally interesting is the fact that they use a competitors back end ERP system yet they continue to renew their competitive their commitment to DemandTec.

Pricing optimization inan area that has significant impact on a retailers competitiveness and going with anything but the best solution in the market is simply not a viable strategy for retailers.

Three, we are pleased to continue making progress toward a third component of our growth strategy during the quarter. Leveraging our success with retailers to provide our applications to CP companies, our goal in this area is twofold. First, to get as many CP companies as possible to upgrade to more advance analytical solutions after they begin to input trade promotion information into our SAS based solution as dictated by the retailer trading partner. And second, after CP companies become more familiar with DemandTec, they seethe power of the information and the solutions that we deliver, to upsell them to thecore promotion optimization solutions that our retailer customers are using to their benefit on a daily basis.

As part of this effort it is important that we see increased usage of the DemandTec tradepoint network, between retailers and CP companies. The more these parties collaborate, the better the value for every party involved. In doing so, we stand to benefit from a growing network effect. To that point, we recently announced a $1 millionth trade deal managed between retailers and their trading partners using DemandTec tradepoint network. This is an important milestone in proof point, the growing traction of our solution inthe marketplace. Retailers and CP companies are using our DemandTec tradepoint network to negotiate trade deals back and forth. They are not simply submitting information and picking up the phone to finish negotiations. This is evidenced by the fact that each trade deal is touched on average, 3.5 times by the retailer and the CP company.

In addition to the growing use of DemandTec tradepoint network, we also are encouraged by a recent survey conducted by Booze Allen Hamilton. In this survey, 92% of retailers said collaboration was very important while the remaining 8% said it was important. From CP companies perspective, 56% rated collaboration as very important, while 39% rated it as important.

Thekey benefits of collaboration by both CP companies and retailers included not only ROI and effective promotions but revenue growth, market share gains and more efficient planning. We believe this is encouraging as it relates to the future interest in DemandTec tradepoint network. We believe DemandTec is uniquely positioned to benefit from this trend due to our relationships with industry leading retailers.

CP companies such as Con-Agra, Kelloggs, Kraft, Nestle are notable examples of companies that renewed their fee based option to the DemandTec tradepoint network. We are also pleased to share with you that during the quarter, Kraft, Nestle and Hershey upgraded to the DemandTec promotions solution as well.

In order to ensure our continued success, I am pleased to announce that Bill Phelps has been promoted to Chief Customer Officer. Bill will lead the functional areas of engineering, product management, product services and customer support. He joined DemandTec last year, a senior VP of Professional Services, after a distinguished 17 year career at Kana, CrossWorlds Software, Booz, Allen & Hamilton and Andersen. Bill hasan industrial engineering degree from Stanford University and we are confident that this change will leverage our software as a service business model and ensure the success of our customers as well as DemandTec.

In addition, Jim Dai, our Senior VP of Engineering, will be leaving DemandTec after four years of service. Excepting the end of our fiscal year ending February 2008. I would like to thank Jim for his dedication and professionalism over the last four years.

And finally, we are pleased to add Ron Baker, a highly experienced industry veteran to our Board of Directors atthe beginning of the fourth quarter. Ron was a consumer products industry consultant and retired Nestle executive. Following a career of 20 years that included executive positions in logistics, management of information systems and financial management, we believe there is a very large CDM opportunity with CP companies from along term perspective and we are particularly looking forward to Ron’s contributions and advice as we expand our business in that strategic area.

In summary, our third quarter results were solid and we are optimistic about our outlook for the remainder of the year. Interest in our solutions remains high and we are executing against our three point growth strategies designed to position DemandTec as a leader inthe large and growing consumer demand management market. With that, let me turn it over to Mark to go through the financials.

Mark Culhane

Thanks Dan. I’ll provide more details on our third quarter operating results, followed by financial guidance for the fourth quarter and full year fiscal 2008 before opening the call for questions.

Let me begin with the income statement. Total revenue for the third quarter was $15.9 million, an increase of 49% over the comparable period last year and 9% sequentially over our second quarter. To reiterate from our last earnings call, DemandTec has a subscription based business model where we recognize revenue ratably over the term of the contract. The majority of our revenue is generated from our retail customers with pricing based on the number of stores, product categories and SKUs. Generally, these retail contracts typically have an average annual contract value of approximately $2 million with term lengths of two to three years.

