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WebSideStory Inc. (WSSI)

Q4 2005 Earnings Conference Call

February 1st 2006, 4:30 PM.

Executives:

Jeffrey Lunsford, Chairman, Chief Executive Officer, Chief Financial Officer.

Jim MacIntyre, Chairman, Chief Executive Officer, Visual Sciences, LLC

Analysts:

Safa Rashtchy, Piper Jaffray

David Hilal, Friedman, Billings, Ramsey

Mark May, Needham & Company

Brad Whitt, RBC Capital Markets

Peter Scheidler, Peninsula Capital

Troy Mastin, William Blair & Company

Sean Jackson, Avondale Partners

John Torrey, Montgomery & Company

Wendell Laidley, RS Investments

Jeff Osher, JMP Asset Management

Richard Baldry, First Albany Capital

Kyle Evans, Stephens

Conrad Valentino, Baron Capital

Presentation

Operator

Ladies and gentlemen, thank you for your patience and welcome to WebSideStory Q4 2005 and Year-End Earnings Conference Call. My name is Dillon, I will be your conference coordinator for today. At this time all participants are in a listen-only mode, however, we will be facilitating a question and answer session towards the end of today’s conference. Operator Instructions I would now like to turn the conference over to your host for today’s presentation, Mr. Jeff Lunsford, Chairman and Chief Executive Officer, please proceed, sir.

Jeffrey Lunsford, Chairman, Chief Executive Officer

Thank you and good afternoon. I also have on the line with me Jim MacIntyre who is the co-founder and Chairman and CEO of Visual Sciences, LLC. Welcome to WebSideStory’s Fourth Quarter and Full-Year ’05 Earnings conference call. Filing a live call and audio archive of this call will be available on our Investor Relations section of our website at www.websidestory.com. Today’s call contains forward-looking statements that are not a description of historical fact, for example, statements about future results of operation, growth opportunities, the anticipated synergies of WebSideStory’s and Adams Business and about the projected future financial performance of Adams, WebSideStory, and Visual Sciences’s businesses are also the forward-looking statements.

You should not regard any forward-looking statement as a representation by WebSideStory that any of its plans will be achieved. Actual results may differ materially from those set forth in this release due to the risks and uncertainties inherent in WebSideStory's business. Such risks including without limitations to WebSideStory’s limited experience in the emerging market with unproven business and technology models, the risk of incurring higher and expected cost associated with integrating the operations of Adams and Visual Sciences with those of WebSideStory. WebSideStory's reliance on its Web Analytics services for the majority of its revenue, the risk with sales of Adams and Visual Sciences services will not be as high as anticipated, WebSideStory’s recent achievement of profitability, and the risk that it may not maintain its profitability. The highly competitive markets in which WebSideStory operate that may make it difficult for the company to retain customers, the risk that WebSideStory's customers fail to renew their agreements, the risk that WebSideStory's services may become obsolete in a market with rapidly changing technology and industry standards, and also WebSideStory may incur anticipated or unknown losses or liabilities associated with integration for the Adams and Visual Sciences and other risks described in WebSideStory’s filings with the SEC.

Including WebSideStory's Annual Report on Form 10-K/A for the year ended December 31, 2004, and quarterly report on the Form 10-Q for the quarter ended September 30, 2005. Do not place undue reliance on these forward-looking statements, which speak only as of the date of this call. WebSideStory undertakes no obligation to revise or update the information or forward-looking statements in this call reflects subsequent events or circumstances.

Okay, today we have a strong quarter to talk about, and an incredibly exciting merger that we think dramatically expands the growth opportunities for WebSideStory. We are joining forces with the highly regarded team at Visual Sciences, an innovative provider of streaming data analysis and visualization software and on-demand services headquartered in McLean, Virginia. That is bolstered under the web analytic thing as the company with the hottest technology in the market.

Before getting into that, let’s walk you through our Q4 results and provide some insight into how the business continues to perform. Q4 was another record quarter for WebSideStory. In the quarter we achieved record revenue of 11.7 million, 79% higher in Q4 of ’04, we are $0.15 per share in pro forma earnings as compared to street consensus of $0.14. We added 3.5 million of cash to the balance sheet. Our pro forma pre-tax margins increased from 23% to 26% tracking nicely towards our previously discussed target of 30%. Our Web Analytics bookings were up 47% from Q4 2004, which should help a life year the Google free search initiative we’d heard us in the enterprise sector. I should note the Q4 was the largest Web Analytics bookings quarter we have ever had by a substantial margin.

We signed 129 contracts with new customers from various modules of the WebSideStory Active Marketing Suite, up from 110 last quarter. We had great new customers like Sotheby's, Highfield Healthcare and Miller Highman in the Search and Content business and Clear Channel Communications, John Hancock, Seagate, Bell Resources, and Charles Schwab in the Analytics business. Our average contract size for new customers was just over $30,000 in one-year value and our average relationships sites for all customers remain just over $40,000 per year. In the quarter we also launched a WebSideStory index, a new statistical parameter that features techno graphic and e-commerce trends called from the millions of users that visit websites using the company’s award winning Web Analytics technology HBX.

We have published two insightful index releases over the last two weeks, one observing the search engines of more than twice the conversion rate of other online customer acquisition sources, and one observing a visitor using a site search box on our customer sites converted at 2.7 times the rate of other visitors demonstrating the value of site search and we obviously provide an on-demand site search solution in our Search and Content solutions group.

We completed key management hires in the quarter, expanding our U.S. sales management with a proven industry sales leader who have managed half of our North American sales operation and who previously set sales records of WebTrends and Omniture, and with a proven VP of Engineering, we spent 5 years running development for Webzen right down the street here and very well respected company on Wall Street doing some of their high growth years. We made good progress on getting HBX bid to market, this release is running approximately 90 days behind our original schedule and that’s due to some changing requirements in the APIs - in partnership agreements as we work to connect to the PPC networks.

Q4 was a solid quarter for us all around. In the quarter we became convinced with the high-end of our marketplace offered great opportunity for us to expand, that we are actually under investing in sales and marketing and R&D relative to the opportunity before us. You will see reflected in our forward-looking guidance that we are ramping our investments in these areas and expect our margins to compress slightly for two quarters as a result. We believe this is the correct long-term need for the business and we believe we’ll begin to see the paybacks for those investments in Q3 of 2006.

Starting the financial detail, the fourth quarter of 2005 was our 9th consecutive quarter of profitability. We achieved record revenues and profitability. Our gross margin was 83% in Q4, 1 percentage point higher than the previous quarter, the gross margin includes $89,000 of amortizable intangibles and stock-based compensation representing less than 1% of revenue.

Operating expenses before stock-based comp, amortization of intangibles and other non-recurring items as a percentage of revenue decreased from 61% in Q3 of this year to 59% in Q4, a pickup of two points. In Q4, operating expenses included 209,000 of non-recurring items. Compared to last quarter, sales and marketing expenses increased slightly from 34% to 35% of revenues, we began that ramp of sales and marketing investments that I mentioned previously in the quarter and continued it in the Q1.

Cost related to our pro-active insight user form contributed to this change.

Technology development expenses as a percentage of revenue were up slightly from a 11% last quarter to 13% this quarter, this reflects our investment and development activities in Russia and lower capitalized software development cost as been in the year’s production. We capitalized 204,000 of certain cost related to the development of our forthcoming bid management tool this quarter, we anticipate the technology development expenses will increase as a percentage of revenue in the first quarter as we scale down the capitalization of those costs and those projects near completion in market launch.

G&A expenses decreased from 16% to 13%, non-recurring items related to the restatement of prior period financial statements, sub-lease loss exposure charges and reversal of the sales tax liability also contributed to the quarterly change in G&A. Non-GAAP net income before stock-based compensation expense, amortization of intangibles and other non-recurring items was approximately $3 million or 26% of total revenue in the fourth quarter compared to 23% in the previous quarter and 15% in the fourth quarter of last year.

Non-GAAP earnings per share before stock-based compensation expenses and amortization of intangibles and other non-recurring items were $0.15 on a fully diluted basis for the quarter.

Turning now to the balance sheet, as I mentioned, we generated 3.5 million in cash in the quarter, demonstrating again the cash generation power of this recurring revenue business model. Our working capital and liquidity remained strong with approximately 35.1 million in cash and marketable securities at the end of the quarter. 18.2 million of working capital and no material debt again at quarter end. We are excluding from that figure with approximately $807,000 of restricted cash that we set aside in Escrow as part of the holdback in our Adam’s acquisition.

Our differed revenue balance grew from 10.9 million to 12.8 million during the quarter. Accrued liabilities grew inline with the growth of our business. In the press release we issued earlier today, we provided guidance on revenue for the first three quarters of 2006, we also provided guidance for both GAAP and non-GAAP earnings per share for the first two quarters of 2006.

Our earnings guidance assumed to cash tax rate of 20% for the year. In Q4, we released the allowance against our net operating losses in the amount of over $3 million trading a large one-time increase of $0.15 per share in our GAAP earnings in Q4. Now that the NOL allowance has been released, we’ll report a full-statement in federal tax rate of an estimate 38% in our GAAP financials even though our effective cash tax rates with the benefit of these NOLs is estimated to be approximately 20% in 2006. Please note that our forward-looking guidance reflects the adoption of FAS-123(NYSE:R) for expensing stock options beginning on January 1, 2006 as well as additional stock-based compensation charges that will arise out of the Visual Sciences merger.

We can deal any other questions on the financials in the Q&A session. So, as you can tell from these results, this business is growing at a nice clip while operating at nice margins. As stated above, we ramp up our sales and marketing spend in Q4 and continued to do so in Q1. So, you should not expect to see margins continue to expand as rapidly as they have in 2005. We consistently said we believe and get this business to 30% pre-tax margins by some time in 2007 and 26% we achieved in Q4 gives us confidence that 30% is achievable.

Today we also filed an 8-K announcing a resignation of our Founder, Blaise Barrelet from WebSideStory’s Board of Directors, that’s why I believe 8-K will be filed tomorrow. Blaise served this company well for 10 years and he is easing into retirement spending 6 months each year aboard and working on other entrepreneurial pursuits. We thank Blaise for founding the company and helping to built it into what we have here today.

Wrapping up on the quarterly results, with record enterprise bookings, record cash generation and record customer adds we feel the Q4 is one of the strongest quarters since bringing WebSideStory public. The macro environment in which we operate continues to be very healthy fueled by three waves of growth. The first is online ad spending which is growing at 30% a year. The second is online commerce, which is growing at 25% a year. The third is the growing acceptance of on-demand software and that marketplace is growing at approximately 25% a year. We expect these three waves to continue at close to these growth rates for the next two to three years and believe WebSideStory is uniquely positioned to benefit from the high growth opportunities their convergence creates.

