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.
DemandTec, Inc. (DMAN) F3Q08 Earnings Call January 10, 2008 5:00 PM ET
Operator
Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to theDemandTec third quarter earnings conference call. During today’s presentation allparties will be ina listen onlymode. Following thepresentation, theconference will beopen for questions. If you have aquestion please press thestar followed by theone on your touchtone phone. If youwould like to withdraw your question, please press thestar followed by thetwo. If you’re using speaker equipment,please lift the handsetbefore making your selection. Thisconference is being recorded today, Thursday, January 10, 2008. I wouldnow like to turn theconference over to Mr. Tim Dolan, please go ahead sir.
Tim Dolan
Good afternoon, thank you for joining us on today’sconference call to discuss DemandTec’s third quarter fiscal 2008 results. This call is also being broadcast live over theweb and can beaccessed in theinvestor relations section of DemandTec’s website atwww.demandtec.com. With meon today’s call are DanFishback, DemandTec’s president and CEO and Mark Culhane, DemandTec’s CFO.
After themarket close today DemandTec issued apress release with results for its third fiscal quarter ended November 30, 2007. Acopy of the release isavailable online at thecompany’s website. Please note that wewill be discussing inthis conference call non-GAAP costs and expenses inoperating and net profitability numbers which excludes stock based compensationand amortization of intangible assets. We refer you to thepress release for reconciliation of these non-GAAP amounts and their comparableGAAP amounts.
During thecourse of this conference call, DemandTec’s management may make forward lookingstatements regarding financial projects, plans and objections for futureoperations and managements beliefs about potential market size and growth aswell as the company’sfuture performance, financial condition or results of operations. These forward looking statements arenot historical facts but rather reflect DemandTec’s current expectations andbeliefs based on currently available information. We undertake no obligation to provide updateson the future. DemandTec’s actual results may differmaterially from those projected. Therisk factors section of our form10Q on file with theSEC discloses risks that could cause these differences. Please note that any future product, featureor specifications referenced intoday’s call areinformational only and arenot commitments to deliver any technology or enhancement. DemandTec reserves theright to modify its product plans atany time.
With that said I’d now like to turn thecall over to DemandTec’s President and CEO, Dan Fishback.
Daniel Fishback
Thank you Tim. Helloand thank everyone for joining us today. I’m going to start with asummary of our performance and other accomplishments during thequarter and then Mark will provide some details on our financial results for thequarter, after which we will take questions.
We arepleased with thecompany’s financial results for thequarter which were highlighted by strong revenue growth and non-GAAP operatingprofitability that were both above our guidance, along with continued strength infree cash flow. Solid execution of ourthree point growth strategy is driving our financial performance.
Taking alook at thefinancial highlights of thequarter, total revenue came inat $15.9 million,representing a 49%growth on ayear-on-year basis, and 9% growth on asequential basis. From aprofitability perspective, better than expected revenue took thecompany to deliver non-GAAP operating income of $352,000 inthe quarter, which wasalso above our guidance. To re-iterate akey point on our lastearnings call, we are inthe early stages ofwhat we believe is asignificant market opportunity and our top priorities continue to berevenue growth and market share gains.
With that said we arefocused on expanding our margins and increasing our cash flow, atthe same time weinvest in our growthstrategy initiatives. For thefirst nine months offiscal 2008 thecompany generated approximately $8.2 million incash from operations and extended $2.9 million incapital expenditures, resulting inapproximately $5.3 million infree cash flow.
We believe theold ways of determining price and building customer loyalty for retailers andconsumer product manufacturers or CP companies such as simple costplus pricing, following competitor’s pricing, one size fits allpromotions are nolonger sufficient intoday’s ultra-competitive and dynamic market. DemandTec’s solutions aredesigned to optimize pricing, promotion, mark down and other merchandising andmarketing decisions to help retailers and CP companies achieve their revenue,profitability, their sales volume objectives while reinforcing their bannersand brand.
Our products use thescience of synthesizing demand, consumer and market intelligence to understand,predict and influence consumer behavior. In addition, byusing a SaaS businessmodel to deploy our software, we enable our customers to respond more rapidlyto changing consumertrends and preferences than they would beable to do with onpremise software. We believe this is notonly a differentiatorfor DemandTec today but also asignificant competitive barrier for thelong-term as well, given theSaaS business model benefits for consumer demand management or CDM.
I would like to provide areview of our three point growth strategy along with anupdate on how we aremaking progress ineach area. Thefirst component to our growth strategy is to continue to extend industryleadership position with theworld’s largest retailers. We intend tocontinue to leverage our strong market position to pursue additional retailopportunities around theglobe and leverage our investments indistribution, partnerships, multi-language product capabilities.
