Executives
Rick Rudman – CEO, President and Co-Founder
Steve Vintz – CFO
Analysts
Tom Roderick – Thomas Weisel Partners
Philip Rueppel – Wachovia Securities
Laura Lederman – William Blair
Brendan Barnicle – Pacific Crest Securities
Robert Breza – RBC Capital Markets
Rag Sarathy – Ferris, Baker Watts
Brad Whitt – Broadpoint Capital
Rich Baldry – Canaccord Adams
Vocus, Inc. (VOCS) Q1 2008 Earnings Conference Call Transcript April 22, 2008 4:30 AM ET
Operator
Welcome to the Vocus's First Quarter 2008 Earnings Conference Call. The date of this call is April 22, 2008. This call is the property of Vocus Incorporated and any recordings, reproduction or transmission of this conference call, without the express or written consent of Vocus Incorporated, is strictly prohibited. This call is being recorded. You may listen to the webcast replay of this call by going to the Investor Relations section of Vocus's web site. I will now turn the call over to Steve Vintz, Vocus's Chief Financial Officer.
Steve Vintz
Good afternoon. We are very pleased that you could join us today to discuss Vocus's results for the first quarter of 2008. Now, I will cover the Safe Harbor Statement and then turn the call over to Rick Rudman, Chairman, President and Chief Executive Officer.
During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events, and the future financial performance of the Company. We want to remind you that these forward-looking statements are based on information available to us today as of today's date and are subject to risk and uncertainty. We assume no duty or obligation to update these forward-looking statements even though our situation may change in the future.
We encourage you to review our filings with the Securities and Exchange Commission, which are available at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations. We also intend to discuss the non-GAAP measures. A reconciliation of GAAP and non-GAAP results is also available in the press release we issued today, which is on our web site at www.vocus.com.
I will now turn the call over to Rick Rudman. Rick?
Rick Rudman
Thanks, Steve. We are off to a great start in 2008 with outstanding Q1 financial results. Taking a look at our financial highlights, revenue come in at $17.9 million up 42% year-over-year, non-GAAP operating income hit $2.9 million, an 89% increase versus Q1 last year. And on the free cash flow line, we achieved 66% year-over-year growth coming in at $5.1 million.
In reviewing the Q1 financials, we were particularly pleased with the leverage in our operating model, which clearly demonstrates our ability to pull top line growth through to profitability and cash flow.
Now, I would like to drop down a level and provide you with some additional color on the quarter. During Q1, we added 219 net new subscription customers. To put this into context, this is a new record high for the company and double what we saw last year in Q1. Our flow of business was well balanced in terms of order sizes, geographic spread and industry segments. For example, during Q1, we closed business with organizations as small as mybowlingcoach.com and US Lacrosse, all the way up to large companies like Merck and Warner Brothers.
In the mid market, we continue to see organizations buying Vocus in order to leverage limited resources and promote their business through Web-based PR. The mid market includes over 300,000 prospects and represents our fastest growing market segment with average annual subscriptions of $10,000. While the mid-market is exciting due to the shear number of prospects, we are also seeing continued success in the large market where we still derive about 50% of our revenue.
Larger companies are using Vocus to move their paper-based PR departments to the Web in order to increase collaborations, improve results and measure the effectiveness of their PR initiatives. We continue to add new large marketing customers every quarter with annual subscriptions of $40,000 and with some subscriptions in excess of $200,000 per year.
And while $40,000 or $10,000 annual PR subscription makes complete sense to a large or mid-size organization, even $10,000 is out of reach for many small businesses. Keep in mind that until recently, many of the 26 million small businesses in the U.S. couldn't afford any form of public relations.
With outsourced PR costing $5,000 or more each month, and with traditional press releases costing $1,000 and more. Small businesses have been reluctant to embrace public relations as a tool to promote their businesses. With our PRWeb news release service and our Small Business Edition, even organizations with less than $5 million in annual revenues can now use PR in their marketing mix for as little as $3000 per year, or even with a single $80 press release. This is the power of PR for the masses and it represents potential $3 billion market segment for Vocus.
Although, this is a relatively new segment for us, we are very pleased with the growth of PRWeb and with the initial results of our Small Business Edition. As we continue to expand and sell into each of these market segments large, medium and small, it's also important to note that each segment is profitable for us, since the cost of doing business scale up and down based on the ASP within each segment.
