Vignette Corporation Q1 2008 Earnings Call Transcript

Apr.28.08 | About: Vignette Corp (VIGN)

Vignette Corporation (VIGN) Q1 2008 Earnings Call April 23, 2008 5:00 PM ET

Executives

Jennifer Baker - IR Manager

Mike Aviles - President and CEO

Pat Kelly - SVP and CFO

Somesh Singh - SVP of R&D and Technical Operations

Analysts

Nathan Schneiderman - Roth Capital Partners

Mark Schappel - Benchmark

Scott Burge - ThinkPanmure

Brian Murphy - Sidoti & Company

Operator

Good afternoon. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vignette quarter one, 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you, Ms. Baker. You may begin your call.

Jennifer Baker

Thanks, Christy. Good afternoon, and welcome to Vignette's first quarter 2008 financial results conference call. I am joined today by Mike Aviles, President and CEO and Pat Kelly, our Chief Financial Officer, and also in the room is Somesh Singh, Senior Vice President R&D and Technical Operations.

I'll begin today by reading our required risk disclosure statement. Our comments today may include forward-looking statements, related to Vignette that involve risks and uncertainties, including but not limited to quarterly fluctuations in results, management of growth, market acceptance of certain products, integration of acquisitions, general economic conditions and other risks.

These risks are discussed in the Company's Form 10-K filed with the Securities and Exchange Commission and in our quarterly reports filed from time-to-time with the Securities and Exchange Commission. Please be cautioned the forward-looking statements are not guarantees of future performance and actual results may differ materially from management's expectations.

Furthermore, our discussion includes certain non-GAAP financial measures in an effort to provide additional financial information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. Such reconciliation is included with our results and is in our earnings press release available on the website, as well as in the Form 8-K filed with the SEC.

I will now turn the call over to Mike.

Mike Aviles

Thank you, Jennifer. And that thank you all for joining our call. We are disappointed with our results in Q1. We came off a good fourth quarter and a good year in fiscal '07. We also felt, we had some good product momentum going into the first quarter. However, we fell significantly short on license revenue in North America.

Factors both inside and outside the business affected our performance. But the bottom line is we did not execute. We are not making any excuses for it. The challenges are there. But so is the opportunity. We can point a lot of progress over the past quarter and over the past two years. And the financial strength and the stability of Vignette remains strong, but we all know, we need to demonstrate an ability to drive license revenue. And we simply need stronger focus, and more consistent results from our sales and marketing efforts.

The state of our business remains volatile on a quarter-by-quarter basis. You can see that by the results over the past three quarters. If we peel back the financial performance for Q1 year-over-year, license revenue was down and disappointing. Most of that issue was concentrated around North America and financial services. That put pressure on our margins. Less license revenue and more services revenue resulted in lower margins.

We also made investments going into the year around sales, products, and customer care in an effort to drive growth. So the two things combined put some pressure on our margins. Operating income was down versus last year as a result. You can clearly see these investments that we're making.

Sales and marketing expenses were up 10% over the prior year, but the bulk of that increase comes from sales headcount increases. R&D was up 7% versus last year, but we have a lot of new and enhanced products to show for it.

Other income was down about $1 million year-over-year. There's two factors here. Half of it due to the lower cash balances from the stock repurchase program. The other half can be attributable to lower interest rates. There is a saying that you are never as good as your numbers and you are never as bad as your numbers. Vignette is much better than our performance in Q1.

On the positive side, our services business had another strong quarter. We ended up with 9% growth year-over-year with margins increasing. Our professional services were up 14% year-over-year during the quarter. And maintenance revenues were up 5% with renewal rates also showing strength.

We are pleased with the business we generated from our international operations. International had its best Q1 in five years. And that is both in dollars, as well as a percent of revenue. We closed on the acquisition of Vidavee, a video content management company. And during the quarter, we continued to execute on our stock repurchase program.

There are several things that affected our performance, but the biggest one is the need to drive more sales force effectiveness. It is not a capacity issue around sales. We can't point to the number of reps as the issue. This is more about sales and marketing effectiveness and stability.

What are some of the things we are doing about it? We are driving stronger focus and more accountability from sales leadership throughout the Company. We are continuing to upgrade the team. We are still transitioning some key positions, and we need stability across both sales and services.