Our retail customers such as Wal-Mart, Best Buy, [Monopre],Safeway, [Cossino] and Target, among others, areinfluencing other retailers and CP companies by changingthe dynamics of theway they compete intheir respective markets every day. Witha blue chip customerbase and a proventrack record of delivering business results, we continue to seeadditional customers around theworld adopting DemandTec as we believe we arebecoming recognized as thesafe choice inconsumer demand management market.
Last quarter we spoke about expanding our global presence,with our competitive selection atConad, a large Italianretailer and we arepleased to share another example of this trend with you inthe third quarter whenwe added Pharmacia Amada or Fasa, thelargest drugstore chainin Latin America, with more than 160 million shoppers peryear.
Fasa purchased our flagship DemandTec Software as aService application for use across their entire chainof stores spanning Chile,Peru and Mexico. Fasa selected DemandTec for multiple reasons,including our intuitive user interface which we discussed last call as part ofour latest software release, our solid science platform, domain expertise andsoftware as a servicebusiness model.
Second component to our growth strategy is to expand ourretail relationships by delivering measurable results which drive theadoption of incremental solutions as well as renewals. Inthe third quarter wewere pleased thesuccessful implementation of theDemandTec price led directly to follow on sales of our promotion and markdown solutions. Both of these add on solutions have theability to deliver significant ROI for our customers and they have theability of generating meaningful revenue for DemandTec as well.
We arethrilled to expand our relationships to thelargest retailers of theworld in thethird quarter, Target and Best Buy, both of whom signed multi-yearmulti-million dollar agreements for additional DemandTec solutions aftersuccessfully deploying our flagship DemandTec price solution.
We believe these add on sales areevidence of several factors. First, theyshow how leading retailers aremaking significant investments intechnology to improve their pricing strategies to gain market share. Second, they further demonstrate DemandTec’sability to deliver additional solutions that result insignificant value adds to our customers. Finally, they show that our customer relationships can providesignificant follow on opportunities for along termperspective.
Inaddition, we renewed our longterm relationship with Brookshire Grocery Company. This was thethird time that Brookshire hasrenewed their relationship with DemandTec and their current agreement includesour DemandTec price and DemandTec promotion solutions. Brookshires is entering their sixth year asDemandTec customer and they use our solutions to support pricing activities atover 150 stores. What is equallyinteresting is thefact that they use acompetitors back end ERP system yet they continue to renew their competitivetheir commitment to DemandTec.
Pricing optimization inan area that hassignificant impact on aretailers competitiveness and going with anything but thebest solution in themarket is simply not aviable strategy for retailers.
Three, we arepleased to continue making progress toward athird component of our growth strategy during thequarter. Leveraging our success withretailers to provide our applications to CP companies, our goal inthis area is twofold. First, to getas many CP companies as possible to upgrade to more advance analyticalsolutions after they begin to input trade promotion information into our SASbased solution as dictated by theretailer trading partner. And second,after CP companies become more familiar with DemandTec, they seethe power of theinformation and thesolutions that we deliver, to upsell them to thecore promotionoptimization solutions that our retailer customers areusing to their benefit on adaily basis.
As part of this effort itis important that we seeincreased usage of theDemandTec tradepoint network, between retailers and CP companies. Themore these parties collaborate, thebetter the value forevery party involved. Indoing so, we stand to benefit from agrowing network effect. To that point,we recently announced a$1 millionth trade deal managed between retailers and their trading partnersusing DemandTec tradepoint network. Thisis an importantmilestone in proofpoint, the growingtraction of our solution inthe marketplace. Retailers and CP companies areusing our DemandTec tradepoint network to negotiate trade deals back andforth. They arenot simply submitting information and picking up thephone to finish negotiations. This isevidenced by the factthat each trade deal is touched on average, 3.5 times by theretailer and the CPcompany.
Inaddition to thegrowing use of DemandTec tradepoint network, we also areencouraged by a recentsurvey conducted by Booze Allen Hamilton. In this survey,92% of retailers said collaboration was very important while theremaining 8% said it wasimportant. From CP companiesperspective, 56% rated collaboration as very important, while 39% rated itas important.
Thekey benefits ofcollaboration by both CP companies and retailers included not only ROI andeffective promotions but revenue growth, market share gains and more efficientplanning. We believe this is encouragingas it relates to thefuture interest inDemandTec tradepoint network. Webelieve DemandTec is uniquely positioned to benefit from this trend due to ourrelationships with industry leading retailers.
CP companies such as Con-Agra, Kelloggs, Kraft, Nestle arenotable examples of companies that renewed their fee based option to theDemandTec tradepoint network. We arealso pleased to share with you that during thequarter, Kraft, Nestle and Hershey upgraded to theDemandTec promotions solution as well.