Pricing for CP companies, on the other hand, is generally based on the number of categories or retailer programs being automated. The average deal size here is much smaller, typically inthe tens of 1,000’s of dollars, but the long term strategy is that as we prove our value, CP companies will expand their use of our solutions throughout the company, leading to recurring customer relationships, significantly greater in value. Contracts with CP companies are typically one year terms.

We generated 90% of our third quarter revenue from the retail industry, with 10% coming from the CP industry. This compares to a vertical mix of 94% and 6% respectively for full year fiscal 2007. It is worth noting that our tradepoint acquisition occurred in November 2006 and has been the primary driver to our revenue with CP companies.

Geographically, we generated $14 million or 88% of total revenue from the United States inthe third quarter. This is an increase of 42% compared to $9.9 million or 92% total revenue inthe year ago period. Revenue from international operations was $1.9 million or 12% of our total revenue inthe third quarter. This is an increase of approximately 137% compared to $817,000 or 8% of total revenue inthe year ago period. We believe there is a significant growth opportunity inthe international markets and we expect that our international revenue will become a larger percentage of total revenue in future years.

Turning to costs and profitability, we will be discussing our results on both a GAAP and non-GAAP basis. Please be sure to look at our press release for a reconciliation of non-GAAP to GAAP amounts. I’ll begin with a summary of our non-GAAP results, which excludes non cash expenses associated with stock based compensation and amortization of acquired intangibles associated with the tradepoint acquisition.

Non-GAAP gross profit was $11.1 million inthe third quarter, representing a year-over-year increase of 48%. Non-GAAP gross profit in the third quarter excludes $154,000 of amortization of intangibles and $539,000 of stock based compensation. Non-GAAP gross margin was 69.5%, an increase over the company’s full year fiscal 2007 gross margin of 67.8%. Our long term target for non-GAAP gross margin is 78%-80%, which depends on our achieving economies of scale from our infrastructure investments.

Turning to non-GAAP operating expenses, non-GAAP R&D expense was $5 million, a 33% increase year-over-year and represented 31.5% on a percentage of revenue basis. Non-GAAP R&D expense excludes $580,000 of stock based compensation expense. DemandTec’s R&D expense is higher as a percentage of revenue compared to other software as a service providers, as we are addressing a complex solution required expertise in both science and software development and we are investing aggressively to extend our leadership position, given we are still in the early stages of what we believe is a significant market opportunity. From along term perspective, we expect R&D to decline as a percentage of revenue even as it grows in absolute dollars.

Non-GAAP sales and marketing expense was $4.1 million during the third quarter, a 41% increase year-over-year and represented 25.7% on a percentage of revenue basis. Non-GAAP sales and marketing expense excludes $605,000 of stock based compensation expense.

During the third quarter, non-GAAP general and administrative expense was $1.6 million, a 131% increase year-over-year and represented 10.1% on a percentage of revenue basis. Non-GAAP G&A expense excludes $340,000 of stock based compensation expense. The increase in non-GAAP G&A expense from the prior year quarter is primarily related to the costs associated with becoming a public company.

Our non-GAAP operating income was $352,000 inthe third quarter, up from $78,000 in the year ago quarter. Non-GAAP operating income excludes $2.1 million of stock based compensation expense and $243,000 of amortization of purchased intangibles. Total non operating income was $1.2 million inthe third quarter, compared to a non operating expense of $231,000 inthe year ago quarter. The increase in non operating income was mainly due to our increased cash balance as a result of our IPO in the second quarter and the fact that we no longer have interest bearing debt on our balance sheet.

In the third quarter, the company generated non-GAAP pre-tax income of $1.5 million and we recorded a $181,000 income tax provision principally related to Federal and State alternative minimum tax and international taxes. This led to third quarter non-GAAP net income of $1.3 million or non-GAAP earnings per share of $0.04 based on 32.4 million fully diluted weighted average shares outstanding. This is an improvement from a non-GAAP loss per share of $0.03 in the year ago period.