So, we are really excited about the fundamentals of our business model which allows us to generate great top line revenue growth while also delivering strong growth in operating income and free cash flow.
In terms of geographies, we saw growth in both North America and Europe. In Europe, Q1 revenues grew 87% year-over-year driven primarily by our UK operations with some early success in other parts of Europe and Asia. We continue to believe that there is a large and untapped opportunity for Vocus in these regions, especially in some of the larger economies in Western Europe.
So, based on our success coming out of Q1 and the strong market demand for our products, we continue to invest in our sales force both in the U.S. and Europe. At the end of Q1, we had 110 quota-carrying sales reps, up from 91 at the end of Q4. Our 2008 plan calls for 120 to 125 reps by year-end and we're pleased with the quality of the people we are finding and the ramp times to productivity.
From a competitive standpoint, I really have no changes to report this quarter. We continue to see the same fragmented market with no real competitive changes either in the overall market dynamics or product offerings. Keep in mind that the overall market remains underpenetrated and 50% or more of our sales are still made to companies that are using any PR Software or companies that are using books, paper, or generic desktop software.
Finally, let me take a moment to briefly address the macroeconomic environment. Simply put, we haven't seen any impact of economic factors on any aspect of our business, and in fact Q1 bookings were stronger than expected. I believed there are several reasons for this.
First, we don't see organizations reducing their spending on public relations. PR typically delivers a better ROI than other forms of marketing including advertising. Secondly, with averaged ASPs between $20,000 and $25,000 and with mid-market ASP of $10,000, these are really low cost subscriptions that deliver incredible value and do not come under IT oversight.
And finally, our customer base is extremely diverse with no one industry representing more than 10% of our business and no one customer representing more than 1% of our business. We also continue to sell to organizations of all types including corporate not-for-profit and government.
So, in summary, this was really an exciting quarter for us. We delivered accelerating growth on the top line, added a record number of net new customers and successfully expanded the direct sales organization. All are significantly improving our operating income and free cash flow. Given our performance this quarter along with the favorable market dynamics we are seeing, we are very excited about our outlook for 2008.
I will now turn the call over to Steve Vintz who will provide us with some additional information on the business. Steve?
Steve Vintz
Thanks, Rick. I would like to start today by covering some detail on our income statement. In terms of revenue, I'm very pleased to report that the first quarter of 2008 was our 35th consecutive quarter revenue growth. Revenues for the quarter were $17.87 million, which represents a 42% increase year-over-year and a 9% increase over the prior quarter.
Total active subscription customers increased by a record 219. The compelling growth in our net adds year-over-year is reflective of the continued momentum in our business and the return of investment we're seeing from our expansion in the SMB market. We ended the quarter with 2646 active subscription customers, compared to 1832 at the end of Q1 2007 and 2427 at the end of Q4 2007.
As noted on prior calls, our customer accounts do not include any transaction based customers from our PRWeb service, nor does it include any customers whom subscribe to our software indirectly via third-party channels.
On the cost side, our non-GAAP gross margin for the quarter was 82% compared to 81% last year and 83% last quarter. The expansion of our gross margin over the years has put us well within reach of the target long-term range of 84% to 86%. However, as noted on our last call, we do not expect any incremental expansion in our gross margin this year due to planned investments in international content.
Non-GAAP operating expenses for the quarter were $11.9 million, an increase of 36% year-over-year and 5% over the prior quarter. As a percentage of Q1 revenue, sales and marketing costs were 42%, R&D was 6%, and G&A was 19%. Sales and marketing expenses were $7.5 million this quarter, which is up from $5.3 million last year and $7.2 million last quarter.
Sales and marketing expenses for Q1 did not include or do include, should I say, lower sales commissions in comparison to Q4, which was higher due to seasonally high bookings at the end of the year. I'd like to mention for our new participants today that we expect all of our sales commissions as they are earned in the period of sale rather than amortize the expense over the periods in which we recognize the belated revenue. This treatment is a little different from other SAS companies.
As a result, sales and marketing costs may fluctuate period to period based on bookings. The lower sales commissions for Q1 were more than offset by the significant investment we made in expanding our direct sales organization.