Inorder to ensure our continued success, I ampleased to announce that Bill Phelps hasbeen promoted to Chief Customer Officer. Bill will lead thefunctional areas of engineering, product management, product services andcustomer support. Hejoined DemandTec last year, asenior VP of Professional Services, after adistinguished 17 year career atKana, CrossWorlds Software, Booz, Allen & Hamilton and Andersen. Bill hasan industrialengineering degree from Stanford Universityand we are confidentthat this changewill leverage our software as aservice business model and ensure thesuccess of our customers as well as DemandTec.
Inaddition, Jim Dai, our Senior VP of Engineering, will beleaving DemandTec after four years of service. Excepting theend of our fiscal year ending February 2008. I would like to thank Jim for his dedication and professionalism over thelast four years.
And finally, we arepleased to add Ron Baker, ahighly experienced industry veteran to our Board of Directors atthe beginning of thefourth quarter. Ron was aconsumer products industry consultant and retired Nestle executive. Following acareer of 20 years that included executive positions inlogistics, management of information systems and financial management, webelieve there is avery large CDM opportunity with CP companies from along term perspectiveand we areparticularly looking forward to Ron’s contributions and advice as we expand ourbusiness in thatstrategic area.
Insummary, our third quarter results were solid and we areoptimistic about our outlook for theremainder of theyear. Interest inour solutions remains high and we areexecuting against our three point growth strategies designed to positionDemandTec as a leader inthe large and growingconsumer demand management market. Withthat, let me turn itover to Mark to go through thefinancials.
Mark Culhane
Thanks Dan. I’llprovide more details on our third quarter operating results, followed byfinancial guidance for thefourth quarter and full year fiscal 2008 before opening thecall for questions.
Let mebegin with the incomestatement. Total revenue for thethird quarter was $15.9 million, anincrease of 49% over thecomparable period last year and 9% sequentially over our second quarter. To reiterate from our last earnings call,DemandTec has asubscription based business model where we recognize revenue ratably over theterm of thecontract. Themajority of our revenue is generated from our retail customers with pricingbased on the number ofstores, product categories and SKUs. Generally, these retail contracts typically have anaverage annual contract value of approximately $2 million with term lengths oftwo to three years.
Pricing for CP companies, on theother hand, is generally based on thenumber of categories or retailer programs being automated. Theaverage deal size here is much smaller, typically inthe tens of 1,000’s ofdollars, but the longterm strategy is that as we prove our value, CP companies will expand their useof our solutions throughout thecompany, leading to recurring customer relationships, significantly greater invalue. Contracts with CP companies aretypically one year terms.
We generated 90% of our third quarter revenue from theretail industry, with 10% coming from theCP industry. This compares to avertical mix of 94% and 6% respectively for full year fiscal 2007. Itis worth noting that our tradepoint acquisition occurred inNovember 2006 and hasbeen the primarydriver to our revenue with CP companies.
Geographically, we generated $14 million or 88% of total revenuefrom the United States inthe thirdquarter. This is anincrease of 42% compared to $9.9 million or 92% total revenue inthe year agoperiod. Revenue from internationaloperations was $1.9 million or 12% of our total revenue inthe third quarter. This is anincrease of approximately 137% compared to $817,000 or 8% of total revenue inthe year agoperiod. We believe there is asignificant growth opportunity inthe internationalmarkets and we expect that our international revenue will become alarger percentage of total revenue infuture years.
Turning to costs and profitability, we will bediscussing our results on both aGAAP and non-GAAP basis. Please besure to look at ourpress release for areconciliation of non-GAAP to GAAP amounts. I’ll begin with asummary of our non-GAAP results, which excludes non cash expenses associatedwith stock based compensation and amortization of acquired intangiblesassociated with thetradepoint acquisition.
Non-GAAP gross profit was $11.1 million inthe third quarter,representing ayear-over-year increase of 48%. Non-GAAPgross profit in thethird quarter excludes $154,000 of amortization of intangibles and $539,000 ofstock based compensation. Non-GAAP grossmargin was 69.5%, anincrease over thecompany’s full year fiscal 2007 gross margin of 67.8%. Our longterm target for non-GAAP gross margin is 78%-80%, which depends on ourachieving economies of scale from our infrastructure investments.
Turning to non-GAAP operating expenses, non-GAAP R&Dexpense was $5 million, a33% increase year-over-year and represented 31.5% on apercentage of revenue basis. Non-GAAPR&D expense excludes $580,000 of stock based compensation expense. DemandTec’s R&D expense is higher as apercentage of revenue compared to other software as aservice providers, as we areaddressing a complexsolution required expertise inboth science and software development and we areinvesting aggressively to extend our leadership position, given we arestill in theearly stages of what we believe is asignificant market opportunity. From along term perspective,we expect R&D to decline as apercentage of revenue even as itgrows in absolutedollars.