Now, I would like to talk to you about our merger of Visual Sciences, I can tell you that I’ve personally never been more excited by a technology in my 20 years in the business. As you know WebSideStory’s Active Marketing Suite is currently comprised of award winning digital marketing solutions in Web Analytics, Site Search and Web Content Management. Within the Web Analytics area of the Active Marketing Suite, our intention is to integrate Visual Sciences solutions with HBX to the stream integration platform as we are doing with search and publish.

This integration will expand our ability to offer deep ad hoc segmentation, multi-channel data analysis and real-time data visualization capabilities to our more sophisticated customers. In addition to this expansion within our traditional core markets Visual Sciences expands WebSideStory’s addressable market to now include opportunities for call center, e-mail, point of sale, branch and other types of transactional analytics are the core focus. We estimate this combination expands WebSideStory’s addressable market from approximately 1.4 billion to approximately 2.4 billion, a potential annual revenue opportunity.

A little context, within the digital marketing sector, four distinct trends are fueling product innovation and affording small companies like WebSideStory and Visual Sciences an opportunity to differentiate. These four innovation drivers are, No.1, the proliferation of new customer acquisition sources and business models on the web. No.2, the rapidly growing use of streaming media and other rich media to enhance the end users experience. No.3, the proliferation of handheld devices and other viewing outlooks that need to be tracked, and No.4, the evolution of single channel Web Analytics into even more valuable multi-channel enterprise analytics.

This transaction, this merger with Visual Sciences solidifies our leadership position with Web Analytics space and helps us significantly advance our position with respect to all of these innovation drivers. Focusing on the fourth driver, the movement from single-channel to multi-channel, we see a major trend where single-channel Web Analytics is rapidly evolving in the multi-channel enterprise analytics. As large enterprises contemplate tracking more offline data within their analysis systems, there is a natural tendency from them to consider more in-house solutions. This transaction opens up back half of the market, which we were previously seeding to other players, the WebSideStory. As mentioned above we believe the combination of the in-house marketplace plus the multi-channel analytics marketplace represents approximately $1 billion in additional annual opportunity for WebSideStory. Like WebSideStory, Visual Sciences offers an innovative and differentiating technical architecture and operates a robust profitable business. They bring an established presence in the government, e-commerce, technology and travel sectors, which compliments WebSideStory strengths in media, e-commerce, healthcare and technology. And both companies were strong in financial services.

Visual Sciences designed a solution from the ground-up with high volume processing in multi-channel analytics in mind and they have two patents pending on their unique approach. To this merger WebSideStory brings a worldwide distribution platform in over 1100 enterprise customers representing a significant cross sale opportunity. WebSideStory sales and marketing operations which is currently producing over a 125 newly signed customers per quarter bringing world class – brings world class lead generation in customer acquisition capabilities to Visual Sciences to help fuel our growth.

In addition to this augmentation of new customer acquisition capabilities, we believe there is a good opportunity to cross sell Visual Sciences solutions into many of WebSideStory’s high-end customers. In addition to Visual Site their Web Analytics solution they also offers Visual Call, Visual Mail and Visual Document, and Jim is available to answer questions about these products for you in the Q&A section.

We also believe the cross selling opportunity exists in offering search and publish to Visual Sciences customers. Visual Sciences has approximately 40 employees and over 40 customers, they have built a sterling reputation in the Web Analytics marketplace through selective retarding high-end customers and successfully adding value within those accounts.

Their revenue growth has been an excess of 70% in the preceding three years. We plan to invest in the government division and are excited about the opportunities presented by our nation's Homeland Defense initiative. Visual Sciences technology has unique capabilities in the area of real-time data visualizations and dynamic segmentation of massive data stores that are in our opinion unmatched.

Visual Sciences management team is a proven group with extensive software development, product management, enterprise sales and enterprise consulting backgrounds. Visual Sciences is focused on the high-end of the analytics marketplace, their average contract size is approximately $200,000, approximately five times larger than the WebSideStory’s average annual customer relationship of $40,000. About 1/3rd of their business is either on-demand or managed services and other 2/3rds are license, software, maintenance and consulting. They recognize their license revenue ratably over the contract to a minimum maintenance term, so most of the license revenues predictable and spread over the first year of the relationship.

Their business is characterized by additional growth within their accounts as the customers begin using their solutions and want to expand the scope of the data they are analyzing. Combined these two companies create the undisputed leader in Web Analytics and on-demand digital marketing solutions. As you can see in the guidance the combined business will be generating approximately 14 million in revenue per quarter with pro forma operating margins in the 20% to 25% range. Our topline growth is forecasted to remain in the 40% range year-over-year. Our revenue model will be largely recurring in nature with approximately 90% of our quarterly revenue growth are being already contracted entering any particular quarter.

Our gross margins will be approximately 80%, our consulting of software or on-demand services mix will be 10% to 20%, and we will continue to invest in building out an eco system of implementation and consulting partners to help leverage our solutions in the accounts faster than we can do alone. And stream partners to help our customers benefit from interoperability of the many different systems needed to run a world-class digital marketing operation.

We expect to generate 2 to 3 million in cash in the first quarter before transaction fees and other one-time charges associated with the transaction. Consideration used in the acquisition includes approximately $57.3 million comprised of 22 million in cash, a senior note for $20 million with a 4% interest rate maturing on July 31, 2007 but call over by WebSideStory at anytime with no prepayments penalty. 568,512 shares of stock with a market value of 11.5 million as of yesterday’s close the development in Escrow until March 31, 2005, and 189,600 shares of restricted stock valued at 3.8 million as of yesterday’s close, plus 350,000 employee options and a warrant to purchase 1082,923 shares of WebSideStory at a price of approximately 1846 to 1847, exercisable within next 18 months. Visual Sciences will operate as a wholly owned subsidiary of WebSideStory, a business unit and Jim MacIntyre and David Scherer the two co-founders of Visual Sciences will serve as the business units CEO and CTO respectively. No cost synergies are planned as both companies are growing at rates where any identified excess costs gets immediately redeployed into other areas in support of growth.

Now, in the accounting trend, the accounting on this transaction is a bit complex, so I would to take a minute to discuss it. Most importantly the revenue we are going to be able to recognize in the Visual Sciences business unit is going to be impaired for the first year due to a large adjustment in deferred revenue required in GAAP purchased accounting. We are currently estimating this adjustment to represent around $4 million in lost revenue.

Now, I am not an accountant so I will not try to explain to you why or how GAAP creates a situation where you can buy a healthy company that would do just for example, purposes only, say 12 million of revenue and 2 million of earnings in a given year and it’s a very active you are purchasing them and nothing more takes that performance down to only $8 million in revenue and a $2 million loss. As you know we eat, sleep and breathe cash flow here at WebSideStory, so we are not going to let that complex accounting deter us from a great profitable company that dramatically expands our addressable market, and creates a great cross sell opportunity within our customer base. Instead we’re going to go ahead and affect the transaction and have done so, and manage our business on a pro forma basis as if we will still have that revenue coming in since we still have the cash coming in. This leads to a rare situation of our pro forma revenues needed to reflect the operating health of the business. Symantec utilize this in conjunction with their acquisition of Veritas as a reference point for you.

The guidance we’ve provided today in the press release reflects combined company operations. And by the way the deferred revenue problem that I just mentioned goes away over the roughly 12 years schedule that that revenue will be recognized normal. The guidance we provided today in the press release reflects combined company operations beginning February 2, 2006. This preliminary estimate is subject to revision upon completion of our purchase accounting analysis with respect to the transaction.

The revenue adjustment will call to GAAP revenue and earnings contribution of the Visual Sciences business units to differ materially from how these financials would look on a standalone basis. A reconciliation of pro forma revenue to GAAP revenue and pro forma earnings to GAAP earnings is provided with the guidance. All numbers or estimates reflect the company’s preliminary forecast for the business at this time. My advice is when the accounting gets complex just follow the cash, this transaction has very favorable cash characteristics, because it is not a tax free reorganization, WebSideStory will benefit from an approximately $15 million step-up in basis that will be depreciated over 15 years creating a cash benefit of approximately $1.3 million per year in reduced tax payments.

So in summary on a GAAP basis, this business unit will look $4 million worse in the next year but on a cash basis it will actually be over $1 million more profitable. We elect to follow the cash and work to earn more for you every day. Based on the pro forma revenue and earnings numbers we are going to be going to be using to manage our business, this transaction is neutral but slightly accretive in 2006 and accretive in 2007. To be conservative I would ask you all to assume neutral in new models. As stated above we see substantial growth opportunities and now that we have achieved the levels of profitability we are currently running at, we believe it’s prudent to deploy excess earnings generated from the leverage of growth into more sales and marketing R&D and customer service. We think, we seize the high ground with this merger and we’re going to be investing in fortifications to protect our preferred position in the marketplace. I would now turn the call over to the operator and open up the lines for Q&A. Thank you for your time.

Questions and Answers

Operator

Thank you very much sir. Operator instructions Our first question comes from the line of Safa Rashtchy of Piper Jaffray. Please proceed.

Q - Safa Rashtchy

Good afternoon, Jeff and everyone, couple of questions since as you little bit, this is kind of a complex transaction here, but before we get into that, I believe your revenue for Q4 was slightly below the low end of your guidance and I might have missed if you addressed that but can you give us some color as to how the quarter went and was it kind of slightly slower than you expected or just kind of, variation is to be expected?

A - Jeffrey Lunsford

Yeah, so they were really, there was about a – I guess a $400,000 revenue shortfall over consensus which is 12.1, we have guided 12 to 12.3, and there were four contributing factors and none of them really reflect negatively on our enterprise business. The first was we had, as I mentioned record bookings and it was just a backend loaded quarter, so bookings grew 47% Q4 to Q4 and we did more in December and it wasn’t quite as mapped out as we get modeled in that, led to about $150,000 less in revenue, that we had been expecting in the quarter when we guided 12.0 to 12.3. The second is ad revenue as you guys know we monetize free site search by getting that subsidized with ad revenue and that ad revenue came in about $150,000 lower than we had forecast. And this was only our second Q4 they’ve launched that product right at the beginning of Q4 2004. And so, we don’t have and then ad revenues you guys know is somewhat seasonal. We didn’t have the historical sort of basis, so when we were guiding the 12.0 to 12.3 we were assuming about 150,000 more to that ad revenue. We view that ad revenue as non-strategic, it is a funding source, a nicely profitable funding source but it isn’t our core business. The third thing was a swing in the Euro that contributed to about $100,000 of difference in what had been forecasting. And then the fourth thing was HitBox Professional, as you guys know HitBox Professional is about $1 million worth of our business. Since the day we took this company public I have told people that it is not a strategic revenue line for us that we did not like the consumer sector here, we don’t think you can make a lot of money at $20 a month. And that business has been slowly eroding overtime and so that came in about $50,000 less than we have been modeling when we guided 12.0 to 12.3. So, it’s up to you guys to decide whether any of those four things reflects at all on WebSideStory’s core business. We certainly want to do better, a better job forecasting and are going to do that but those of the contributing factors, Safa, does that help?