We ended the first quarter with 110 quota-carrying sales reps compared to 72 this time last year and 91 last quarter. This is in line with our expectations for the quarter and also tracking in line with our guided range of our 120 to 125 reps for the year. The aggressive hiring in sales reps during the first quarter is also consistent with past practice, as we typically hire most of our new reps early in the fiscal year and work to ramp those reps during the course of the year.
R&D expenses were approximately $1 million this quarter compared to $635,000 last year and $902,000 last quarter. During the same quarter last year, we capitalized approximately $250,000 of development costs related to the release of Spring '07, which resulted in a reduction in R&D costs that would have otherwise been expensed during that quarter. G&A expenses were $3.3 million this quarter compared to $2.8 million last year and $3.2 million last quarter.
In terms of profitability, Q1 non-GAAP operating income was $2.9 million, a notable increase to the $1.5 million in the first quarter of 2007 and up from $2.3 million last quarter. Our operating margin was particularly impressive this quarter at 16% compared to 12% last year, and 14% last quarter. Non-GAAP net income was $2.8 million for the quarter, compared to $1.9 million last year and $2.8 million last quarter. Non-GAAP diluted earnings per share was $0.14 for the quarter, compared to $0.11 last year and $0.14 per share last quarter.
Now, discussed in the press release that we issued today, we are now expecting a non-GAAP effective tax rate of 30% for the full-year 2008, which is up from the previously guided rate of 10%. I will discuss our tax rate in greater detail momentarily, when I will review guidance, but it is important to know that the impact of this change in tax rate, when it's first applied to the – or when it applied to the first quarter, would have resulted in $0.02 per share of higher tax expense and assumed in our previous guidance.
In terms of the balance sheet and cash flow, we closed the quarter with $73.1 million in cash, cash equivalents and marketable securities, up from $67.5 million at the end of Q4. The increase in cash and short-term interest-bearing investments are due to strong free cash flow. We generate at $5.1 million in free cash flow this quarter compared to $3.1 million last year and $6 million last quarter. This represents 66% year-over-year growth.
Accounts receivable, increased to $10.8 million from $7.3 million last year and DSOs for the quarter were 55 days, which is essentially in line with our expected range of 55 to 60 days for the quarter. Deferred revenue totaled $35.8 million at the end of the first quarter, which represents an increase of $8.9 million over last year. Okay, now let's turn to guidance for the second quarter and the full-year 2008.
For the second quarter of 2008, revenue is expected to be in the range of approximately $18.6 million to $18.8 million. Non-GAAP EPS, which excludes amortization of intangible assets and stock-based compensation, is expected to be in the range of $0.12 to $0.13 per share assuming that estimated weighted average 20 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 27%.
Amortization of intangible assets and stock-based compensation is expected to be $0.17 per share. Non-GAAP EPS is expected to be in a range of a loss $0.05 per share to a loss $0.04 per share assuming an estimated weighted average 17.8 million basic and diluted shares outstanding. For the full-year 2008, revenue was expected to be in the range of $75. 9 million to $76.7 million, which represents a $1.8 million increase over the mid-point of our guided range from our last call. We also expect to generate more free cash flow for the quarter or should I say, for the year. Free cash flow is expected to be in the range from $19.5 million to $20.5 million for 2008.
Non-GAAP EPS before amortization of intangible assets and stock-based compensation is expected to be in the range of $0.50 to $0.52 per share assuming an estimated weighted average $20 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 30%. Amortization of intangible assets and stock-based compensation expense is expected to be $0.57 per share. GAAP EPS is expected to be in the range of a loss of $0.17 to a loss of $0.15 per share assuming an estimated weighted average 17.8 million basic and diluted shares outstanding.
Our effective tax rate assumes the allowance against our net operating losses and other deferred tax assets remains in place. As our press release indicates, our revised guidance reflects an incremental $0.15 per share of income tax expense for the full year which had increased our estimated book tax expense from $1.5 million or 10% non-GAAP effective tax rate to $4.4 million or a 30% non-GAAP effective tax rate for the year.
Our higher expected tax expense is primarily due to the limitations we now expect on utilizing certain U.S. net operating loss carry-forwards coupled with higher projected U.S. taxable income for the year. So we are moving to a more normalized or statutory tax rate in the U.S. several quarters sooner than anticipated, which has pushed up our non-GAAP consolidated tax rate from 10% to 30% for the year. It's important to note that this impacts only our book tax expense and is not expected to impact the cash tax we'll actually pay in 2008, as the NOLs I discussed earlier are deductible for cash tax purposes.