Non-GAAP sales and marketing expense was $4.1 million duringthe third quarter, a41% increase year-over-year and represented 25.7% on apercentage of revenue basis. Non-GAAPsales and marketing expense excludes $605,000 of stock based compensationexpense.
During thethird quarter, non-GAAP general and administrative expense was $1.6 million, a131% increase year-over-year and represented 10.1% on apercentage of revenue basis. Non-GAAPG&A expense excludes $340,000 of stock based compensation expense. Theincrease in non-GAAPG&A expense from theprior year quarter is primarily related to thecosts associated with becoming apublic company.
Our non-GAAP operating income was $352,000 inthe third quarter, upfrom $78,000 in theyear ago quarter. Non-GAAP operating income excludes $2.1million of stock based compensation expense and $243,000 of amortization ofpurchased intangibles. Total nonoperating income was $1.2 million inthe third quarter,compared to a nonoperating expense of $231,000 inthe year agoquarter. Theincrease in nonoperating income was mainly due to our increased cash balance as aresult of our IPO in thesecond quarter and thefact that we no longer have interest bearing debt on our balance sheet.
In thethird quarter, thecompany generated non-GAAP pre-tax income of $1.5 million and we recorded a$181,000 income tax provision principally related to Federal and Statealternative minimum tax and international taxes. This led to third quarter non-GAAP net incomeof $1.3 million or non-GAAP earnings pershare of $0.04 based on 32.4 million fully diluted weighted average sharesoutstanding. This is animprovement from anon-GAAP loss pershare of $0.03 in theyear ago period.
Looking atthe results on aGAAP basis, including stock based compensation expense and amortization expenseof 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 pershare was $0.04 based on 26.2 million weight average shares outstanding. This compares to aGAAP loss per share of$0.06 in theyear ago quarter.
Turning to thebalance sheet, cash and marketable securities were $74.1 million atthe end of thethird quarter, this represented aslight decrease of approximately $1.1 million from theend of the previousquarter. Theoverall decrease incash 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 anote payable to tradepoint shareholders, offset by positive free cash flowof $1.9 million. Theremains approximately $500,000 to bepaid off on thetradepoint shareholder’s note payable inthe next 12 months.
Our accounts receivable balance atthe end of thethird quarter was $17.5 million, representing anadjusted DSO of 76 days, taking into consideration thechange indeferred revenue, given we have asubscription based business model. Thiscompares to 80 days atthe end of theprevious quarter. There can bematerial fluctuations from ashort term perspective, given thelarge valued associated with our retail billings, but from along term perspective,we target our adjusted DSO inthe range of 60-70days.
Total deferred revenue for thethird quarter was $52.6 million, anincrease of approximately $5 million from theend of the secondquarter. Thesequential increase indeferred revenue was higher than normal and was due to thetiming and size of billings related to both existing contracts as well as newand renewal contracts. This largerincrease skews both thecurrent period and future comparisons on this balance sheet account.
As we pointed out on our last earnings call, our deferredrevenue may fluctuate on aquarter to quarter basis due to factors such as timing of renewals, occasionswhere customers payfor multiple years up front and thefact that our average contract sizes can belarge. As we have stated on severaloccasions, changes indeferred revenue quarter to quarter plus revenue ina quarter area proxy for billings inthe quarter, but notbookings, given we dolarge multi-year agreements and generally only bill thefirst year up front.
Finally, looking atour cash flow. We generated positivecash from operations of $2.6 million inthe quarter and used$679,000 on capital expenditures, resulting in$1.9 million of free cash flow. Weexpect our cash flowto fluctuate on aquarter to quarter basis but we believe that we will deliver continued growth incash flow on anannual basis.
For thefirst nine months offiscal 2008, thecompany has generated$8.2 million in cashfrom operations and used $2.9 million on capital expenditures, resulting in$5.3 million inpositive free cash flow. This comparesto the year agoperiod where we generated $105,000 incash from operations and used $1.4 million on capital expenditures resulting in$1.3 million of negative free cash flow.
Inaddition, on a year todate basis, we arecurrently running at afree cash flow marginof approximately 12%, above our target of 10% entering theyear. We expect our free cash flowmargin to end the yearslightly above our 10% target. Beforeturning it over toquestions, I will finish by providing guidance for thefourth quarter and our fiscal year 2008, ending February 29, 2008. Theoperating income and earnings pershare guidance I’m going to give arenon-GAAP and exclude stock based compensation expense and amortization ofintangibles.