Q - Safa Rashtchy

Yeah it did, thank you. Second on Google, you mentioned in your comments that you did not see any impact in terms of customer renewals, I believe. Have you seen any impact on pricing, is there any increased price sensitivity? And also what Google in their conference call yesterday stressed several times that they are really pushing the analytics and I wonder if you could comment on what impact you think that might have on your industry whether it could potentially even expand the market or could it create some pricing pressure for you?

A - Jeffrey Lunsford

Well, when we measured bookings, we measured on a dollar basis and with 47% Q4 to Q4 growth, remember Google acquired Urchin back in I think Q1 of last year and they’ve been pushing it ever since then, and then they cut the price in half in Q2 of last year, and then in Q3 they made it free. So, we’ve had about a year of competing with, a) of Google owned analytics product, b) of Google half off analytics product and then c) a Google free analytics product, and Q4 was the best quarter we ever had, 47% year-over-year bookings growth. And we had 129 customers. So we don’t see it impacting our enterprise business than, whether you look at customer ads, whether you look at price pressure or dollar, we just don’t see it. We are not in denial, we are tracking it and as you know we run our business where we give our customers more volume every year for the same price, the same way Intel does with their chips, we do the same thing with an on-demand service. And it maybe that the fact the works were sort of engineered to drive our unit cost down every year helps us, because our customers feel like they are getting enough from us of an additional upon renewal, that it’s not worked going off and leaving. And I would also just say that the solutions are two different things. And I keep getting many, many questions on the topic and I think at the end of the day, I am just most focused on the results of the business to answer the questions rather than to try to get a feature function or what does Google Free do versus what does HBX do. Now, Visual Sciences is at the extreme high-end of the market. I think, HBX is safe from Google Free, the business is healthy, growing, and I think Visual Sciences is safe and free and even, from the higher end average sale price of 200,000 plus.

Q - Safa Rashtchy

Okay, and one last question on the Visual Sciences, can we take the guidance you’ve given and relative to your prior guidance assume that, what is implied in there with Visual Sciences run rate and can you also talk about their margin structure. And finally I’m assuming from what you have said and just to look at Visual Sciences products that there is little to no overlap in customers?

A - Jeffrey Lunsford

There is little to no overlap in customers but we think there is a good bit of cross sell synergy. What was the first half of your question?

Q - Safa Rashtchy

Just some color on the revenue run rate for the company?

A - Jeffrey Lunsford

Okay, so you know, I mean if we - you guys know our model, right. If we did 11.7 in Q4 then we would be guiding probably, that $400,000 rolls through. So it recurs expect for maybe the part that was just late bookings in the quarter. But everything else I mean we are going to have to be more conservative on how we forecast the ad revenue. The Hitbox Pro business is on a down slope and has been for two years, so that will stay on that trajectory, we hope we don’t have any Euro swings but we probably on a standalone, we would have brought revenue down a little bit and what I am saying on earnings is it is absolutely in our opinion the right thing to do to step up the sales and marketing and with anything, we shouldn’t have made $0.15 in Q4, we should have made 14 and already had the sales and marketing engine ramped because there were so much opportunity on the high-end, so we probably would have eased in revenue a little bit and, taken earning down a penny which we’ve done for Q1, the guidance, and as I said Visual Sciences is, I plan on that being neutral because we’re here, we’re building this business not for Q1 of ’06, we’re building this business for 2007 and 2008. There’s a whole new market opportunity developing and we think we are in the lead but we got well funded competition and we want to make sure, we can maintain that lead.

Q - Safa Rashtchy

And the marginal structure, are they similar to what you have at WebSideStory?

A - Jeffrey Lunsford

Yes.

Q - Safa Rashtchy

Okay, thank you.

A - Jeffrey Lunsford

Sure.

Operator

Thank you very much sir. Ladies and gentlemen, your next question comes from the line of David Hilal of Friedman, Billings, Ramsey. Please proceed.

Q - David Hilal

Good, thank you. Jeff, the 47% bookings number you’ve used, I’m assuming that’s combined, so could you give us what the organic growth…?

A - Jeffrey Lunsford

No, no, the 47 was Web Analytics only and I was careful to point that out because I wanted people who were worried about Google to understand that.

Q - David Hilal

Okay, so…

A - Jeffrey Lunsford

You know we didn’t break organic versus inorganic and we’re really – I guess we’ve been with Adams for two quarters now. Yeah, over two quarters, there is too much flow in back and forth cross sales and combined deals in cross commissions and so we’re not really tracking at the bookings level in organic versus, or really revenue or earnings level organic versus inorganic with Adams and us any more.

Q - David Hilal

Okay, and when I try to be the math on Visual Sciences based on your guidance and what your guidance was, I am trying to figure what a trailing 12 month number was for Visual Sciences and, you know is it somewhere around 6 million and million to ballpark or you can just tell us what it was?

A - Jeffrey Lunsford

No, no, yeah we are going to file an 8-K, their audit is not complete, so it was in the 8 million revenue range and their margins were I think in the 25% pre-tax, 25% to 35% pre-tax range something like that.

Q - David Hilal

Okay.

A - Jeffrey Lunsford

I mean, when their audit is complete, we’ll be filing an 8-K I think we have 60 days from today to do that and you will see that then.

Q - David Hilal

Now, I want to make sure I understand the way they recognize rather than, I think you’ve said, part of the business which is a traditional enterprise software model, however they recognize the license over the minimum maintenance period, so it’s usually recognized over 12 months, is that accurate?

A – Jeffrey Lunsford

Yes.

Q - David Hilal

Okay, so can you give more clarity on the…?

A – Jeffrey Lunsford

I also have a third of their business, which is on-demand or managed services, which is recurring.

Q - David Hilal

Right. So, when we think of our models here, it sounds like we’re going to need to add a new revenue line item for the traditional software model that they have. So when you think of revenue mix can you, you just gave us a total aggregate revenue number. Can you help us explain between kind of on-demand traditional software and then the maintenance they are also getting?

A – Jeffrey Lunsford

At a very high level, I would tell you, I think license revenue, traditional license revenue will be less than 10% of our revenue or about 10% of our revenue something like that. So this is still and because that revenue is largely spread, it’s more predictable, so this business will still have 85% to 90% of current revenue just depending on how you categorize license that gets spread ratably over a year.

Q - David Hilal

Okay and is Jim on the line with you Jeff?

A – Jeffrey Lunsford

Yes, he is.

Q - David Hilal

I am fine Jim.

A - Jim MacIntyre

Hi David, how are you?

Q - David Hilal

Good, Jim, what is the split of your business, it looks like Jeff talked kind of played a visual sight, is that your leading product?

A - Jim MacIntyre

Hey David, we’re going to breakout their products by revenue line and what we want you guys, I want to give you access to Jim today to talk about his products but not various specifics about his business. When we have the 8-K on filed then you’ll be able to see his business in the full light of day.

Q - David Hilal

Okay, all right, I wait for that I guess, and then between that two sets of products, I understand they are going to run as a separate entity, is there going to be, so is there any product integration that needs to happen or the products remain independent, and maybe I’ve connected together but there is no major R&D effort to integrate them?

A - Jeffrey Lunsford

It’s the latter, I think their technology is perfect for layering on top of massive data stores like we have with HBX and then giving you very, very cool and now we’re going to probably setup a day next Tuesday in New York, so those you there in New York we’re going to invite you, and we’re going coordinate all that tomorrow to show you Jim’s technology and you’ll begin to understand what we’ve got here and what the potential is. And so they will connect to HBX to the stream API, we’ve got to report in API, we got to go layer them into our proprietor data store and it’s going to open up a whole new level of reporting for our customers.

Q - David Hilal

Okay, then I apologize one more question, Jim the 40 employees can you split those out between like sales and R&D? And what is your sales, I assume its all direct, but can you elaborate on that?

A - Jeffrey Lunsford

That’s fine, go ahead Jim.

A - Jim MacIntyre

Okay, our R&D team is about 10 David, and then the back book of the company about, I guess about 16 in consulting and then the rest is sales, marketing and administration.

Q - David Hilal

Okay, thanks guys.

A - Jeffrey Lunsford

Thank you.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from the line of Mark May of Needham & Company. Please proceed.

Q – Mark May

Thanks for taking my question, first couple regarding the acquisition, wondering can you give us an idea of the number of customers that the company’s had at the end of the year and what the expectations are in terms of net ads this year? Also trying to understand how there’s a sell-through or sell-in opportunities there, it seems like the products are very similar, and I am trying to better understand that? And then thirdly, related to Visual Science, if they get 8 million in revenues so asking I’m not sure exactly the accounting you are using there, I’m assuming that’s GAAP it looks like you’re assuming around 10 million this year, so is that roughly about the growth rate you’re looking forward which is around 25%? And I had one quick follow-up if I could.

A - Jeffrey Lunsford

Yes, so lets take these customers, we had over 1100 at the end of the year and they had over 40. Sell-through, I have is as we’ve been talking to Jim which is a process that’s taken quite some time from the day I saw their technology, and I would – I travel around and talk to our customers niche and I really I would be interested in doing this, or I would be interested in doing that. And what HBX is is a fantastic analysis engine that has the most material breath of reporting in the industry. So we’ve got these products called Report Builder and Active Viewing and we have our customers sending morning reports out to affiliates, 800 affiliates every morning and segmenting date on those. What Jim has built is the ability to sit there in real-time and say, oh what if this? What about that? And do it over massive data stores and literally have your queries answered in 5 or 10 seconds, and they do not disclose who their customers are, but they have some very customers that use this technology for very impressive purposes. And our customers, he would not be closing $200,000 contracts on the high-end of the market. If there wasn’t, let’s call it an – that just average contract. So he does $400,000 contracts and $1 million contracts and he does it when other Web Analytics guys average sales like ours is 40,000 or 100,000, and we will do a couple of $300,000 to $400,000 a quarter.

They are going in and they are showing multi-channel ROI. So it’s really great to get a return on investment from your analytics investment when you are completing the marketing ROI lead for online, and we get a lot of our customers of 10x ROI in the first three months. It’s even more powerful when you start marry in up call center data, branch data, web data and looking at customer interaction across all those channels. So, let’s take one of our large customers as an example, Wachovia, for Wachovia the web is a tiny part of their business, it would be really cool if Wachovia could look at their customers in the call center branch and web, and HBX we are building the ability, we are going to extend our data schema and a created data import API to do all this but Jim has built it, they built, he and David share – built their system from the ground up with multi-channel analytics in mind. They are calling on customers and saying, just think multi-channel Day 1 and whereas we and others are calling on customers saying we are a Web Analytics company and we’re going to add the multi-channel capability down the road. So there is, any of our customers who have multi-channel businesses which is most of them, and who have the budget to spend $0.25 million, or $0.5 million dollars to get that multi-channel capability is across our candidate for Visual Sciences, and we have about 1100 of those customers. And just in traveling around and talking to those customers, I know the first 5 customers, I am going to call and they will use our technology in conjunction with his if I can predict.