Looking atthe results on a GAAP basis, including stock based compensation expense and amortization expense of intangibles, our GAAP gross profit was $10.4 million, our operating loss was $2 million, our net loss was $967,000 and our GAAP loss per share was $0.04 based on 26.2 million weight average shares outstanding. This compares to a GAAP loss per share of $0.06 in the year ago quarter.

Turning to the balance sheet, cash and marketable securities were $74.1 million atthe end of the third quarter, this represented a slight decrease of approximately $1.1 million from the end of the previous quarter. The overall decrease in cash and marketable securities was due primarily to a $1.8 million payment related to offering costs associated with our IPO and a $1.3 million payment on a note payable to tradepoint shareholders, offset by positive free cash flow of $1.9 million. The remains approximately $500,000 to be paid off on the tradepoint shareholder’s note payable inthe next 12 months.

Our accounts receivable balance atthe end of the third quarter was $17.5 million, representing an adjusted DSO of 76 days, taking into consideration thechange in deferred revenue, given we have a subscription based business model. This compares to 80 days atthe end of the previous quarter. There can be material fluctuations from a short term perspective, given the large valued associated with our retail billings, but from along term perspective, we target our adjusted DSO inthe range of 60-70 days.

Total deferred revenue for the third quarter was $52.6 million, an increase of approximately $5 million from the end of the second quarter. The sequential increase in deferred revenue was higher than normal and was due to the timing and size of billings related to both existing contracts as well as new and renewal contracts. This larger increase skews both the current period and future comparisons on this balance sheet account.

As we pointed out on our last earnings call, our deferred revenue may fluctuate on a quarter to quarter basis due to factors such as timing of renewals, occasions where customers pay for multiple years up front and the fact that our average contract sizes can be large. As we have stated on several occasions, changes in deferred revenue quarter to quarter plus revenue ina quarter area proxy for billings inthe quarter, but not bookings, given we do large multi-year agreements and generally only bill the first year up front.

Finally, looking at our cash flow. We generated positive cash from operations of $2.6 million inthe quarter and used $679,000 on capital expenditures, resulting in $1.9 million of free cash flow. We expect our cash flow to fluctuate on a quarter to quarter basis but we believe that we will deliver continued growth in cash flow on an annual basis.

For the first nine months of fiscal 2008, the company has generated $8.2 million in cash from operations and used $2.9 million on capital expenditures, resulting in $5.3 million in positive free cash flow. This compares to the year ago period where we generated $105,000 in cash from operations and used $1.4 million on capital expenditures resulting in $1.3 million of negative free cash flow.

In addition, on a year to date basis, we are currently running at a free cash flow margin of approximately 12%, above our target of 10% entering the year. We expect our free cash flow margin to end the year slightly above our 10% target. Before turning it over to questions, I will finish by providing guidance for the fourth quarter and our fiscal year 2008, ending February 29, 2008. The operating income and earnings per share guidance I’m going to give are non-GAAP and exclude stock based compensation expense and amortization of intangibles.

We expect our fourth quarter revenue to range from $17.1-$17.4 million. Our non-GAAP operating income to bein a range of $500,000-$700,000 and our non-GAAP earnings per share to be $0.04 based on fully diluted weighted average shares outstanding of approximately 33 million. With the ranges that I just mentioned for our fourth quarter, our fiscal 2008 expectations are for revenue to range from $61-$61.3 million. Our non-GAAP operating income to bein a range of $600,000-$800,0000 and our non-GAAP earnings per share to be $0.07-$0.08. This assumes fully diluted weighted average shares outstanding for the year of approximately 23.3-23.5 million shares.

As it relates to fiscal 2009, we are currently in the middle of our planning process. From a high level perspective, our goal will be to continue to invest in our business and focus on revenue growth and market share gains while expanding our non-GAAP gross and operating margins. We are optimistic in our ability to doso given our current outlook. Our plan is to provide detailed fiscal year ’09 and first quarter guidance on our fiscal 2008 year end call and we believe it would be appropriate for analysts to allow us to complete our planning process and update the street appropriately before adjusting their current fiscal ’09 models.

In summary, our third quarter results were once again strong and we continue to be optimistic about our outlook. With that we will now open the call up for any questions. Operator.

Question-and-Answer Session

Operator

Thank you sir, we will now being the question and answer session. As a reminder, if you have a question, please press the star, followed by the one on your touchtone phone. If you would like to withdraw your question, press the star followed by the two. If you’re using speaker equipment, you will need to lift the handset before making your selection. Our first question comes from Jason Maynard with Credit Suisse, please go ahead.