We expect our fourth quarter revenue to range from$17.1-$17.4 million. Our non-GAAPoperating income to bein arange of $500,000-$700,000 and our non-GAAP earnings pershare to be $0.04based on fully diluted weighted average shares outstanding of approximately 33million. With theranges that I just mentioned for our fourth quarter, our fiscal 2008expectations are forrevenue to range from $61-$61.3 million. Our non-GAAP operating income to bein arange of $600,000-$800,0000 and our non-GAAP earnings pershare to be$0.07-$0.08. This assumes fully dilutedweighted average shares outstanding for theyear of approximately 23.3-23.5 million shares.
As itrelates to fiscal 2009, we arecurrently in themiddle of our planning process. From ahigh level perspective, our goal will beto continue to invest inour business and focus on revenue growth and market share gains while expandingour non-GAAP gross and operating margins. We are optimisticin our ability to doso given our currentoutlook. Our plan is to provide detailedfiscal year ’09 and first quarter guidance on our fiscal 2008 year end call andwe believe it would beappropriate for analysts to allow us to complete our planning process andupdate the streetappropriately before adjusting their current fiscal ’09 models.
Insummary, our third quarter results were once again strong and we continue to beoptimistic about our outlook. With thatwe will now open thecall up for any questions. Operator.
Question-and-Answer Session
Operator
Thank you sir, we will now being thequestion and answer session. As areminder, if you have aquestion, please press thestar, followed by theone on your touchtone phone. If youwould like to withdraw your question, press thestar followed by thetwo. If you’re using speaker equipment,you will need to lift thehandset before making your selection. Our first question comes from Jason Maynard with Credit Suisse, pleasego ahead.
Jason Maynard –Credit Suisse
Good afternoon guys and congratulations. You guys areselling into some retailers that aredoing well and others that aren’t doing sogreat, I’m curious as to getyour perspective on what you’re seeing atleast from your dealings with some of these customers around themacroeconomic impact that’s going on and some of theconcern about consumer spending because clearly you’re winning some of thesedeals with some folks that arehaving some trouble and I’m curious as to what’s thedynamic and theconversation like with those customers?
Daniel Fishback
Hey Jason it’s Daniel. I’ll take that question. From ourperspective and theindustry’s perspective, there’s many segments of retail. If you look atour customer base today, some 60% of our retail customers arefast moving consumergoods, FMCG, that’s grocery and mass merchants. In many cases,that segment of retail, historically, hasbeen counter-cyclical innature. Disposable dollars by consumers arespent at thegrocery store not atrestaurants which tend to compete again for those mass merchant and I thinkWal-mart has exciting newstoday on their business.
Certainly, as you being to look atareas of apparel and thelike, from my purview, those segments tend to bemore hit and I think thenews reflects that, wedon’t sell to those markets so, we don’t have alot of insight into that. Inthe consumerelectronics area, much hasbeen published this week which we allread at theCES conference inVegas, I mean the toneof the comments aredramatically different between aTarget a Best Buy and aCircuit City, soclearly we see thebiggest and strongest and most agile retailers taking anopportunity to make investments and understanding theconsumer better for acompetitive advantage, both inexpanding and contracting markets.
So, retails bigand segmented, we focus themajority of our efforts inFMCG and our customers arethe biggest and themost stable and can really look atI believe from my perspective look atthe ebbs and flows inthe economy asopportunities for market share gains.
Jason Maynard –Credit Suisse
Maybe shift over to Mark here, we’ve been waiting fordeferred revenues thelast couple quarters to show that sort of normal historical dip that I guessyou would expect to seeand you’ve obviously beat on that line item thelast couple quarters. Any sort ofthoughts that you should give us interms of how you think Q4 will shake out along thedeferred revenue line and general what thetone 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 Q4as we mentioned, we’re pleased to seethe growth indeferred revenue for thethird quarter, it wasbetter than normal driven by billings, better than normal, from acombination of existing contracts and billings related to those as well asrenewals in thequarter, one of which we highlighted, Brookshire, inour comments as well as new billings. You know we talked about itas part of our strategy, continuing to make our customers successful and sellthem more things and we talked about Target and Best Buy and soforth, so, we continue to have apositive 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 withMorgan Stanley. Please go ahead.
Peter Kuper – MorganStanley
Great, thanks very much. In general guysyou talked about Target and Best Buy as coming up, large, credible companies,obviously, extending their relationship here, is this part of, like aBest Buy for example, becoming more of aglobal franchise, looking to you guys as astrategic partner here, or is itmore just, a littlemore incremental inlet’s say thecurrent US accounts? Give alittle more color on therelationship there as it’s developing here.