Now you will remember when we did Adams we predicted that we would have good cross sell there, up site search into our analytics customers and we have had that, and we had another good quarter of cross sale with Adams, and I believe but we will not, I’ll tell you next quarter how we are doing and I’ll give you guys metrics against that success. Also if you look at this transaction and if you look at Adams, the company are about the same size, they were both trying to get about the same profit margins and I think if you look back, what you guys had for us last year, you guys had $0.42 consensus pro forma for 2005 and we did $0.46 I think. I think that this technology, this company it looks the same, when you model the business we got –we got a lot of execution ahead of us but, if you think of what we accomplished with Adams over the last 12 months, actually over the last 7 months, I think we can accomplish the same kind of performance with Visual Sciences over the next 12 months.

Q – Mark May

That was very helpful, and then I had the question regarding the growth rate this year, this write-off roughly $8 million, last year going to $10 million that’s right?

A - Jeffrey Lunsford

No, what we said is 40%, we think that the combined businesses will be able to grow at around 40% rate.

Q – Mark May

Okay and then just my last question, no surprise in the fourth quarter that Google Analytics did not impact your business because when they went free I think within minutes they shut off the signups, but I believe in early January they turn this back on, I am wondering have you seen any impact on the business in January from that?

A - Jeffrey Lunsford

No.

Q – Mark May

Okay.

A - Jeffrey Lunsford

We are tracking.

Q – Mark May

Thanks.

A - Jeffrey Lunsford

Sure.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from the line of Brad Whitt of RBC Capital Markets, please proceed.

Q - Bradley Whitt

Hey Jeff, how are you doing?

A - Jeffrey Lunsford

Great.

Q - Bradley Whitt

I was wondering if maybe Jim could give us, just to help us out a little bit Jeff, maybe give us without mentioning specific customer names, just give us one or two customers as far as how, specifically how they are using this technology, maybe one in the government sector, one outside the government sector. And then also if Jim could talk a little bit about whom he competes with?

A - Jeffrey Lunsford

Yes Jim, thank you.

A - Jim MacIntyre

Okay, the government customers that Visual Sciences supports use our technology for similar purposes as our technology is used in the commercial arena, but the specific use cases of it are not something we in many cases know or can disclose. In the case of our commercial customers we have concentrations of customers in financial services, travel, and a number of other key markets you would expect, technology and ecommerce. We so as many of our customers have started with core Web Analytics, they tend to be customers who have used other Web Analytics solutions in the past and have run into the limitations of them and are looking for either a system that could support very much larger base of data, have more intense questions about the data, what ad hoc analysis capabilities that haven’t been before available. At the same time they would like to integrate data from customer data warehouses, from other channels such as call center data, IVR system data, electronic mail system data and so on. In many of our customers they’ve picked -- started with Web Analytics and then moved to use the product in related areas of Visual Call with the next application we released, it looks that IVR and another call center data. We also released an application called Visual Mail recently that looks at electronic mail system data. But the technology platform is applicable to other types of transactional data and this system is been used to look at travel reservations data, credit card transaction data, network – lower level of network transaction data, and a whole variety of other types of data that are real-time streaming forces of data into which you might like to integrate other data about the customers and systems that they are using.

Q - Bradley Whitt

Okay and would you – is it possible Jeff that some of your customers would switch based on what Jim saying from HitBox to Visual Science application?

A - Jeffrey Lunsford

It’s possible but most of our customers are using, the reason we win deals is because of the maturity of the product and the breadth of the reporting.

A - Jim MacIntyre

Okay.

A - Jeffrey Lunsford

And so on the high end, we’ve been competing with Jim from time to time. And he has won some and we’ve won some, I mean he can – I don’t think I am at liberty to talk you at about one big win in financial services that we won head to head against Jim but then I could tell you and I am not at liberty to tell you his customers names, a couple of big ones that he won against us. It really and Jim maybe you can take this from the standpoint of a WebSideStory competitor, it really kind of depends on the needs of the customers, Jim you have anything to add there?

A - Jim MacIntyre

Sure, so what I founded, being involved in a lot of these different sales like those over the last years is that, that the team at WebSideStory has done a tremendous job building out HBX and the reporting capabilities and broader report distribution capabilities of HBX as well as some of the innovative analysis technology they’ve added have made it a very competitor, its really surged over the last year. At the same time Visual Sciences has a very deep strength in ad hoc analysis and dynamic segmentation, customer analysis as we call it. And these two drivers both reporting and broad report distribution and deep ad hoc analysis often tend to be two different key drivers in the sales cycle, so in some cases, in many cases customers have been forced to choose between more depth in reporting that was provided by an HBX or more depth in terms of ad hoc analysis, the ability to answer very board range of business questions on the fly, on an interactive basis. So, the customers in many cases they are forced to choose between these two things, where I think in most every case, if they could have had those two things together are available to them from the same vendor its what they would have chosen.

Q - Bradley Whitt

Okay that’s helpful, and Jim how many, I mean, I am assuming these sales primarily through direct sales reps, how many reps do you have and you think that the, the HitBox sales reps will have the expertise in the identical enough to sell this application we have to stick with a separate sales force?

A - Jeffrey Lunsford

Let me take that one Brad, Jim I think you just mentioned it has three or four sales folks, I mean it’s very much a high-end, the enterprise sales rep finds the opportunity within the consulting team really has to prove it out. And that’s how you win million dollar contracts. What we are going to do is take our enterprise sales groups in the U.S. and we are going to train them up, because those guys the way we operate as they have 150 named accounts. So if we take that, I think it’s – I don’t know the extract number its 150, it’s about call it 1200 or 1500 named accounts pretty much all of Jim’s target market is on that list. So these guys already own the territory and we are going to train them up on lets call it qualification of Visual Sciences opportunities immediately. And then Jim has already been investing, and we are going to continue to invest in anybody good that we can find on the consulting or call sales engineering side to augment, that’s really the growth governor of his business is how many of these talented supervisory consultants I think we have working on these proof of concepts that are going to win the million dollar deals for us. And some of him need government clearances to actually be able to be involved in the projects. So our sales force in the U.S. will be working on a high-end to expand its ability to find and participate and really dig into these multi-channel opportunities right, call center, Visual Mail, Visual Document, and but they are not going to, they are keeping their HBX quotas and this is going to be an opportunity for them to earn extra this year. And then in Europe Visual Sciences has no presence, no sales presence at all, and we’ve got about 20 people over there now, we’ve got eight quarter carrying reps. So our guys in Europe will carry the flag for Visual Sciences immediately and right now Jim is getting RFTs from world-class Fortune 50 companies in Europe with no bandwidth that respond to them. And so what I think we are going to be able to do here is they’ve already had a great practice of picking and choosing the big deals that they know they can win and they go win them with like an 80% win rate. Whereas our win-loss rate probably, because we’re doing 125 a quarter with probably a 40% win rate that we are competing agency 4 or 5 other companies. So I think we still win more in after share, and I think we can keep that 80% win rate up for Visual Sciences and, but we’ll have an 80% win rate on half a million dollar averages rather than the few hundred thousand average deals, so we are picking the bigger better projects.

Q - Bradley Whitt

Okay, so how long is your normal proof of contract, Jim?

A - Jim MacIntyre

Typical proof of contract will take anywhere from a month to two months.

Q - Bradley Whitt

Okay I am going to turn it over Jeff, let other folks ask questions.

A - Jeffrey Lunsford

Okay thank you Brad.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from the line of Peter Scheidler of Peninsula Capital. Please proceed.

Q - Peter Scheidler

Congratulations on the merger, it sounds like there is not a lot of integration risk in the first six months of this, is that a reasonable assumption?

A - Jeffrey Lunsford

Yes, I mean Jim doesn’t have a marketing department, he’s got a very well regarded industry analyst who just turned him from Forester, his name is Bob Chatham, he is with CMO, but he is now not going to have to built up, the marketing lead generation, webinar trade show engine. We have that ready to plug in, their back office is a talented group of people but he didn’t have a CFO, he had an acting CFO part-time. So we’ve got all the kind of G&A public company overhead for him. And we are going to train the sales folks in a very targeted basis, and we are going to attack these enterprise accounts and we are going to keep hiring in his sales and engineering group. The product integration is Jim’s average implementation, if we have the right people, you can go in there, and have somebody live in a week, and so the question is, can you get to the data? And we know where our data is that’s all we do all day along in HBX. And so, we are going to have a prototype of what we think is capable, probably within a few months here, and hit the road selling it to our customers.

Q - Peter Scheidler

So this is a little bit different than the Adams acquisition, is that correct?

A - Jeffrey Lunsford

That is correct, yeah its – Adams was the expansion from just Web Analytics in offering more digital marketing tools like their site search is pulling data from HBX or going to pull data from HBX with reporting API and then, due behavioral party targeting results of site search to customers that are using both. And that was a sort of creation of the WebSideStory Active Marketing Suite. This is if you think about it expanding along the other axis not the digital marketing axis but just through the enterprise into other channels. And I think, I guess – I think we are being conservative in saying it only expands the turn by $1 billion but we always try to be conservative. But as far as the message to the market it is still the WebSideStory Active Marketing Suite and Analytics which is HBX Search, from search which is site search publish which is web content management. Visual Sciences is going to operate as a business unit and we are going to selectively target their product, we’re not going to, this isn’t a product that you mass market, its much more like a SAS or something like that.

Q - Peter Scheidler

That go actually just to high-end customers mainly?

A - Jeffrey Lunsford

Absolutely

Q - Peter Scheidler

Great, thanks a lot

A - Jeffrey Lunsford

Thank you.

A - Jim MacIntyre

Thank you.

Operator

Thank you very much sir, and ladies and gentlemen your next question comes from the line of Troy Mastin of William Blair & Company, please proceed.

Q - Troy Mastin

Thanks, good afternoon. I missed in your prepared remarks what you said about big, I wonder if you could review that for me in terms of the timing of the launch?

A - Jeffrey Lunsford

Yeah, bids running about 90 days late, we’re suppose to get into beta in February which is this month now. So lets call it mid late February and the delay has been, we are bolting on to PPC networks, APIs and, one of the networks API went down, they had to change some code, one of them changed the API altogether and changed the business rules. So it’s, when you are layering on top of other people’s technology you are somewhat dependent upon them and, we are not perfect either so, anyway the net result is we’ll get the thing in the beta here by the end of February, let’s call it. And what I’ve been saying all along is, bid is $5 to $10,000 average sales, so it’s not going to dramatically impact the numbers either way but we want that product in the market, the integration is really cool. We’ll show you next week in New York. The primary purpose of that is going to be to show you Jim stuff, Visual Sciences is just at its Visual, once you see it you get it, and the light bulb goes on as to how much value it can add. But we can also show you bid, I mean bid is integrated within HBX and there is just a lot of value in having all that together.