On a cash basis, our non-GAAP tax rate remains unchanged at 5% or approximately $800,000 of cash tax for 2008. I'd also like to note that our Q1 actual and projected full-year book tax expense does not reflect the reversal of the valuation allowance against our deferred taxed asset. If we were to reverse all or part of our valuation allowance, and it is likely that we will, and we exclude that reversal from our P&L, we would realize a tax benefit after reversal from stock-based compensation expense under 123R that would actually lower the $4.4 million of projected book tax for the year.
However, the accounting rules require that we do not assume any reversal of the valuation allowance, and it's related effects on our tax rate on recording our provision for the current quarter and calculating our book tax expense for the year. Moreover, while we have not provided guidance for 2009, we believe the higher 2008 book tax expense will not have an impact on what we are modeling for book tax in 2009 nor is it expected to significantly impact cash tax for 2009.
So, I would like to be clear this change impacts only book tax expense for 2008. That said, I would like to spend some time reviewing our EPS guidance for the year in greater detail so you understand what has changed from the prior quarter. Our prior non-GAAP EPS guidance for the year was $0.63 per share to $0.65 per share and our guidance today is $0.50 per share to $0.52 per share.
We have updated our guidance today to reflect the impact of three key factors on earnings per share. First are taxes. As I mentioned earlier, higher book tax expense is expected to reduce EPS by $0.15 per share. Second is interest income. We are modeling $0.04 per share of lower interest income for the year due to a declining yield in our investments account. Just to give you some context here, when we provided guidance in February, we were earning over a 5% yield on our marketable securities.
We did at that time assume some contraction of that yield to the mid to high 3% range. However, due to the current interest rate environment and some expected additional rate cuts, we are now modeling a 2% effective yield by year end which will result in a $0.01 per share reduction in EPS for Q2. Last and really the most important factor here is the significant momentum we are seeing in our business.
As Rick commented earlier, Q1 was one of our best quarters ever, as revenue, operating income, and free cash flow all exceeded our expectations. As a result, our guidance reflects a range of $0.06 per share from higher projected operating income due to a better than expected outlook for 2008. Our guidance today also contemplates a 17% non-GAAP operating margin for 2008, which is up from the 15% to 16% target range that we discussed earlier this year.
Our ability to drive leverage in the business and expand our operating margin over the years is noteworthy as we have gone from 7% operating margin in 2006 to 13% in 2007, to what we expect will be 17% in 2008. In summary, our 2008 EPS guidance reflects $0.15 per share of incremental tax expense, $0.04 per share of lower interest income and $0.06 per share of higher operating income due to better than expected results. So Q1 was a great quarter for us as revenue, operating income, and free cash flow were all better than expected.
Accordingly, we are raising our guidance in all of these areas for the full-year 2008. As I discussed earlier, our non-GAAP result and guidance does not include stock-based compensation expense and amortization of purchase intangible asset. In the press release that we issued today, we provided guidance both on a non-GAAP and GAAP basis for earnings per share for the second quarter and full-year 2008. Please refer to the press release for details.
At this time, I'd like to turn the call over to the operator, so we can take your questions. Operator?
Question-and-Answer Session
Operator
(Operator instructions) And your first question comes from Tom Roderick with Thomas Weisel Partners.
Tom Roderick – Thomas Weisel Partners
Hi, good afternoon.
Steve Vintz
Hello.
Tom Roderick – Thomas Weisel Partners
I guess, with all the questions regarding the macro out there, the place we would theoretically see radically see if there was a slowdown would be, I guess on your bookings line, and when I look at the bookings line I calculate 45% year-over-year growth, so very clear in market acceleration on that line. Was there anything in terms of abnormally large deals on the quarter, anything that would skew that bookings line upward and can you just talk a little bit more about the pace of deal flow during the quarter? Thanks.
Steve Vintz
Hi, Tom, this is Steve. As Rick discussed our peak [ph] revenue is due to solid performance across the board. We saw better bookings across all geographies and product lines and the flow, as you mentioned, of these bookings was very strong. And we also saw better transaction revenue from PRWeb. All of that combined with probably a couple of hundred thousand dollars of non-recurring revenue related to partnerships in Q1 have really pushed up the revenue in the quarter. So nothing unusual, just a combination of strong performance across the board.