Daniel Fishback
Certainly thecolor I can provide you given thecontractual agreements we have with our customers and our ongoing policyregarding bookings disclosure, they’re expanding their relationship with us andas a result of oursecond point of our three point strategy, which is to invest inmaking those customers successful and then ultimately measuring that success bytheir satisfaction as well as their increased investment inour technologies. Soyou know certainly they’ve expanded their footprint with us.
Peter Kuper – MorganStanley
Right, I wasn’t trying to speak ina numbers message, Iwas getting a sense,is Best Buy expanding into China for example, kind of curious as to theglobal expansion plans you guys becoming now this kind of strategic partner as thecompanies expand their footprint versus anything you’re doing inthe existing account,because it’s afunction of adding more value as you’re replacing other solutions that someshops have or another had one other vendor intheir alongside you et cetera.
Daniel Fishback
Yeah, again, I can’t give you specifics about what they’regoing to do exceptthat we are kind of astrategic relationship with them that goes back to thesummer of 2004 and we’re participating with them both domestically andinternationally.
Mark Culhane
And I think as they expand internationally that clearlyprovides opportunities for us as they continue to growon an internationalbasis as well.
Peter Kuper – MorganStanley
Got it, that’s great and then two more little ones maybe ifI could. On tradepoint I think youmentioned point number three Dan inyour commentary something we’ve looked atas potential upside down theroad here, the milliontransaction milestone, that’s certainly great. What are theeconomics looking like for that now as you’re getting to acritical mass here or it’s starting to head towards thecritical mass, how arepeople looking at itfrom an economicsmodel for you to getsome incremental revenue out of that.
Daniel Fishback
Well certainly thebusiness model in mostcases are retailcustomers mandate theusage on thenetwork. They paythe fee for theaccess to the networkand provide a freeaccess option to their trading partners. As we expand thenumber of value added services that we sell to those manufacturers, again, thatcan be different by individualretailer, I would seeon two fronts. I would seemore incremental fee options as well as more traditional DemandTecpromotion. Our corepromotional product being sold to those manufacturers as they become more andmore comfortable with theuse of DemandTec viatradepoint. Soit’s more add-ons and ultimately more upgrades inyear to year promotion.
Peter Kuper – MorganStanley
Okay, soinvestors should becomfortable that if tradepoint not astandalone huge revenue generator, thefact that you get thisincremental settle in inthe corecertainly a muchbetter acquisition strategy for new business I would guess.
Daniel Fishback
Yes.
Peter Kuper – MorganStanley
Okay and then final real quick. Some of these wins, have you guys seen inthe competitiveenvironment how areyou seeing thecompetition as you’re clearly doing very, very well. How is thewin looking thisquarter, how is itlooking going forward and any competitive replacements specifically that youcan site.
Daniel Fishback
Yeah I can’t cite any competitive replacements of meritduring thequarter. From acompetitive landscape my comments would bethat basically more is thesame than has changed. Obviously thesame competitors that we’ve spoken to inthe past arestill out there but we haven’t seen asignificant change incompetitors or pricing pressure inthe marketplace.
Peter Kuper – MorganStanley
Alright, great, thanks again on agreat quarter.
Daniel Fishback
Thanks.
Operator
Thank you our next question comes from Brendan Barnicle withPacific Crest Securities, please go ahead.
Brendan Barnicle –Pacific Crest Securities
Thank you very much. Hey guys I was wondering if you could give us anupdate on any changesin thesales force, I know there was some talk about maybe adding some heads, anythinggoing on on that side?
Daniel Fishback
No significant numbers to speak of inthe addition of headcounts. You know we certainly think thatwe will probably add somewhere inthe two to four by theend of the fiscalyear. So, nothing of merit to speak tosignificantly on changesthere.
Brendan Barnicle –Pacific Crest Securities
Alright and then also you mentioned Kraft and Nestle over attradepoint and theadd-on. How longdo those type of dealstake to get theadd-on business?
Daniel Fishback
You know we really have again two components today of our CPbusiness. One is theupgrade from the freeversion to DemandTec tradepoint plus, those sales cycles tend to berelatively short. They tend to behandled in thelion’s share by telemarketing, tele-sales or theinternet campaigns. Our sales cycles on theDemandTec promotion, which would bethe usage of ouranalytical and optimization products by themanufacturer to create better trade promotions for their trading partner, mostsales cycles tend to beanywhere from aquarter to three quarters and thelike.
Brendan Barnicle –Pacific Crest Securities
And then just lastly itlooked like AR was abit higher this year than itwas a year ago,anything in particularattributing to that increase?