Q - Troy Mastin

I thought you have some in beta already, as you had 12 last quarter that were in beta...

A - Jeffrey Lunsford

12 that were signed up for beta…

Q - Troy Mastin

Oh, okay.

A - Jeffrey Lunsford

That we were waiting to start.

Q - Troy Mastin

Okay and then, did this have any impact on expenses in the quarter, I guess a favorable impact, because you were to begin to amortize some of the developmental cost behind Bid with its launch in Q4?

A - Jeffrey Lunsford

Yeah that’s what I’ve said we did, till we amortized or, I am sorry, yeah we amortized or capitalized two hundred and whatever it was $1000 of R&D expense in the quarter. And we will get all planned on a - I think we might have planned on 100,000 instead we ended up doing 200,000 in the quarter. And we’re driving that number down as quickly as we can because, fewer and fewer people working on it, as it narrows, things kind of crystallize its in QA. And I don’t want to capitalize software development ever, we sort of do it grudgingly because the orders make us.

Q - Troy Mastin

So how much then was not expensive that you expected to expense in the fourth quarter?

A - Jeffrey Lunsford

Probably about a 100,000.

Q - Troy Mastin

Okay. Then I wanted to ask about bookings, you mentioned 47% for Analytics, I wonder if you can give insight to the other businesses you have in put that 47% bookings growth in perspective to past quarters?

A - Jeffrey Lunsford

Yeah the past quarters, I think, in Q3 bookings were 30% to 40% was the number I use, so it was in between there. What I’ve always said is if we can grow bookings at 30% to 40% and keep renewals at 90 as you know, plus or minus a point percent then the topline will grow at about 40%. And some quarters will do 40 plus percent bookings growth, other quarters will do 30 plus, we‘ve never done less than 30% bookings growth. Well actually I should retract that, I would have to go look at the spreadsheet to see if we have less than 30% bookings growth. So that’s the target Troy, is 30% to 40% growth.

Q - Troy Mastin

Okay. And so the 47% you said again is a record and you’ve generally been running in the 30% to 40% range, is it fair way to put it?

A - Jeffrey Lunsford

Yes.

Q - Troy Mastin

Okay and then cash taxes you’ve said 20% in ‘06, how do they look in ’07 do we go to more of a full provision in ’07 do you know yet?

A - Jeffrey Lunsford

Well, we are going to have some tails on these things but some of the stuff created, the tax benefit created through the acquisition of Adams and through the merger of Visual Sciences, some of that stuff tails out for 15 years but it becomes less and less meaningful. I haven’t done tax forecasting into ’07, I probably shouldn’t answer that.

Q - Troy Mastin

Okay and I am just look into your guidance, I am perplexed when I get this all accounting because you are recognizing a pretty healthy tax provision for GAAP purposes, yet you have GAAP losses and I am trying to understand that, I know you might have able to explain it, because that’s maybe some complex accounting, but…

A - Jeffrey Lunsford

Well, yeah it’s because GAAP makes you paint a picture of an, you could paint a picture which is a non-cash loss when you are actually generating cash. And, the tax rates and I’m only the acting CFO and luckily we have one starting Friday I think. You get the tax benefit of the stuff, you may have already flushed it, so the only way if you are going to be a company that is going to be during any acquisitions at all, you just you have to follow the cash because with purchase accounting, it just gets really upside down really fast.

Q - Troy Mastin

Okay. Do you have a visibility on GAAP profitability after ‘06 by any chance?

A - Jeffrey Lunsford

After ‘06?

Q - Troy Mastin

Yes.

A - Jeffrey Lunsford

No, we give two quarters of earnings guidance and three quarters of revenue guidance.

Q - Troy Mastin

I am just curious if there are strange items in 2006 over the next few quarters that make your GAAP profitability look unusually negative that were reversed themselves and within a year or so from beyond your guidance?

A - Jeffrey Lunsford

Well, yeah the amortization of intangibles, sales off and usually that’s a little more front-end loaded. Stock-based compensation now with FAS 123(R) will be an ongoing charge. So it’s really just whether or not the amortization of intangibles, how quickly that goes away. And if, you acquire another business then you just sort of refill that problem, right. And then on the flip side of that this deferred revenue adjustment, we’re now on a GAAP basis, we won’t be able to take 4 million of Jim’s revenue this year. That would make you look better on a GAAP basis from revenue out in the future.

Q - Troy Mastin

Okay I will let someone else on, thanks.

A - Jeffrey Lunsford

Sure.

Operator

Thank you very much sir. And ladies and gentlemen your next question from the line Mr. Sean Jackson of Avondale Partners, please proceed.

Q - Sean Jackson

Yeah good afternoon. I missed the discussion about the competitors in Visual Sciences, I think that obviously I think you mentioned you compete with some of the pure play web Analytics vendors. But given the fact that you can do multi-channel analytics, does that put you up against the SAS or the SPSS or those kinds of companies?

A - Jeffrey Lunsford

I will let Jim answer that, I give you my color and comments from the beginning, we are not standing up saying we are a BI company. What we are saying is that, the space is evolving and actually companies that are high throughput transaction analytic engines like HBX and like Visual Sciences, we think are actually better positioned than most of the other guys whether you call them BI or whatever you want to call them bring to the market. Because most of those are big batch daily change, where data gets batched in one place and it gets batched in another, and it gets batched in another and finally you are going to layer over it and do some whole lot queries. And half of their challenge is how do they architect that, how do they get the data through, how do they get it all consistent and normalized in timely fashion whatever is going around batch. We don’t have that problem, neither one of us do, because we are both real-time architectures. And then the second thing is, those solutions were all generally designed with sort of business P&O and manager CFO types in mind, and our technologies were both developed with real-time ecommerce professionals and marketers and other government types in mind. And we think that the interface, the user interface, the paradigm that we created is much more flexible and much more powerful just by virtue of fact that the customers that we’ve had to make happy as compared to those guys that to make happy. A number of those guys have announced web analytics packages. Some of them, one of them has announced it 3 times, and we still never see it in the marketplace. Right, so we believe that from where we started positions us much better to skate where the pots going to be and play in the enterprise analytics space going forward than the other folks.

Q - Sean Jackson

Okay, so up to this point though within that 80% win rate, Visual Sciences has not seen those guys, you will not compete with these guys, they are still pure play web guys or not?

A - Jim MacIntyre

Yeah as Jeff said, well, the web analytics has the characteristic of producing very high volumes of data, that has tackled with traditional data management in OLAP type business intelligence products, it would be very expensive to deploy and often architecturally impossible. There are many other areas, other areas that we tackle are much the same, so when you look at high volumes of telephone call system data or high volumes of electronic mail or high volumes of network data. These have the same characteristics, the traditional business intelligence OLAP type products can’t process this data in real time, they function in batch and work and are extremely expensive. So we been through the discipline of dealing with very high volumes of data on a real-time basis and web analytics able to build an infrastructure that allows that data to be managed much less expensively and in fact allows it to be processed and analyzed in real-time at the same time. That’s allowed us to kind of look for other areas of data like the other customer interaction channels and other sources of such high volume events like data that are outside of the realm of focus for BI companies given their core architecture and as Jeff said, history in handling relatively small sets of data.

Q - Sean Jackson

Okay that was helpful. And also were there any other bidders for this company. I mean was this just WebSideStory or did you talk to anybody else?

A - Jeffrey Lunsford

We don’t comment on activity like that and I don’t think Jim should either at this point.

Q - Sean Jackson

Okay, all right. Thank you.

A - Jeffrey Lunsford

Thank you.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from the line of John Torrey of Montgomery & Company, please proceed.

Q - John Torrey

Good afternoon. Two questions for you, you mentioned Jeff, I think that consulting was accounting for about 10% to 20% of Visual Sciences revenue base, is that correct?

A - Jeffrey Lunsford

No, no. I was saying John, going forward that the pro forma business to combine business will probably be 10% to 20%.

Q - John Torrey

Consulting?

A - Jeffrey Lunsford

Yes.

Q - John Torrey

Okay. And in terms of the advertising, I know it’s a very small amount, I think you’ve described in the past that the advertising revenue would run around 5% of the total mix for the quarter. It seems like the expectation with the 150 description you described here for Q4 was a little bit higher, should we be modeling a better performance on that revenue line above 5% mix going forward for the core WebSideStory business?

A - Jeffrey Lunsford

As far as the ad revenue?

Q - John Torrey

Yeah the ad mix.

A - Jeffrey Lunsford

I would model it flat, that’s sort of how we are modeling.

Q - John Torrey

All right. And the 47% bookings I know you’ve answered this a couple of times, but just to be absolutely clear, that’s just HBX for Q4?

A - Jeffrey Lunsford

Yes that is analytics, that’s right.

Q - John Torrey

Okay and then on Visual Sciences, I think I understand what you are talking about from a data access perspective, but I guess what I am curious about is among the 40 customers that Visual Sciences accumulated, was the analytic intelligence that the company was able to deliver to its customers used primarily for digital marketing channels or in broader marketing program context beyond, just beyond line of web channel?

A - Jeffrey Lunsford

So Jim, why don’t you take that?

A - Jim MacIntyre

Yeah, the Visual Sciences started - focused on Web Analytics is the first area of the application of our technology platform and it makes up the bulk of the business we developed over the initial years of that company. And as we evolve the technology platform we began fielding additional applications, all on the same underlying technology platform. Our team was able to generalize, it’s going to apply to other areas like IVR and other call management system data as well as electronic mail and other areas of data. So the vast majority of our business is Web Analytics and we branched into Visual Call with the release of that application in 2004 and further into the mail analytics business in 2005. And then further the technology platform can now be applied as Jeff described to other general types of transaction and event like data. And different of our customers once they initially implemented it for Web Analytics or Call Analytics have taken the technology platform and applied it in a relatively wide range of ways.

A - Jeffrey Lunsford

Hey John, let me jump in for a second. My lawyer has advised me that I can actually answer the M&A question, because we never allowed to comment on M&A activity. But I think it’s important that you guys understand how we got together. This company was bought not sold, I chased Jim around the country for 5 months because I saw what he had and thought that, a) maybe it was a long-term strategic threat to WebSideStory but b) I thought that, the distribution platform that we had was a fantastic opportunity if we could couple his technology which is truly unique with our distribution platform that we could both generate more well for our shareholders together rather than apart. And Jim can comment, I mean basically they were looking at, everybody in the industry was of course calling on them but there was not an active sale process. They were looking at either taking private equity or working with us. And Jim, maybe you want to comment on this sort of why you decided to do one rather than the other.