Jason Maynard – Credit Suisse

Good afternoon guys and congratulations. You guys are selling into some retailers that are doing well and others that aren’t doing so great, I’m curious as to get your perspective on what you’re seeing at least from your dealings with some of these customers around the macroeconomic impact that’s going on and some of the concern about consumer spending because clearly you’re winning some of these deals with some folks that are having some trouble and I’m curious as to what’s the dynamic and the conversation like with those customers?

Daniel Fishback

Hey Jason it’s Daniel. I’ll take that question. From our perspective and the industry’s perspective, there’s many segments of retail. If you look at our customer base today, some 60% of our retail customers arefast moving consumer goods, FMCG, that’s grocery and mass merchants. In many cases, that segment of retail, historically, has been counter-cyclical in nature. Disposable dollars by consumers are spent at the grocery store not at restaurants which tend to compete again for those mass merchant and I think Wal-mart has exciting news today on their business.

Certainly, as you being to look at areas of apparel and the like, from my purview, those segments tend to be more hit and I think thenews reflects that, we don’t sell to those markets so, we don’t have a lot of insight into that. Inthe consumer electronics area, much has been published this week which we all read at the CES conference in Vegas, I mean the tone of the comments are dramatically different between a Target a Best Buy and a Circuit City, so clearly we see the biggest and strongest and most agile retailers taking an opportunity to make investments and understanding the consumer better for a competitive advantage, both in expanding and contracting markets.

So, retails big and segmented, we focus the majority of our efforts in FMCG and our customers arethe biggest and the most stable and can really look at I believe from my perspective look atthe ebbs and flows inthe economy as opportunities for market share gains.

Jason Maynard – Credit Suisse

Maybe shift over to Mark here, we’ve been waiting for deferred revenues the last couple quarters to show that sort of normal historical dip that I guess you would expect to see and you’ve obviously beat on that line item the last couple quarters. Any sort of thoughts that you should give us in terms of how you think Q4 will shake out along the deferred revenue line and general what the tone of billings looks like.

Mark Culhane

Yeah Jason, we don’t really guide to deferred revenue. I think we’ve put out strong guidance for Q4 as we mentioned, we’re pleased to seethe growth in deferred revenue for the third quarter, it was better than normal driven by billings, better than normal, from a combination of existing contracts and billings related to those as well as renewals in the quarter, one of which we highlighted, Brookshire, in our comments as well as new billings. You know we talked about it as part of our strategy, continuing to make our customers successful and sell them more things and we talked about Target and Best Buy and so forth, so, we continue to have a positive outlook on our fourth quarter.

Jason Maynard – Credit Suisse

Okay, great. Well, good job, thanks.

Operator

Thank you, our next question comes from Peter Kuper with Morgan Stanley. Please go ahead.

Peter Kuper – Morgan Stanley

Great, thanks very much. In general guys you talked about Target and Best Buy as coming up, large, credible companies, obviously, extending their relationship here, is this part of, like a Best Buy for example, becoming more of a global franchise, looking to you guys as a strategic partner here, or is it more just, a little more incremental in let’s say the current US accounts? Give a little more color on the relationship there as it’s developing here.

Daniel Fishback

Certainly the color I can provide you given the contractual agreements we have with our customers and our ongoing policy regarding bookings disclosure, they’re expanding their relationship with us and as a result of our second point of our three point strategy, which is to invest in making those customers successful and then ultimately measuring that success by their satisfaction as well as their increased investment in our technologies. So you know certainly they’ve expanded their footprint with us.

Peter Kuper – Morgan Stanley

Right, I wasn’t trying to speak ina numbers message, I was getting a sense, is Best Buy expanding into China for example, kind of curious as to the global expansion plans you guys becoming now this kind of strategic partner as the companies expand their footprint versus anything you’re doing inthe existing account, because it’s a function of adding more value as you’re replacing other solutions that some shops have or another had one other vendor in their alongside you et cetera.

Daniel Fishback

Yeah, again, I can’t give you specifics about what they’re going to do except that we are kind of a strategic relationship with them that goes back to the summer of 2004 and we’re participating with them both domestically and internationally.