Tom Roderick – Thomas Weisel Partners
Okay. And then in terms of your sales head hiring, adding 19 on the quarter is pretty aggressive in the first quarter. Again, I know you like to front-end load that, but did your pace of hiring – was that swayed at all by the deal flow on the quarter and by the strong bookings environment you saw out there?
Steve Vintz
No, not really. I mean, we were pretty much on plan, maybe slightly ahead of plan in terms of our hiring. But, as you said, we typically would like to get our hiring under way as quickly as possible in the new year and just happened to find a lot of good candidates. I think the fact that that we're selling well and bringing in so many deals and having a great bookings quarter is always helpful when you're going to higher sales reps, because they coming and they see kind of the winning environment.
Tom Roderick – Thomas Weisel Partners
Sure. Last question from me here, you indicated two factors on the strong revenue performance this quarter, number one was PRWeb and the second one was partnership revenue. Can you just expand a little bit more on the partnership side of the equation, what is the channel contributing as a percentage of revenue now, any big partners out there that you're seeing real traction with, just some more commentary around the channel would be helpful?
Rick Rudman
Sure, this is Rick. There is – channels I think still represents about 5% of our overall revenue. And we don't really anticipate a lot of changes with that, so while we sign up new partners from time to time, I don't really think directionally we're thinking that partnerships are going to grow dramatically to be a much larger piece of what we do I think we still think direct is going to be the predominant driver of bookings and revenue for us. So, I think we just happen to have in this quarter a couple of hundred thousand of revenue – of one-time revenue that came in, but I don't think it's indicative of any major growth in our channels business.
Tom Roderick – Thomas Weisel Partners
Okay, great. Thanks. I will jump back in the queue and let others jump in here. Thanks very much.
Operator
And your next question comes from Philip Rueppel with Wachovia Securities.
Philip Rueppel – Wachovia Securities
A little more granularity, on the sales reps increase, in the past you'd said you'd primarily be investing internationally, is that true or are you see still seeing opportunity to grow that sales force in the U.S.?
Steve Vintz
Both is probably I think a fairer characterization. So, we are growing on a percentage basis. We are growing the number of sales reps or the sales organization faster overseas. So I believe in 2008, we are almost doubling the number of quota-carrying sales reps, but keep in mind that on a smaller base of sales reps. But, we are also aggressively hiring in the U.S. as well.
Philip Rueppel – Wachovia Securities
Okay, great. And you mentioned the strong bookings performance. Was there any change in pricing or contract length or anything else other than just good, customer adoption and execution that would explain some of that bookings growth?
Steve Vintz
No change to pricing in particular and if you look at all of our other financial metrics, there was no other significant changes. So, ASPs, renewal rates, price increases, all that was unchanged for the quarter.
Philip Rueppel – Wachovia Securities
Great, thanks. And then finally, Steve, just that I make sure I get everything right on the tax changes, et cetera. You've mentioned that the impact of the taxes was $0.02 in Q1, but interest income did not – your change in assumptions for interest income didn't affect the outcome in Q1, is that correct?
Steve Vintz
That is correct.
Philip Rueppel – Wachovia Securities
Okay, great. I think I have got it for the rest of the year. Thanks very much.
Operator
And your next question comes from Laura Lederman of William Blair.
Laura Lederman – William Blair
Yes, following up on the question on bookings, was it certain modules that sold really well, was it more up sells than usual? In other words, I am just trying to get a sense of more specifically where the strength might have been.
Rick Rudman
No, I don't think there was any change in terms of number of modules or up sell. I guess if we had to characterize it, I think we just closed more deals. We just brought onboard, as you can see from the record number of net new ads, we just had really great momentum going through the quarter. We closed, I guess it would be fair to say we closed more deals than expected and brought in more bookings than we anticipated. As Steve said, we also – the flow was strong and had more deals probably closing earlier then expected in the quarter. That helped boost revenue. But on the bookings side, it was just a really good solid quarter, but none of the characteristics of the deals were really different.
Laura Lederman – William Blair
Can you also talk a little bit about PRWeb? You mentioned that it came in a little bit above expectations to where you are seeing strength there, also any strengthen being able to sell subscriptions (inaudible), no change in it mainly coming in, if kind of (inaudible) press releases?