A - Jim MacIntyre

Sure, yeah I mean, as we were considering, looking at the growth potential for the company in 2006 and beyond at the end of 2005, we had a nice year last year following a couple of prior next years and we saw tremendous amount of opportunity and we realized that to expand into the European market and other areas that we would either need to, need to grow through private equity relationships or through other means in this. At the same time we got in touch with Jeff and we never as Jeff mentioned, we haven’t decided what we’re going to do Jeff got in contact, we didn’t have a banker or anybody trying to sell our company and intended to in fact, so we, it was -- if its wasn’t where we excepted to be when we started 2005 or quite honestly when we ended it. But as I get to know more about HBX about the team at WebSideStory and they get to know more about us we decided that this would allow us to take advantage of the technology that we built more rapidly, and we gain a platform that’s quite exciting to us and at the end, the end analysis. So we’re very pleased with this, we think this will allow us to get our technology out in the hands of many more customers much faster than any other route we could see.

A - Jeffrey Lunsford

Okay John I don’t want to interrupt you but I thought that was important.

Q - John Torrey

No I understood. One other quick question, Jeff you had mentioned the $4 million deferred revenue write-down, I wrote in my notes 12 years but I can’t imagine that’s right in terms of the period over which you expect those…

A - Jeffrey Lunsford

No, no, no…

Q - John Torrey

…renewals the cycle?

A - Jeffrey Lunsford

No, the $4 million and by the way that’s an estimate and its subject to the completion of our purchase accounting analysis, but we think its going to be above $4 million. That will be a problem for a year.

Q - John Torrey

Okay.

A - Jeffrey Lunsford

Because if you think of Jim’s average, kind of contract cycle most of his deferred revenue will work off over the first year and then it’s not a problem anymore.

Q - John Torrey

Yeah I now understand okay.

A - Jeffrey Lunsford

It was actually a tax benefit that will be enjoyed for 15 years at about 1.3 million in cash excess cash per year. So you guys can NPV that however you want but, it’s good.

Q - John Torrey

Great thanks very much.

A - Jeffrey Lunsford

Sure.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from line of Wendell Laidley of RS Investments, please proceed.

Q - Wendell Laidley

Thanks, maybe I missed this on the call Jeff that, could you give us a sense for what kind of run rate and expense days Visual Sciences is operating at now and I am curious to know what your assumptions are for that business when you look with the guidance?

A - Jeffrey Lunsford

Well, so what we said is, they did about 8 million in revenue in ‘05 and 25% to 30% pretax margins, and it was an LLC so they didn’t pay any taxes at the corporate level. And going forward we think that these combined businesses, and its going to be just like Adams I mean by the time we get a quarter or two done, its going to be hard to figure out which, where to put the revenue and where to put the expense. But these combined businesses will put up, the kind of 40% growth we’ve been putting up.

Q - Wendell Laidley

So, I guess what, you are doing it on the heels of a quarter that for the first time was, below the guidance. So what I am trying to do is reconcile what’s pretty modest sequential growth of the business with what 17% growth in deferred revenues as well as your comments about bookings, so was there some business that fell off in the quarter that you weren’t able to make-up for from a booking standpoint, just trying to, we are talking about roughly 600 grand in subscription revenue so kind of put in context?

A - Jeffrey Lunsford

Yeah I think the, $400,000 or exact 450 when you add it up, it was really the problem and so it’s the core business stood right in the, right in the same sort of renewal rate ranges we target and the bookings were higher than we targeted.

Q - Wendell Laidley

Right, so all of the four factors there is something that you have an experience before is otherwise the compounding effects?

A - Jeffrey Lunsford

We had an experience in ad revenue shortage like this, and ad revenue as I said we are just modeling it flat at this point. And because those are smaller websites, there is thousands of them that use our free storage. And then at some point you know and we are signing up, I don’t know how many 14 more everyday or 14 more every week I don’t track the numbers, some number like that. And then, where we, at some point if their online business is growing and doing well then they will want to get some of them will actually want to not have other people advertising on their site, right?

Q - Wendell Laidley

All right

A - Jeffrey Lunsford

And so that’s kind of its own little sort of you know eco system but so we are just in, we were forecasting that to grow and if you go and look at the Adams documents which were publicly filed, you will see what we were, what Adams and we sort of arms like negotiate and we thought we’re going to be, because its time to their earn out.

Q - Wendell Laidley

Great

A - Jeffrey Lunsford

And that’s all with their earn out is focused on is that revenue. When we did the transaction with Adams we were worried about the volatility of this revenue stream because it was very new and so we structured for it. And if you run this rate out right now then it will be somewhat self-correcting not on the earnings multiple basis but on a sort of a one for one dollar basis, its sort of self-correcting that if we were $0.5 million or $1 million or whatever below the forecast over that period and we’ll get some of that money back out of that earn out.

Q - Wendell Laidley

Right, so what’s your assumption for Visual Sciences contribution for the three quarters that you’ve given revenue guidance?

A - Jeffrey Lunsford

It’s taken both the businesses and growing them at roughly the 40% rate that we said we thought we could do.

Q - Wendell Laidley

So, but if they are doing at 8 million in ‘05 presumably they are exiting ‘05 doing at least 2 million a quarter.

A - Jeffrey Lunsford

Prior to any deferred revenue adjustment, yes.

Q - Wendell Laidley

Right, so I guess that’s where you come out and…

A - Jeffrey Lunsford

And we got a 58 day over 90 day adjustment to make.

Q - Wendell Laidley

Okay.

A - Jeffrey Lunsford

Right, so I mean, you got to figure all that into it too, because we’re only getting the math of February 2nd.

Q - Wendell Laidley

Okay.

A - Jeffrey Lunsford

So that maybe why, if you trying to do the math and maybe why Q1 was lower than you thought as you only got 58 days.

Q - Wendell Laidley

Right, obviously the skeptics going to say, you are buying a company on the heels of decelerating growth for the core WebSideStory business that has, has Adams right now. So to the degree you can be more transparent about the contribution from Visual Sciences that we can compare old guidance versus new guidance and understand what the implied performance of WebSideStory as that would be helpful?

A - Jeffrey Lunsford

Yeah it’s just real difficult to figure out like I’m going to probably try to plug Visual Sciences into a big renewal we have going on, and where do I credit that revenue. So we were trying to be more, yes simplistic in our modeling and I said earlier we would have taken the revenue guidance down standalone. Our business is very forward, it’s got visibility and we would have, you can’t take $400,000 off of Q4 and then go and make it up, make up $800,000 in Q1 plus whatever your formally projected growth rates were.

Q - Wendell Laidley

But is that the amount that you would have taken it down by?

A - Jeffrey Lunsford

Probably we taken out less than 400 because like I said the bookings does fill back in between the quarter right. So…

Q - Wendell Laidley

My last question, will you be transparent and breakout the Visual Sciences contribution in the first two quarters of ‘06. Just to get comfort as far as how the core WebSideStory business is doing?

A - Jeffrey Lunsford

We’re going to do exactly what we did with Adams, which is we gave you, we filed an 8-K. And again I don’t think I can talk with financial accuracy around with what’s the earnings contribution next quarter.

Q - Wendell Laidley

No just the revenue contribution, that’s what people care about.

A - Jeffrey Lunsford

Yeah, yeah absolutely.

Q - Wendell Laidley

Okay, so we’ll be able to look at what the core WebSideStory business is for at least the next two quarters – did with Adams?

A - Jeffrey Lunsford

You are going to be, what’s you are going to be have to see is license revenue which we didn’t have before, right. And you are going to see consulting revenue which we currently have very, very little of like 50k this quarter or something, it is very small. So you are going their business pop in right away.

Q - Wendell Laidley

Right.

A - Jeffrey Lunsford

And then but the further we get out, it gets very difficult to try and figure out where to put the buckets.

Q - Wendell Laidley

I understand them, more transparency you give will help with that 400k delta in context about whether it’s the beginning of the trend or a one-quarter readjustment.

A - Jeffrey Lunsford

Yeah, you are right.

Q - Wendell Laidley

Okay thank you

A - Jeffrey Lunsford

Thank you.

Operator

Thank you very much sir, ladies and gentleman your next question comes from the line of Jeff Osher of JMP Asset Management, please proceed.

Q - Jeff Osher

Hi guys, Wendell asked the question I was getting at, but just for a little more transparency and clear you along those lines, if Visual Sciences exited ‘05 with trailing revenues of 8 million, its you presume if you just assume when your quarterly revenues today with 40% growth you get about eleven two in ‘06 and if you just look kind of if you assume there is some linearity to that eleven two and layer that in, I am sure you can see Wendell’s point that it looks from your guidance relative to, the old guidance somewhere kind of consensus was for the first three quarters that you are taking the core business down significantly, so any transparency you can give moving forward. I think would be a bit positive because the skeptics as Wendell pointed out are going to look at the extreme just of our acceleration of the core business?

A - Jeffrey Lunsford

Yeah I guess the only thing I would say about those skeptics, again I haven’t done the math because I’ve been focused on what the combo looks like going forward but it probably would have come down 300,000 or something like that of the 400,000 and that would flow completely through the year, so that would have taken my internal models down by something like 1.2 million or 1.5 million, I don’t know, but it’s a, you have to look at the bookings in customer ads is actually the forward-looking sort of predictive indicator, and that and then obviously attrition, and we’re not saying there is an attrition problem, because we’re saying we’re running in the same basic renewal rate ranges we have been running in.

Q - Jeff Osher

Yeah, I hear you on that Jeff, I just looking at the numbers – from everything we’ve heard there is, the attritions is certainly normal which says a lot about how you are serving customers, but the consensus estimate are kind of the mid points of guidance, ‘04 was 42.5 million rate, and I am just taking Q3 consensus, not that the analyst got it right, but just kind of taking the 15.3 in your mid point, netting out the rest of black hole revenue is 48 million. So, for the first three quarters that assumes that had the organic business been what everyone was kind of expecting, that assumes Visual Sciences only adds 5.6 million in that…

A - Jeffrey Lunsford

Yeah that…

Q - Jeff Osher

Do you see the dislocation there?

A - Jeffrey Lunsford

Well, the consensus of what do you say, what was consensus?

Q - Jeff Osher

It was 42.4 coming into your announcement tonight.

A - Jeffrey Lunsford

40 consensus for what?

Q - Jeff Osher

Revenue, I’m taking 13.1 which was the mid point of your guidance for Q1. 14 million for Q2 again the mid point and I’m just throwing the 15.3 for Q3 which was analyst consensus.

A - Jeffrey Lunsford

Right.

Q - Jeff Osher

I am getting 42.4 for the first three quarters.

A - Jeffrey Lunsford

Oh, I am sorry I thought you are talking about for the year.

Q - Jeff Osher

No, no, no sorry about that. No, I’m just taking the first three because that’s all you guided for, right for the combined entity.

A - Jeffrey Lunsford

Yeah.

Q - Jeff Osher

So there is, if I assume the core business was roughly the same or take 400,000 out, which would be the lower basis is what I am saying, even if I add the 400 back that you missed from this quarter and assume the basis is where you would have like to been and we would have like to seen you.