We have a new head of worldwide professional services, we have a new head of North American professional services, we have a new head of partners and alliances, and we also recently announced a new head of products and marketing. We will continue to enable the team. There is still lots of work require to get our field fully enabled to compete in the marketplace.

Upgrading, coaching, accountability and competitive selling are all things that we are working on in addition to enabling around new and existing products. Another effort is around pipeline management and pipeline development, particularly in the field.

We are making a concerted effort around our top customers, we have campaigns around new products, in particular, high-preference delivery, community services and Vignette Recommendations, and we are driving more demand gen activities, such as webcast, Vignette days and an Analyst Day that we have scheduled in May.

We are also taking on efforts to up-sell and cross-sell new and existing customers with our broad range of products. From our product perspective, there are many product releases out in the marketplace. They include Vignette Collab 7 server 7.2, Vignette Community Services 7.0, Rich Media Services 7.1, High Performance Delivery 7.0, Vignette Content Management 7.5, Vignette Application Portal 7.4 and Vignette Recommendations 7.0.

In the next several months, we intend to deliver more enhanced and new products. We'll see Vignette Community Application, 7.0, Vignette Case Manager and Records Manager 7.3, Vignette System Cloning 7.0 and Vignette Media.

All our product initiatives are centered around a few basic principles, one, to include Web 2.0 capabilities, and capitalize on that, to increase functionality, integration and usability of all of our products, and to reduce the complexity and lower the cost of deployment of our solutions.

Let me give you some examples. Last quarter, we released skip-level upgrade capability with VCM 7.5. Example, a customer with any interim release of VCM can skip level to VCM 7.5 in one single upgrade. This allows customers to upgrade according to their business needs without fear of falling behind. This is our release philosophy going forward.

In the second half of '08, you will also see us release a system cloning product that will allow our customers to migrate data, system settings, custom codes, extensions in an automated and super fast fashion. We are rolling out VPS advanced solutions, which is a set of engineered services that include both code and best practices.

We are simplifying APIs with each new release and the release of High Performance Delivery was another example that delivers a dramatic increase in throughput while cutting response time. It minimizes the need for more hardware to get required throughput and performance. We are also continuing to pursue our agenda around corporate development.

During past calls, we have said our interest would be around building on our core markets in Next-Generation Web, web experience management, Digital Services Hub or gaining more vertical market penetration. We said we would have interest around smaller acquisitions that refine our focus and strengthen our niche. Our approach was to either buy it, build it or partner for that technology.

We had interests around adjacent markets such as personalization, social computing and digital asset management. I think the results of that effort are shown in a lot of the new products we are putting into the market as well as the acquisition of Vidavee, so why Vidavee?

Video is the fastest growing component of web strategies of most corporations. Inclusion of video allows companies to create compelling web experiences and create communities around their brand and increase loyalty.

As the usage of videos explodes so do formats use cases and complexity of management, customers need help in managing this rapidly complex environment. The integration of Vidavee capabilities with Vignette content management will give our customers the ability to manage video content just as they manage all other content from one single management console.

We'll also be able to perform powerful functions unique to video-driven business models, such as getting good visibility in what part of video is of most or least interest to viewers, dynamic advertisement insertion, face recognition, advanced search capabilities, the ability to detect watermarks, re-branding capabilities and insertions of live feed are just some examples.

So we are excited about the acquisition of Vidavee that closed this week. We welcome the entire Vidavee team to the Vignette family. And we look forward to making that a very successful acquisition of Vignette.

With that I'd like to turn the call over to Pat Kelly to discuss our results in more detail.

Pat Kelly

Thanks, Mike. Let me start off with sort of a high level summary of the financial results. Obviously, as Mike outlined, we are disappointed in the results. They were primarily driven by weak license revenue. The shortfall in license revenue was helped somewhat by strong maintenance and professional services, but not enough to get us back into the guidance range. And those as we know are lower margin revenue streams, so the mix hurt us on the bottom line.

At the same time, costs were up versus last year as we rebuilt sales and marketing from the low levels that we had in Q1 of last year. And we started making some incremental investments in R&D. As a result, we have a sharp decline in GAAP and non-GAAP net income and EPS.

Turning to the revenues analysis. License revenue at $9.7 million is down 37% from last year. That is obviously very disappointing for us. As Mike outlined, financial services was weak, North America was weak.