Steve Vintz
Right. Well, PRWeb is a segment or part of our business that as you know we sell either direct online or through our account executive team to existing brokers, customers, but we've always said the growth of the press release part of our business is in line or slightly ahead of our overall organic growth. So, if you look at Q1 and you look at our organic growth for Q1 being in line, at this point I guess means 40% or plus. So, PRWeb's doing really well. In terms of the subscriptions, we did introduce the small business edition really mid Q4, as a product that we thought would be particularly appealing to small businesses, companies with $5 million in revenue or less, who really make-up the majority of our PRWeb customers as well and it's a little early to get into talking about that. I mean the numbers for the quarter on a percentage and unit basis were great because we just launched in Q4. So, we're talking about very low base of business here. I think in Q4, in November and December, the first couple of months of launch, we sold about a dozen subscriptions and in Q1, I think we sold about three dozen subscriptions. But, once again, our take on that is we would expect with millions of prospects to be selling hundreds or thousands of subscriptions for this to be a success and I think over the next few quarters, we'll get a better idea of the opportunity.
Laura Lederman – William Blair
Final question from me and then I will pass it on. Can you talk a little bit about plans for Europe in addition to just adding more sales comp because it seems like the opportunities (inaudible) and you're just still uncertain about the rest of Europe and in fact the rest of the world and U.K., so any thoughts on moving into any local countries in other ways to – in addition to adding sales reps to take advantage of that opportunity?
Steve Vintz
Well, I think there is – we're probably focused on two things. One is adding sales people because we have had a lot of success with the direct sales model. We've had less success in our history with more of our approach to that. So, I think you will see us stay more focused on the direct sales approach. We are adding sales reps in – specifically in Germany and in Asia, which is pretty much the expansion plan that I discussed on the last call. So, we are moving now out of the UK, which has really been where our base of business has been. We are now moving into Western Europe and Asia.
Secondly, we are always on the look out for strategic acquisitions and we book our PRWeb, I guess it's now been about a year and half, and I think on previous calls as I talked about our acquisition strategy, we've refined that strategy I think to be not more of a focus on potentially acquiring companies in geographies, where we are not operating, which would pretty much mean outside of North America. So to the extent, we can find companies that are a good fit for us that would be an alternative as well to hiring direct sales people.
Laura Lederman – William Blair
Thank you.
Operator
(Operator instructions) And your next question comes from Brendan Barnicle with Pacific Crest Securities.
Brendan Barnicle – Pacific Crest Securities
Thanks so much. Rick, in your comments you mentioned that you said one of things that would help you on the macro was the diversity of customers, and I was wondering if you see any difference or any advantage to having fair amount of small and midsized customers as opposed to large enterprises, is the buying cycle any easier, any quicker in that market that makes it a little more expensive in a slowdown or not?
Rick Rudman
Well, I guess, we think that our product is strong in a slowdown across all market segments. So, on the one end, you might argue that at $10,000 – with an ASP of $10,000 that would be lot easier for companies to buy upon. Although in the large market at $40,000, you are dealing with companies that are large. So, for a $1 billion company to spent $40,000 a year on their PR platform is also inexpensive for them. So, I don't think we really view it as being – I don't think we are going after the mid-market, because we think it might be strategically better in certain environments. The Vocus product is configured in a very modular way so that we can sell the right product at the right price to any size customer. So, we really want to dominate the entire market from the customers that wants to send out a single $80 press release to the large global 2000 company that wants to put 100 PR people around the world on a PR platform.
Brendan Barnicle – Pacific Crest Securities
Great. Steve, this change in the tax rate, what prompted you guys to define this and make this change, has there been an audit or something like that, it seems surprising at this point that you had to find that?
Steve Vintz
Well, the absorption of NOLs into the P&L is pretty complex, but we have a process where we review the tax rate every quarter. And that said, our guidance has always assumed that we would utilize all or most of the NOLs that's also taxable income this year. There were approximately $4.5 million of NOLs related to stock-based compensation expense, which are not deductible for book tax purposes, but indeed deductible for cash tax. So as a result, because we have not reversed our evaluation allowance this year against our DTI, we can't realize certain tax benefits related to stock-based comp, so the change you are seeing here is primarily result of limitations in NOLs coupled with higher projected U.S. taxable income, so a point is also playing a factor here.
Brendan Barnicle – Pacific Crest Securities
Okay, great. Thank you.