Daniel Fishback
No, I think AR and part of that is tied to thebetter than normal billings inthe quarter. But nothing of substance to comment on,different from theprior quarter in factour 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 withWilliam Blair. Please go ahead.
Laura Lederman –William Blair
Hi guys, great quarter. Following up on some earlier questions. Can you elaborate alittle on the economy,you know we all seemconfused whether we’re heading into amore difficult substantial environment or not. What are youhearing from thecustomers you talk to ingeneral about what they’re seeing inthe economy, more of ahigh level macro question and also following up on thecompetition question, any newson SAPs new re-releasing of theproduct which they said they were going to doa couple months ago.
Daniel Fishback
Laura this is Dan. Let me address thefirst part and you broke up alittle on my end on thesecond part of your question solet me address thefirst part then I’ll have to ask you to repeat thesecond part of your question.
That being said, generally as I mentioned earlier, there aresegments of retail that aredramatically different. My take aftersome research and talking to our customers is fastmoving consumer goods and theleaders in their coreverticles upside of apparel, which we don’t sell to, allseem cautiously optimistic and arebullish about their ability to gain share.
From our perspective the common theme with our customers is, they want tounderstand more about their customers and DemandTec provides analytical ways todo that to make pricing and promotion and mark down and marketing decisionsactionable to derive economic benefits. And from our perspective we believe that is as important in a growingeconomy as an uncertain economy.
Laura Lederman –William Blair
Thesecond question was on SAPand they were supposed to put out anew version of aproduct they acquired, itwas integrated with SAPtraditional products. Any commenton that or any word on thestreet of when that’s expected?
Daniel Fishback
We have not seen achange atall on thecompetitive dynamics of what our competitors aredoing today. Theonly comment I would make, regardless of product introductions, thearea of pricing and promotions and mark downs and marketing areso connected to thecustomer that the onlyfeedback that I could give you is theexample of Brookshires, where regardless of what back end system they’re using,they want to understand themost they can about that customer sothat they can retain that customer, build more loyalty inthat customer and candidly, it’s more than technology, it’s intellectualproperty, it’s theexperience that we bring to bear. Software as aservice, it’s agility, socertainly we keep an eyeon the competition,but we’re not particularly consumed by that topic today.
Laura Lederman –William Blair
Yeah, who areyou seeing where though, inother words where doyou see KSF, where doyou see SAP, where doyou see Oracle or doyou not see them muchbecause they’re mainly inapparel?
Daniel Fishback
You know we don’t seethem much at all. I mean, candidly, inthe high end of themarket we feel like we’re theonly provider today that hasa viable software as aservice solution among those three companies you mentioned. That platform is uniquely positioned to bedynamic to the changesin consumer behaviorand leverage a gridcomputing platform. So, candidly, Iguess maybe in thebottom end of themarket we’ll see morecompetition from a KSFbut candidly thedynamics haven’t changedmuch over the last sixmonths.
Laura Lederman –William Blair
What percentage of thetimers are not acompetitor in thedeal for new customers?
Daniel Fishback
I can’t really comment anything specifics to that. We’ll have to getback to you on that.
Laura Lederman –William Blair
Okay, thanks alot, once again great quarter.
Daniel Fishback
Thank you.
Operator
Thank you, our next question comes from Patrick Walravenswith JMP Securities, please go ahead.
Patrick Walravens –JMP Securities
Great, thank you very much. The businessseems to be goingnicely, I do have onequestion, if you look inyour filings your largest customer in2007 was running around $1.25 million aquarter and then that dropped to $600,000 Q1, looks like itwent a little lower inQ2, 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 sayis we continue to seestrong renewals, we have said when acustomer renews after being with us for two or three year period which is thegeneral average predominately term length we doin our retail deals,they’re typically fully rolled out by then sothe services piecethat may be wasrepresentative in thatfirm’s two to three year deal will clearly not beof the same magnitude inthe go forward dealbecause they’re fully implements. So, ingenerally, it’s generally due to things like that and other types of serviceengagements that we getinvolved with with our customers that arenot ongoing.
Patrick Walravens –JMP Securities
Okay that’s helpful, soin one of these bigsort of multi-million-dollar deals, how biga percentage can theservice component be inthat?
Daniel Fishback
We don’t break itout but historically we’ve said our bookings, theservices component of bookings is approximately 15%-20% of anoverall bookings on anaverage sized deal.
Patrick Walravens –JMP Securities
Okay, can itsometimes be 50%?