Mark Culhane

And I think as they expand internationally that clearly provides opportunities for us as they continue to grow on an international basis as well.

Peter Kuper – Morgan Stanley

Got it, that’s great and then two more little ones maybe if I could. On tradepoint I think you mentioned point number three Dan in your commentary something we’ve looked at as potential upside down the road here, the million transaction milestone, that’s certainly great. What are the economics looking like for that now as you’re getting to a critical mass here or it’s starting to head towards the critical mass, how are people looking at it from an economics model for you to get some incremental revenue out of that.

Daniel Fishback

Well certainly the business model in most cases are retail customers mandate the usage on the network. They paythe fee for the access to the network and provide a free access option to their trading partners. As we expand the number of value added services that we sell to those manufacturers, again, that can be different by individual retailer, I would see on two fronts. I would see more incremental fee options as well as more traditional DemandTec promotion. Our core promotional product being sold to those manufacturers as they become more and more comfortable with the use of DemandTec via tradepoint. So it’s more add-ons and ultimately more upgrades in year to year promotion.

Peter Kuper – Morgan Stanley

Okay, so investors should be comfortable that if tradepoint not a standalone huge revenue generator, the fact that you get this incremental settle in inthe core certainly a much better acquisition strategy for new business I would guess.

Daniel Fishback

Yes.

Peter Kuper – Morgan Stanley

Okay and then final real quick. Some of these wins, have you guys seen inthe competitive environment how are you seeing the competition as you’re clearly doing very, very well. How is thewin looking this quarter, how is it looking going forward and any competitive replacements specifically that you can site.

Daniel Fishback

Yeah I can’t cite any competitive replacements of merit during the quarter. From a competitive landscape my comments would be that basically more is the same than has changed. Obviously the same competitors that we’ve spoken to inthe past are still out there but we haven’t seen a significant change in competitors or pricing pressure inthe marketplace.

Peter Kuper – Morgan Stanley

Alright, great, thanks again on a great quarter.

Daniel Fishback

Thanks.

Operator

Thank you our next question comes from Brendan Barnicle with Pacific Crest Securities, please go ahead.

Brendan Barnicle – Pacific Crest Securities

Thank you very much. Hey guys I was wondering if you could give us an update on any changes in the sales force, I know there was some talk about maybe adding some heads, anything going on on that side?

Daniel Fishback

No significant numbers to speak of inthe addition of head counts. You know we certainly think that we will probably add somewhere inthe two to four by the end of the fiscal year. So, nothing of merit to speak to significantly on changes there.

Brendan Barnicle – Pacific Crest Securities

Alright and then also you mentioned Kraft and Nestle over at tradepoint and the add-on. How longdo those type of deals take to get the add-on business?

Daniel Fishback

You know we really have again two components today of our CP business. One is the upgrade from the free version to DemandTec tradepoint plus, those sales cycles tend to be relatively short. They tend to be handled in the lion’s share by telemarketing, tele-sales or the internet campaigns. Our sales cycles on the DemandTec promotion, which would bethe usage of our analytical and optimization products by the manufacturer to create better trade promotions for their trading partner, most sales cycles tend to be anywhere from a quarter to three quarters and the like.

Brendan Barnicle – Pacific Crest Securities

And then just lastly it looked like AR was a bit higher this year than it was a year ago, anything in particular attributing to that increase?

Daniel Fishback

No, I think AR and part of that is tied to the better than normal billings inthe quarter. But nothing of substance to comment on, different from the prior quarter in fact our adjusted DSOs you know trended down to 76 days this quarter.

Brendan Barnicle – Pacific Crest Securities

Great thank you.

Operator

Thank you our next question comes from Laura Lederman with William Blair. Please go ahead.

Laura Lederman – William Blair

Hi guys, great quarter. Following up on some earlier questions. Can you elaborate a little on the economy, you know we all seem confused whether we’re heading into a more difficult substantial environment or not. What are you hearing from the customers you talk to in general about what they’re seeing inthe economy, more of a high level macro question and also following up on the competition question, any news on SAPs new re-releasing of the product which they said they were going to doa couple months ago.

Daniel Fishback

Laura this is Dan. Let me address the first part and you broke up a little on my end on the second part of your question so let me address the first part then I’ll have to ask you to repeat the second part of your question.