Operator
And your next question comes from Robert Breza with RBC Capital Markets.
Robert Breza – RBC Capital Markets
Yes. Most of my questions have been asked, but Rick, maybe one question, if we look to the record number of new customers and the increase in the sales force, qualitatively are you seeing a quicker ramp as you are bringing on those new reps or increased productivity for people who have been there over the last six months, how would you qualitatively talk about the productivity of the sales people there? Thanks.
Rick Rudman
I would say that some of that may have not [ph] contributed to the strong bookings quarter. I mean any time – if any time you are closing a lot more deals than you anticipated and generating more bookings by selling the same type of deals, usually you would – it would come from a more productive sales organization. So, I think we probably had maybe slightly better than expected ramp up during the quarter of some of our sales reps and maybe in addition to that some better performance from some of the existing reps. I mean all in all, we just had once again a really strong quarter.
So, I would probably attribute some of that to maybe a slightly quicker ramp up of some of the newer folks. But, I think that the market dynamics are just working on our favor right now. So, we've talked about this on previously calls and this is a type of solution that people look to bring onboard when things are going well and people look to bring onboard when things aren't going so well. So, PR is just a fundamental part of the marketing mix, it delivers a great ROI, and so I think the market dynamics also contributed a little bit to a great quarter for us.
Robert Breza – RBC Capital Markets
Thanks for taking my question, great quarter.
Steve Vintz
Thank you.
Operator
And your next question comes from Rag Sarathy with Ferris, Baker Watts.
Rag Sarathy – Ferris, Baker Watts
Good afternoon. And thanks for taking my questions. So you have put the clarification question on the tax. So, you mentioned that you do not anticipate any impact on cash tax rate next year, as we work on book tax rate. Are you implying that we should assume 5%, 30% from cash on book next year?
Steve Vintz
And Rag, just as a clarification, your question pertains to 2009?
Rag Sarathy
Yes.
Steve Vintz
Okay. We haven't given guidance for 2009, but as I mentioned, we are expecting the tax rate that we expect to realize in 2008 for book tax purposes, we'll approximate the same tax rate for 2009. That said, we do get some additional deductions for cash tax purposes that you don't get for book tax, so the cash tax rate will trail much lower than 30%. Probably be a little higher than 5%, but I would say it's less than the 30% that we would report for book tax purposes.
Rag Sarathy
Okay. And then, how much NOLs you have left as of first quarter?
Steve Vintz
We are out of NOLs from operations and that's part of what's driving this tax liability higher from 1.5, which we were originally modeling up to the 4.4. So, we are out of NOLs in the U.S. We do have NOLs in our foreign operations that you can – that we can utilize, but as it relates to income in our foreign operations that we would generate at some future date.
Rag Sarathy – Ferris, Baker Watts
So, then your assumption that you are still expecting much lower cash tax, this is book tax for next year, or even this year is based on what assumption?
Steve Vintz
Well, we are out of NOLs from operations, but we do have some – we do have some deductions for cash tax purposes related to stock based compensation. So, they is approximately $7 million of stock based compensation that will create a tax benefit for cash tax purposes. However, that doesn't run through your tax provisions or it's not deductible for book tax, so still deducted for cash tax purposes, no NOLs from operations for book tax purposes.
Rag Sarathy – Ferris, Baker Watts
Okay, and then one final question. The PRWeb in the past contributed to, I believe, 10% and 15% of the bookings. Is this still the same or probably you are at the high end of that range?
Steve Vintz
It's no change there, but it is 15% to 20% of our revenues come from transaction revenue, and this quarter was no different.
Rag Sarathy – Ferris, Baker Watts
Okay, thank you.
Operator
And your next question comes from the line of Brad Whitt with Broadpoint Capital.
Brad Whitt – Broadpoint Capital
Hi, guys. Thanks for taking my question, just a couple of quick ones. Steve, I am sure you probably mentioned this, the percentage of revenue from international?
Steve Vintz
It's approximately 10%.
Brad Whitt – Broadpoint Capital
Okay. And this impressive customer account of 219, how much of that was driven by the Small Business Edition?
Rick Rudman
About – I think I mentioned about three dozen of those are small business.
Brad Whitt – Broadpoint Capital
Okay. And also we exclude – Rick, will we expect ASPs to kind of trend down a little bit as you put more emphasis on the mid market in Small Business Edition over time, or the additional modules are going to maintain the price points?