A - Jeffrey Lunsford

Right.

Q - Jeff Osher

And that assumes that Visual Sciences only going to add 6 million if we are taking the first three quarters?

A - Jeffrey Lunsford

In actually 2½ quarters.

Q - Jeff Osher

Okay 2½, we add back in that extra half which is 7 or 8?

A - Jeffrey Lunsford

Yeah two point whatever 58/90 is.

Q - Jeff Osher

Right

A - Jeffrey Lunsford

Yeah, I don’t think it’s quite as a haircut as you guys, so 2.64 quarters. So if they contribute 6 to that out, and I don’t have the math but I think that it probably gets pretty close to whatever the eleven six number you were talking about is.

Q - Jeff Osher

Okay well, we’ll run, but again any transparency if you can give, going forward I think is going to help you use the concerns about the core business, Jeff thanks a lot.

A - Jeffrey Lunsford

Yeah, thank you.

Q - Jeff Osher

Okay.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from the line of Richard Baldry of First Albany Capital, please proceed.

Q - Richard Baldry

Thanks. In terms of the structure of the deal, can you talk a little bit more about the unsecured senior notes for 20. And you have this is now your second acquisition less than a year, are there any covenants associated with that, note that would preclude you from doing other acquisitions first write to any follow-on offerings etc. that might limit your financial flexibility? Thanks.

A - Jeffrey Lunsford

Yeah there are no covenants, and there is no penalty on prepayment of the note. So basically Jim and David have built their business and wanted this, they actually wanted some downside protection and they wanted as much equity upside as they could preserve and this structure sort of gives them 2/3rds of downside protection as represented by the cash and the note and also provides them with 2/3rds of equity upside as represented in the worn, in the stock, in the restricted share and the options. And so what they sort of got and I told them if I over ever sold my company I don’t want to do the same thing. This is a good trend, a good structure is a one-sided collar on the further proceeds which is very rare to see in an M&A transaction. So, but there are no - that’s how we sort of got to the structure, right. And then Jim and I are focused on the combined business going forward and, we’d neither one of us wanted to leave the combined business with low on cash. So I think we went up after this transaction with about 13 million in cash and if you look the cash generation of the business there will be cash on-hand to pay the $20 million note of plus interest at the end of 18 months if we need to, so we don’t have a gun to our head, we don’t have to go and raise capital, and we have the luxury of delivering for you guys for a couple of quarters if we wanted to raise capital if the skeptics, we are not against the optimist tomorrow. So we got a good situation where we are going to run our business and we got the cash to pay up the note when we need to, there are no covenants preventing anything further but we are not, I guess don’t view the fact that we did Adams in May and in Visual Sciences in January meaning that we are going to be running around doing a bunch of M&A, I mean these two businesses now we have more than we can say great serving, we can get the a much better investment of our time and spending time hiring the good sales guys and good consultants and good engineers to grow this business and not trying to get spread too thin too fast. So always say plugged into what’s going on out there, but I think that we are going to focus on execution.

Q - Richard Baldry

A pretty basic question, in looking at the headcount of the WebSideStory proper exiting the quarter, if then maybe growing underneath them to the sales quarter side and whether, retention in the sales side is good which seems to be reflective of the high bookings figure in the quarters? Thanks.

A - Jeffrey Lunsford

You are saying how is our sales force performing?

Q - Richard Baldry

The, sort of basic headcount for the whole company excluding the acquired headcount turning out of the fourth quarter and then total number of quoted reps, how that’s changed in retention within that figure?

A - Jeffrey Lunsford

Yeah we had about 220 people at the end of the year and I think 34 quota-carrying reps on new business and about 14 employees quoted on renewal business.

Q - Richard Baldry

So its only one sales head added in the last quarter, if I go back to my notes, what would you expect to see that exiting ’06?

A - Jeffrey Lunsford

Well we also added sales managers, we added a couple of people in consulting. So I am giving you quota-carrying reps. The other thing we are doing is, we ramped our marketing budget starting in Q4, and our marketing program spend is going to be 60% higher this year than it was last year. That’s last time you guys, we are doing what’s right for the business long-term because of the opportunity that’s there, and so we are actually investing more in marketing. And you got to look at the sales and marketing expense as, as a combined investment not just at the sales ad, our sales ad productivity has been growing for the last three years. Those guys are getting better more and more tenure, people are been here with us for a year, do better than the new folks and all that good stuff but it is a combined investment, not just the heads there.

Q - Richard Baldry

Thank you.

A - Jeffrey Lunsford

Sure.

Operator

Thank you very much sir. And ladies and gentlemen our next question comes from the line of Kyle Evans with Stephens, please proceed.

Q - Kyle Evans

Hey Jeff, a couple of questions for you.

A - Jeffrey Lunsford

Sure Kyle.

Q - Kyle Evans

Can you go over the competitive landscape, you people have been pretty focused on Google but could you talk more about Omniture, Coremetrics, WebTrends, etc.?

A - Jeffrey Lunsford

Yeah, the answer would be pretty much exactly the one I’ve given for the last four quarters. Omniture is doing well, growing fast right here, they are going to try to go public, they’ve hired, the CFOs and General Councils and something like that. So I would expect to see them try to go up this year. And Coremetrics is doing well, good brand, good customer attention in the ecommerce sector. WebTrends basically the same from what we see, not much has changed still kind of the larger presence in the market with a big install base that’s an asset to them, their big install bases and their WebTrends 7 release which is out a year ago or whatever got them back into the game, they were sort of out of the game for a while, but it hasn’t been a dramatic ascendancy back to market leadership, and then Visual Sciences as the up incomer that basically everybody was enamored with, and has kind of quietly walked in and took about twenty of the biggest accounts in the space and got everybody’s attention with their technology.

Q - Kyle Evans

Okay. One of the things that investors appear to like about your business model is the stability and the visibility, so can you help us understand how the ecommerce bookings got back in loaded and happen along with that, any kind of average deal size trends within that as those bookings that came in towards the end of the quarter?

Q - Kyle Evans

Yeah, I mean bookings we have like as an example in Q1 of last year, we had this very similar situation where we loudly outperformed on bookings but back then I think we have guided $0.07 to $0.08 and we did 7, so you guys whacked us, whack to start from 14 to 12 or something like that or even 11 and because, and the reason we did seven was because we had such great bookings, and they were late in the quarter. So the extra penny was extra commission, because we would had a record bookings quarter in Q1 and at the time I said, look its a forward, its a forward indicator this is back then I said, literally this is the best sales quarter I have ever had in the software business. As far as everything just coming together, but it came together at the end of the quarter, and we have a very similar situation this quarter although this time we beat by a penny on the earnings but some of that, half of that penny was from the excess software capital. So to me we basically I think we managed our expenses a little better this quarter than we did back in Q1, and you can’t really control sort of within a quarter when your deals are going to come in, you just push hard, we close every month here, we don’t close every quarter, we close every month and push our guys to monthly quarters and it just happened that in Q4 a lot more of it came in December.

Q - Kyle Evans

Any change in average deal size in those December bookings?

A - Jeffrey Lunsford

No.

Q - Kyle Evans

Okay.

A - Jeffrey Lunsford

Well actually I didn’t – well I can’t answer that because I didn’t look at average bookings by months, I just look at it for the quarter, and for the quarter it was about like I said 30 grand across all businesses for one year value of the new customer has.

Q - Kyle Evans

Okay, but still 40 for the HBX?

A - Jeffrey Lunsford

No that’s 40, there is a difference between a new customer booking which was 30,000 I think for the last two quarters it’s been 30, 000, and the average annual relationship, the average annual relationship includes our existing customers, but so do you follow me?

Q - Kyle Evans

Yes.

A - Jeffrey Lunsford

Okay

Q - Kyle Evans

Lastly, you gave us a kind of an HBX Analytics bookings growth number, what was total bookings?

A - Jeffrey Lunsford

It was in that 30% to 40% range. In the target of 30% to 40% range and I apologize, I don’t know exactly I think it was in the mid 30s.

Q - Kyle Evans

Okay, so, the Adams business is still 20% to 25% it, it sort of just the bookings in that piece of business, obviously slow?

A - Jeffrey Lunsford

Yeah and, the reason I apologize because Adams measures bookings on a multi-year value and we measured on a one-year value. So I think I want to say 34%, but I’ve got all you guys up on my stream. So Adams is again growing in the 30% to 40% range that we are growing in and they have some quarters where they do better than that and some quarters where they are in that range, our bookings growth in that, I think Q1 of ’05 was 50%. And then my SG&A team brought in when I, because I said earlier I don’t have the numbers. And, then it was like 35% in Q2. So it just kind of whack up and down.

Q - Kyle Evans

Okay, and last quarter you talked about some large site search wins, anymore continuation of that trend in this quarter?

A - Jeffrey Lunsford

Yes, yeah we closed, I think seven cross sale deals, I think it was about $580,000 or something like that in one-year value or total contract value, of cross sale deals between selling site search or web content management in the HBX customers.

Q - Kyle Evans

Okay, thank you.

A - Jeffrey Lunsford

Sure.

Operator

Thank you very much sir. Our next question comes from the line of Conrad Valentino of Baron Capital, please proceed.

Q – Conrad Valentino

Hey Jeff, thanks for taking the question, just late in the call.

A - Jeffrey Lunsford

Sure.

Q – Conrad Valentino

So, back to the guidance, I just wanted to be clear on the deferred revenue piece that goes away in purchase accounting, so the piece that you are going to add back in for the sort of non-GAAP revenue. I assume that there isn’t actually any cash associated with that and that its already been paid?

A - Jeffrey Lunsford

No there is cash associated with it, if it’s still receivable, so like us Visual Sciences books to deferred revenue when they invoice, not when they get paid. And so what happens is the cash flow of the business is not interrupted at all.

Q – Conrad Valentino

Right, I understand. Okay then -- that seem like the right way to think about it.

A - Jeffrey Lunsford

Yeah.

Q – Conrad Valentino

Okay, and then the next question is, and I know there been a lot of questions about guidance and obviously the whole idea is to try to figure out what the core business guidance would have been. We talked a lot about the revenue and I think that as we all go back and put the numbers into our model we’ll figure out in either be pleased or not pleased and then we can all follow-up back with you. But we haven’t talked too much on the EPS side and so and looking at the guidance it looks like the new EPS guidance, pro forma guidance is $0.11 to $0.13. And is it my understanding that if you backed up the deferred revenue then that new guidance could be $0.06 to $0.08?

A - Jeffrey Lunsford

No, no, no, no. It will be $0.11 to $0.13. Well, if you, when you say back up the deferred revenue, you mean if you take it down because I reconcile that down to GAAP, right down at the bottom of the guidance.

Q – Conrad Valentino

Right, so it looks like there was a nickel of it was like, when you are getting back to GAAP. So I guess what I am asking is, the deferred revenue as it flows through the P&L would add the nickel to guidance?