That being said, generally as I mentioned earlier, there are segments of retail that are dramatically different. My take after some research and talking to our customers is fast moving consumer goods and the leaders in their core verticles upside of apparel, which we don’t sell to, all seem cautiously optimistic and are bullish about their ability to gain share.

From our perspective the common theme with our customers is, they want to understand more about their customers and DemandTec provides analytical ways to do that to make pricing and promotion and mark down and marketing decisions actionable to derive economic benefits. And from our perspective we believe that is as important in a growing economy as an uncertain economy.

Laura Lederman – William Blair

The second question was on SAP and they were supposed to put out a new version of a product they acquired, it was integrated with SAP traditional products. Any comment on that or any word on the street of when that’s expected?

Daniel Fishback

We have not seen achange atall on the competitive dynamics of what our competitors are doing today. The only comment I would make, regardless of product introductions, the area of pricing and promotions and mark downs and marketing areso connected to the customer that the only feedback that I could give you is the example of Brookshires, where regardless of what back end system they’re using, they want to understand the most they can about that customer so that they can retain that customer, build more loyalty in that customer and candidly, it’s more than technology, it’s intellectual property, it’s the experience that we bring to bear. Software as a service, it’s agility, so certainly we keep an eye on the competition, but we’re not particularly consumed by that topic today.

Laura Lederman – William Blair

Yeah, who are you seeing where though, in other words where do you see KSF, where do you see SAP, where do you see Oracle or do you not see them much because they’re mainly in apparel?

Daniel Fishback

You know we don’t see them much at all. I mean, candidly, inthe high end of the market we feel like we’re the only provider today that hasa viable software as a service solution among those three companies you mentioned. That platform is uniquely positioned to be dynamic to the changes in consumer behavior and leverage a grid computing platform. So, candidly, I guess maybe in the bottom end of the market we’ll see more competition from a KSF but candidly the dynamics haven’t changed much over the last six months.

Laura Lederman – William Blair

What percentage of the timers are not a competitor in the deal for new customers?

Daniel Fishback

I can’t really comment anything specifics to that. We’ll have to get back to you on that.

Laura Lederman – William Blair

Okay, thanks a lot, once again great quarter.

Daniel Fishback

Thank you.

Operator

Thank you, our next question comes from Patrick Walravens with JMP Securities, please go ahead.

Patrick Walravens – JMP Securities

Great, thank you very much. The business seems to be going nicely, I do have one question, if you look in your filings your largest customer in 2007 was running around $1.25 million a quarter and then that dropped to $600,000 Q1, looks like it went a little lower in Q2, can you help us understand what’s going on there?

Mark Culhane

Yes, it’s Mark. Obviously we can’t comment about specific customers situations but what we can say is we continue to see strong renewals, we have said when a customer renews after being with us for two or three year period which is the general average predominately term length we doin our retail deals, they’re typically fully rolled out by then sothe services piece that may be was representative in that firm’s two to three year deal will clearly not be of the same magnitude inthe go forward deal because they’re fully implements. So, in generally, it’s generally due to things like that and other types of service engagements that we get involved with with our customers that are not ongoing.

Patrick Walravens – JMP Securities

Okay that’s helpful, soin one of these big sort of multi-million-dollar deals, how biga percentage can the service component be in that?

Daniel Fishback

We don’t break it out but historically we’ve said our bookings, the services component of bookings is approximately 15%-20% of an overall bookings on an average sized deal.

Patrick Walravens – JMP Securities

Okay, can it sometimes be 50%?

Daniel Fishback

Sure, I don’t know if it could ever be that high but it ranges and we continue to sell add-on analytic services to that customer after we get involved with them whether it’s things that we’ve talked about inthe past, some of the analytics offerings that we have, customer loss attrition model, image item analysis, stores own analysis, all these kinds of other things that our customers come back and ask us to help them better understand and help them think that through. Those tend to be service engagements that aren’t on a subscription base that keep going, they doit one time.

Patrick Walravens – JMP Securities

Okay, that’s helpful and then Dan, you guys ran this business through a downturn once before and once again I’m curious, what was the demand from the grocery vertical like the last time around?