Steve Vintz
Brad, hi, this is Steve. Our ASPs, we will said that we expect our ASPs to range between the 20,000 and 25,000, and this quarter was no different. I mean directionally, the impact of the Small Business Edition on mix of business and ASPs will not be significant this year, so we expect it to track within that range. Long-term though, due to mix of business, we would expect ASPs to come down, not due to pricing pressure or weakening competitive positioning because that's not the case, but more so just due to mix.
Brad Whitt – Broadpoint Capital
Yes, that makes sense. And then just curious here, your free cash flow guidance, does that assume any changes in your previous CapEx guidance of $1.8 million for this year?
Steve Vintz
No.
Brad Whitt – Broadpoint Capital
Okay, thank you, that's all I have. Thanks for taking my questions.
Operator
And your next question comes from the line of Rich Baldry with Canaccord Adams.
Rich Baldry – Canaccord Adams
Thanks, could you talk maybe either philosophically or directly about use of the balance sheet? Your cash balance is obviously pretty high, whether you'd look at buybacks at an early stage, being a non-capital intensive company, and then whether internally you have ever quantified the deferred – sort of the drag to your P&L by not deferring your commissions versus what your peers would do? Thanks.
Steve Vintz
Well, we forgot the cash, we expect to generate $20 million of free cash flow this year. Now, that will put us in a range of $85 million to $90 million I believe by year end. And I think, as we look at the market, one of the things to realize is the market is fairly fragmented and as a result the acquisition – any acquisition that we would do would be complementary to our business. So, I think what we – we are at a point now where the cash that we are generating is sufficient to sustain the growth of the business, but at the same time we have cash on hand to go out and acquire business specifically in markets outside of the U.S. So, I don't think we are thinking about cash buybacks at this time, just pleased with the leverage that we have on the balance sheet.
With regard to sales commissions, I think the most consistent thing – the most important thing here is consistency. So, yes, we do non-capitalized commissions like some other SaaS companies. If we did, our operating margins will go even higher than what we are reporting today. However, we believe it's appropriate because the – after the sale was transacted, the commission is earned, the cash is received and as a result, we believe our policy is reflective of the operating practices of the business.
Rich Baldry – Canaccord Adams
Steve, maybe then could you talk about whether the commissions on renewals are sharply lower because it is sort of easier to farm than hunt, and just to check figure, I might have missed on the total headcount actually in the quarter? Thanks.
Steve Vintz
So, in terms of commissions, we pay approximately 15% commission for a piece of new business, so the hunter will generate commission equal to about 15% of the total contract value. Once we acquire a customer, that customer is handed off to an account executive or a farmer. The commission on renewal business and up-sell business is 4%. So, it is important to note there is 11-percentage point improvement on commission in the year two on a renewing customer. And then in terms of total headcount, we ended the quarter with 384 employees.
Rich Baldry – Canaccord Adams
Thanks. Congrats on a good quarter in the tough environment.
Steve Vintz
Thank you.
Operator
And you have a follow-up question from Tom Roderick with Thomas Weisel Partners.
Tom Roderick – Thomas Weisel Partners
Just wanted to follow-up briefly on the sales headcount itself, did you add any heads to the Small Business Edition there, the team selling, I think we had six exiting last quarter, did you hire any more for that group there?
Steve Vintz
We added a couple.
Tom Roderick – Thomas Weisel Partners
Okay. And then just in terms of term lengths, I think so I ask the question about any changes in term length, as you are selling more downstream, as you are selling more to the SMB segment, are you finding customers are still willing to sign up for a full one year subscription or are you doing more in the way of quarterly deals or at least quarterly collection? How's that process working out from both a term length and collections process?
Steve Vintz
No changes to report. Term length has not changed, we're doing predominantly one year deals, and the fees from those deals are still getting paid upfront, so approximately 95% of all of our deals have annual payment terms. We are not seeing the update push to go to monthly or even quarterly installments here.
Tom Roderick – Thomas Weisel Partners
Okay, great. That's it for me, thanks, nice job.
Operator
And there are no further questions at this time.
Rick Rudman
Great, well, I want to thank you all for joining us and we look forward to speaking with you again soon.
Operator
And that concludes today's conference call. You may now disconnect.
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