Daniel Fishback
Sure, I don’t know if itcould ever be thathigh but it ranges andwe continue to sell add-on analytic services to that customer after we getinvolved with them whether it’s things that we’ve talked about inthe past, some of theanalytics offerings that we have, customer loss attrition model, image itemanalysis, stores own analysis, allthese kinds of other things that our customers come back and ask us to helpthem better understand and help them think that through. Those tend to beservice engagements that aren’t on asubscription base that keep going, they doit one time.
Patrick Walravens –JMP Securities
Okay, that’s helpful and then Dan, you guys ran thisbusiness through adownturn once before and once again I’m curious, what was thedemand from thegrocery vertical like thelast time around?
Daniel Fishback
Yeah I mean one thing nice about thegrocery market, it’s fastmoving consumer goods, it’s pretty consistent. In cases whereinflation is slowest could begood for that market. Inflationarypressure would be realtypical for our grocery retailers. Sothe dynamics aredifferent, certainly from our perspective, our customers have become moresophisticated, I mean three or four years agothe generalapplication of scientific applications was almost anovelty, today it’s amust have. SoI would assume that based on our history of running this business, we’llcontinue to focus anappropriate amount of energy on thegrocery market just because that’s avibrant market that’s real consistent and we understand it.
Mark Culhane
And we got aleadership position.
Patrick Walravens –JMP Securities
Alright, great, thank you guys.
Operator
Thank you our next question comes from Todd Lukasik withMorningstar, go ahead.
Todd Lukasik – Morningstar
Hi, this is Todd. Ihad a couple questionson the CP side of thebusiness. I was wondering if you couldtell me thetotal number of manufacturers that you have on tradepoint right now and howmany are free usersversus how many have paid for upgrades?
Mark Culhane
Hey Todd, yeah this is Mark, we don’t provide actualcustomer count information on aquarterly basis and soforth. What we have said is on thefast moving consumergoods area, depending on who that is, they may have vendor relationships with500-1,200 vendors, itreally depends on who you’re talking about and soforth so typicallywhen they adopt tradepoint network they mandate to allof those vendor partners to start submitting their trade deals through thatsystem
Todd Lukasik – Morningstar
Right, okay and specifically with regards to theuse of your promotion product on theCP side, can you tell meagain how that’s priced on that side?
Daniel Fishback
TheCP products get pricedbased on the retailprograms that they want to use itfor and the categoriesat that particularretail program they want to use it.
Todd Lukasik –Morningstar
Okay, similar to thetradepoint product?
Daniel Fishback
Yes.
Todd Lukasik –Morningstar
Okay, great, thanks alot.
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 couldcomment a little bitabout the salesprocess that went into thelarge Latin American winthis quarter, maybe talk alittle if a partnerbrought you into thedeal, if this was anormal sales cycle for this market, maybe help us understand theprocess that went into this bigone.
Daniel Fishback
Sure, again, we’ve been inthis business providing proven results for nearly sixyears today, when somebody wants to make this kind of decision, typically theyknow about us because of our success, I mean retail tends to bea pretty small-knittedcommunity around theglobe. Certainly our partnerships witheverybody from IBM toAC Nielson to Accenture and their footprints around theglobe, when consulted they each always mention us, inthis case there was no specifically, I can’t speak to any partner relationship inthis case.
Typically we focus on thevalue proposition, you know this is not apure technology sales cycle, this hasto do with pricing andpromotion and theunderstanding of how consumers behave. This is not about cross docking apalate of goods in anefficient way, sothere’s no economies of scale and efficiency behind thescene in our salescycle so we tend tofocus with theexecutives at ahigh level on their strategies, we tend to focus on thevalue proposition of our offering and our people and our partners and typicallyour sales cycles tend to have much more of aconsultative approach on astrategy where our software as aservice solution as ameans to that end.
Mark Culhane
…tend to stay away from technology and gizmos and ITdepartments.
Brian Schwartz – Montgomery & Co.
Great and can you also just remind meagain just quickly what version or release your solution is now available onand when the nextupgrade would bescheduled for?
Daniel Fishback
Current release is 6.1. 6.2 is coming out inthe next week to twoweeks actually.
Brian Schwartz – Montgomery & Co.
Great, that’s allI have, thank you for taking my question.
Operator
Thank you there areno further questions inthe queue atthis time, I would like to go ahead and turn itback over to management.
Daniel Fishback
Great, my closing remarks, again thank you everyone forjoining us, we arevery pleased with our Q3 results, we’re making inour opinion strategy gains against our three point growth strategy and we lookforward to speaking with you again after theconclusion of our next quarter. Have agood day.
Operator
Ladies and gentlemen this concludes theDemandTec third quarter earnings conference call, if you’d like to listen to areplay of today’s conference, please dial 1-800-405-2236 or 303-590-3000 andenter in passcode11104661. ACT would like to thank youfor your participation, you may now disconnect.
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