Daniel Fishback

Yeah I mean one thing nice about the grocery market, it’s fast moving consumer goods, it’s pretty consistent. In cases where inflation is slowest could be good for that market. Inflationary pressure would be real typical for our grocery retailers. Sothe dynamics are different, certainly from our perspective, our customers have become more sophisticated, I mean three or four years agothe general application of scientific applications was almost a novelty, today it’s a must have. So I would assume that based on our history of running this business, we’ll continue to focus an appropriate amount of energy on the grocery market just because that’s a vibrant market that’s real consistent and we understand it.

Mark Culhane

And we got a leadership position.

Patrick Walravens – JMP Securities

Alright, great, thank you guys.

Operator

Thank you our next question comes from Todd Lukasik with Morningstar, go ahead.

Todd Lukasik – Morningstar

Hi, this is Todd. I had a couple questions on the CP side of the business. I was wondering if you could tell me the total number of manufacturers that you have on tradepoint right now and how many are free users versus how many have paid for upgrades?

Mark Culhane

Hey Todd, yeah this is Mark, we don’t provide actual customer count information on a quarterly basis and so forth. What we have said is on thefast moving consumer goods area, depending on who that is, they may have vendor relationships with 500-1,200 vendors, it really depends on who you’re talking about and so forth so typically when they adopt tradepoint network they mandate to all of those vendor partners to start submitting their trade deals through that system

Todd Lukasik – Morningstar

Right, okay and specifically with regards to the use of your promotion product on the CP side, can you tell me again how that’s priced on that side?

Daniel Fishback

The CP products get priced based on the retail programs that they want to use it for and the categories at that particular retail program they want to use it.

Todd Lukasik – Morningstar

Okay, similar to the tradepoint product?

Daniel Fishback

Yes.

Todd Lukasik – Morningstar

Okay, great, thanks a lot.

Operator

Thank you our next question comes from Brian Schwartz with Montgomery & Co. please go ahead.

Brian Schwartz – Montgomery & Co.

Great, thank you. Yeah I was wondering if you gave some color already but maybe you could comment a little bit about the sales process that went into the large Latin American win this quarter, maybe talk a little if a partner brought you into the deal, if this was a normal sales cycle for this market, maybe help us understand the process that went into this big one.

Daniel Fishback

Sure, again, we’ve been in this business providing proven results for nearly six years today, when somebody wants to make this kind of decision, typically they know about us because of our success, I mean retail tends to bea pretty small-knitted community around the globe. Certainly our partnerships with everybody from IBM to AC Nielson to Accenture and their footprints around the globe, when consulted they each always mention us, in this case there was no specifically, I can’t speak to any partner relationship in this case.

Typically we focus on the value proposition, you know this is not a pure technology sales cycle, this has to do with pricing and promotion and the understanding of how consumers behave. This is not about cross docking a palate of goods in an efficient way, so there’s no economies of scale and efficiency behind the scene in our sales cycle so we tend to focus with the executives at a high level on their strategies, we tend to focus on the value proposition of our offering and our people and our partners and typically our sales cycles tend to have much more of a consultative approach on a strategy where our software as a service solution as a means to that end.

Mark Culhane

…tend to stay away from technology and gizmos and IT departments.

Brian Schwartz – Montgomery & Co.

Great and can you also just remind me again just quickly what version or release your solution is now available on and when the next upgrade would be scheduled for?

Daniel Fishback

Current release is 6.1. 6.2 is coming out inthe next week to two weeks actually.

Brian Schwartz – Montgomery & Co.

Great, that’s all I have, thank you for taking my question.

Operator

Thank you there are no further questions inthe queue at this time, I would like to go ahead and turn it back over to management.

Daniel Fishback

Great, my closing remarks, again thank you everyone for joining us, we are very pleased with our Q3 results, we’re making in our opinion strategy gains against our three point growth strategy and we look forward to speaking with you again after the conclusion of our next quarter. Have a good day.

Operator

Ladies and gentlemen this concludes the DemandTec third quarter earnings conference call, if you’d like to listen to a replay of today’s conference, please dial 1-800-405-2236 or 303-590-3000 and enter in passcode 11104661. ACT would like to thank you for your participation, you may now disconnect.

Copyright policy: All transcripts on this site arethe copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES INTHE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!