A - Jeffrey Lunsford

No.

Q – Conrad Valentino

Okay.

A - Jeffrey Lunsford

The way I am running the business is, I think the consensus for Q1 was $0.14 and in that same math if I get to include the pro forma revenue which was the stuff that was written off, so with cash then we are guiding to $0.11 to $0.13 as compared to that 14 its consensus.

Q – Conrad Valentino

Thanks.

A - Jeffrey Lunsford

Okay.

Q – Conrad Valentino

Okay, so then, so I guess I am just trying to figure out what, I guess, I mean -- all right, so if the business is, if the acquisition is going to be neutral and I guess the way to think about it is if you didn’t take the nickel of deferred revenue then there would, the business, the acquired business has expenses and so that’s we should think about that sort of as a breakeven. So the core business you would have guided to $0.11 to $0.13 had you not made an acquisition?

A - Jeffrey Lunsford

No, no I am saying with the acquisition, but or was out of it, because it’s neutral, it’s neutral to slightly accretive.

Q – Conrad Valentino

Okay so without…

A - Jeffrey Lunsford

With or without, an EPS would have been $0.11 to $0.13

Q – Conrad Valentino

Okay and then when you originally gave the $0.13 to $0.14 guidance, did you anticipate a 20% tax rate?

A - Jeffrey Lunsford

Yes we did and again what as I said at the beginning and in the middle and in the end, is the reason we are bringing down guidance is because we are ramping the spend on sales and marketing, its not because of the roughly $300,000 in revenue that we would have probably lowered per quarter because you look at the margins we generated in Q4, right?

Q – Conrad Valentino

Yes.

A - Jeffrey Lunsford

So this is really sort of two questions there, what’s the revenue growth of the business and then what’s the earnings performance of the business. And so, I think what we probably would have done to give Wendell the transparencies we probably would have taken revenue down, the guidance range is down by about 300,000 a quarter or something like that for the two quarters remaining. And then we probably, and we still would have guided to $0.11 to $0.13 because we decided we are ramping sales and marketing and that’s the right thing to do. And if anything we made too much money in Q4.

Q – Conrad Valentino

Okay, so that’s what, I mean my questions were, I am just trying to get to how much of the difference in EPS with sales and marketing and so the answer is its all of the EPS difference with sales and marketing.

A - Jeffrey Lunsford

And R&D, we’ve got 19 guys in Russia now.

Q – Conrad Valentino

All right.

A - Jeffrey Lunsford

So its those three areas, I mean what we are saying is the high end of the market is on fire while the world think its getting, going to get raised by Google, we actually think its on fire with opportunity and we’re hiring sales people growing our marketing spend by 60%, and hiring more developers in Russia to ramp-up the R&D throughput of the development engines.

Q – Conrad Valentino

Okay, good.

A - Jeffrey Lunsford

And then maybe all of that messaging got mucked up in the acquisition, Jim we probably should have closed your deal tomorrow so we could have done a standalone announcement and then announced your deal.

A - Jim MacIntyre

Well, whatever would have been, we would have been just as confused I suspect but, that’s good, I mean its nothing but a few good quarters that’s been clear up and that’s sort of the way the things work.

Q – Conrad Valentino

Okay, so then and then the next question is as we think about combining the businesses, one of the pluses of this business has been there is a subscription revenue that is not just a deferred license revenue but it is actually subscription revenue that is connected to a product that can be turned on and off. Is there, so in other words perpetual licenses are, in my opinion from an investment standpoint a less desirable way to run a software company, obviously the most popular way to run them in the past. Looking forward do you think that, you will continue to run the acquired business partially as the perpetual license deferred over 12 months?

A - Jeffrey Lunsford

We are going to be running the business the way Jim has run it which is you basically go into these high-end opportunities and you would listen. First thing you do is you spend two hours listening to their needs and that’s how you close million dollar deals. In my former, but that’s how we closed $10 million deals and then we get it by going with these big global banks and really spending time to understand what they wanted and then mapping our solution into what they needed and delivering them real value. And so the first thing you do is listen and then if they wanted in-house and they are going pay a $1 million and then that’s the beauty. I’ve said this opens up that market to us. And there is two bad things about the traditional perpetual license software model. The first is the unpredictability of the revenue, the second is that when you run your software in-house you got to maintain all these back releases on all these various platforms like Solaris, IRIX, HBX etc. And you can solve the first one with contracts, you can solve the second one with an efficient delivery system that once your solution is installed in-house it auto updates and, as Norton Anti-Virus, an on-demand software company or a licensed software company, right. And Jim’s architecture is sort of exactly that but at the enterprise level if you want him to take the time he can describe it to you, it’s a pretty unique approach.

Q – Conrad Valentino

Okay, well, I mean that is something I look to get into in the future but we don’t have to now. But especially my understanding is that, at the high-end this is you basically got to give them want they want. And, so the best way to approach that is just create a high where you can auto update or if they want the license they are going to get the license.

A - Jeffrey Lunsford

Yeah, and he does on-demand and the managed services and in-house license really all three.

Q – Conrad Valentino

Okay. Okay, good that’s all I got for you now, I appreciate it and I hope to follow-up soon.

A - Jeffrey Lunsford

Thank you Conrad.

Operator

Thank you very much sir. Ladies and gentlemen we have a follow-up from Kyle Evans of Stephens, please proceed.

Q - Kyle Evans

Hi Jeff, it sounds like the average deal sizes were kind of inline with prior quarters, what about the length of the contracts, there’s been any lengthening of those average deals?

A - Jeffrey Lunsford

17 months. Yeah kind of like clockwork, it been that way for a year. We’ve been trying to get it longer because it does help you on the renewal side of things, but it seems when I got here it was 12.2 months or something like that, we got at the 17 and it seems the sort of level off, seems like half of our customers will do multi-year deals, and the other half pretty much wanted to do one year to start off.

Q - Kyle Evans

Okay thanks

A - Jeffrey Lunsford

Yes sir, thank you.

Operator

Thank you very much sir, we do have another follow-up from the line of David Hilal, of Friedman, Billings, Ramsey, please proceed.

Q - David Hilal

Jeff, when you guys report the March quarter, how many revenue lines are going to be on the P&L and what are they?

A - Jeffrey Lunsford

It’s going to be, the only additional revenue line is going to be the license.

Q - David Hilal

Okay, so maintenance I would assume will fit it in subscription, where is the consulting going to go?

A - Jeffrey Lunsford

We have consulting in our P&L results that is bundled in.

Q - David Hilal

Yeah.

A - Jeffrey Lunsford

Okay. So, as acting CFO I can’t answer that question, and I will work that out with Claire Long and we will start out Friday and we will get back to you, because I am going to give, I am all for transparency, but I also don’t know other rules, you know what I mean.

Q - David Hilal

Right, okay. Now the deferred write-down of 4 million, is that mostly from the license bucket?

A - Jeffrey Lunsford

The deferred is mostly, well actually Jim do you know that your deferred revenue schedule how it…

A - Jim MacIntyre

That’s the biggest, the largest portion of it David.

Q - David Hilal

Okay. So its sounds like we’ll continue to add obviously subscription and advertising lines, so there will be a license line, so we have at that level at least three and what you are not sure is whether there is going to be a four and I guess that would be consulting, and if its not a four, consulting is going to go on to one of those other three?

A - Jeffrey Lunsford

And you mentioned maintenance, so I don’t know, I know we’ll have license that will add, and I don’t know the GAAP, 97 to definition of what maintenance is and whether Jim’s support is included in that, that’s what I am saying, I just I don’t want to make a commitment that I am going to add a bunch of lines that I don’t know if I even can’t add. So the thing that this business has are consulting, maintenance and license. We do have consulting today but the bulk of our consulting gets bundled in, we’ll sell a $200,000 deals that will include 10 days of consulting.

Q - David Hilal

When you guys made that determination, having probably a mid quarter call to give that guidance will be helpful because otherwise I think there will be lots of confusion in 90 days from now on that. The other question I want to ask, Jim…

A - Jeffrey Lunsford

So then if we be on revenue but miss on maintenance you are going to whack me then.

Q - David Hilal

Well, people will focus on the revenue mix, right, so just one of those point we want to understand, what’s strong and what’s weak.

A - Jeffrey Lunsford

Yeah.

Q - David Hilal

Its clearly we can’t, we can’t figure that, because we know something strong, we know something is weak in the business too. We can’t answer like pinpoint, which is which.

A - Jeffrey Lunsford

Well, no I thought that I in giving you the four components of ad revenue, bookings, Euro, and HitBox Pro that I was doing exactly what you want, which has given you visibility. I mean most companies might not spend the time and tell you about their HitBox Pro business which was $50,000 worth than they thought.

Q - David Hilal

Right.

A - Jeffrey Lunsford

So I am trying to give you guys all the visibility that you are asking for, but sometimes you ask for questions that we don’t even have calculations for, and so then the question is alright do I need to figure that out on the fly because the way I run the business is bookings, attrition and cash flow and in customer ads. If, when you try to get more complex in that then I’ve got to go hire three people in FP&A just to run all the different scenarios for us and it’s just how work the investment.

Q - David Hilal

Alright and then my next question, so with the perpetual licenses that Jim sells, he recognizes that over 12 months which is the first maintenance contract period, what, to do that, there needs to be, I think there needs to be some outstanding deliverables, so accounting allows you to defer and recognize. So Jim, what do you do in different, in the way you license that software that allows you to recognize it over 12 months as opposed to be enforced to recognize it upfront like most software companies do?

A - Jim MacIntyre

David, we have a variety of ongoing support services beyond the scope of the maintenance agreement that we extend to the customers to that period of time. So it’s because they are large and implementations of our system where people are often integrating new these types of data as the weeks and months go by. We have a team that’s allocated that stays involved with that expansion process. It also allows us to stay very involved and look for the natural areas of expansion for the product line at the same time.

Q - David Hilal

Okay thank you guys.

A - Jeffrey Lunsford

Thank you, David.

Operator

Thank you very much sir and that concludes our Q&A session for today, I’ll like to turn the call back over to our speakers for any closing remarks they may have.

Jeffrey Lunsford, Chairman, Chief Executive Officer

That’s it folks, we are going to work on giving you all the transparency you need and we are going to schedule a day, I believe its going to be next Tuesday in New York where any of you that want to be there or any of your investors would be out to come and see this technology live, and I think the folks will understand more, I think they will be pretty bullish on what we were up to when they see that. So we’ll get back to you when we know more about that event. And at that time we’ll stop the call.

Operator

Thank you very much sir. Thank you ladies and gentleman for your participation in today’s conference call. This concludes the presentation and you may now disconnect. Have a good day.

Jeffrey Lunsford, Chairman, Chief Executive Officer

Thanks.

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Source: WebSideStory Inc. Q4 2005 Earnings Conference Call Transcript (WSSI)
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