International came in at 41% of the total. That's up considerably versus 32% in Q4 of '07 and 34% in Q1 of last year. We did three large deals this last quarter, those being deals in excess of $1 million each, which is consistent with reasonably good past quarters. So the bigger issue for us this quarter was a lower number of total transactions overall. And weakness in sort of the mid-sized deal range.

On the professional services side, revenue was very strong at $14.7 million, which is 14% over last year's Q1 and our highest overall professional services revenue quarter in over five years. We anticipate continued strength in professional services, maybe not quite at this level, but we expect it to be strong going forward.

Maintenance revenue came in at a very healthy $20.3 million this quarter, up 4.9% from Q1 of '07. Retention has been good, and we expect we will be able to continue strong maintenance in spite of low license sales in recent quarters.

Turning to the cost side of the equation. Gross margin on license was 95%, which feels about right, so no particular news on that front. Cost of services revenue was about flat versus last year, and at the same time, we had an 8.6% increase in services revenue. So our gross margins on services improved considerably year-over-year. However, overall gross margin is down 2.6% from 63.3 % last year to 60.7% this year and that's obviously due to the mix between the license and services.

If I take a look at the operating expenses, sales and marketing was up a lot versus last year, up $1.4 million, or 10% as we rebuilt the organizations after the high attrition we experienced a year ago. At the same time, R&D is up about $500,000 from Q1, '07 and has shown steady increases over the past couple of quarters as we put more money into product.

G&A was down a bit from last year from $5.2 million in Q1 '07 to $4.8 million in Q1 '08. However, at 10.7% of revenue, G&A is still higher than we like it to be. On the bottom line, on a GAAP basis, we had a loss from operations of $2.2 million. After we make adjustments of $2.6 million, non-GAAP profit from operations was $400,000.

Clearly those numbers are down quite a bit and we are disappointed in those as Mike said. Other income is off sharply from last year's trend as interest rates have been falling and lower cash balances due to the share buyback program.

Income taxes, we actually had a positive income tax expense of $455,000, despite a GAAP pretax loss. Let me spend a little time kind of explaining that. Our tax provision includes profits on our foreign subsidiaries, taxes on profits from foreign subs, foreign withholding taxes and US minimum taxes.

We had positive income tax expense despite the GAAP loss primarily because the amortization of intangibles which hits the P&L does not give us a tax benefit. So in fact we have a positive income from a tax perspective.

After other income and tax expense, the result was a GAAP loss of $800,000, and a loss per share of $0.03. Adjustments we make per GAAP to non-GAAP are given in a special table in the press release, so I wont go through those. The key items are amortization of intangible and acquired technology and stock option expense.

After we make those adjustments, we had non-GAAP net income of $1.8 million, or $0.07 per share. Turning to some other metrics, cash flow for the quarter was very strong at $10 million as our collections team did a stellar job. As a result, DSO is now 49 days, and our net accounts receivable is low.

The bad news is that with low license bookings and low AR. to start off with, we expect cash flow to be weak in Q2. In the first quarter, we bought back $1.3 million shares at an average price of $13.86. And as a result, our fully diluted shares for Q1 are at $24.5 million, which is down from $29.1 million, one year ago. Total headcount was flat at 667 from last quarter, up 27 from last year. The number of sales reps we had at the end of the quarter was 50.

Now, let me turn my attention to guidance. The following Q2 guidance reflects our outlook today, April 23, 2008 and contains forward-looking statements subject to this risks we outlined earlier in the risk disclosure statement. Vignette is not obligated to update guidance during the quarter, and if we do so, it will be in a public statement.

To set the stage for our guidance, we expect services revenue to remain strong in Q2. However, we expect license revenue to be flat-to-down from last year. At the same time investments in R&D and customer care will continue to be higher than Q2 of last year. Thus, we are projecting our operating margins will be lower in Q2 versus last year.

We also expect other income to be down due to lower cash levels and also lower interest rates. At the bottom line level, we expect it will add up to lower EPS than last year, as we continue to focus on and invest in growing license revenue.

Let me talk about the impact of Vidavee. Obviously, Mike laid out for us. That's a very excited and differentiated technology. We did not do the acquisition to buy revenue but rather to add an important adjacency to our web experience platform. Videvee should add a very modest amount of subscription revenue, A little bit less than $1 million per year at current run levels, and then obviously our expectation is that will grow as we sell it into our install base.

As a result, the acquisition we project will be modestly diluted for the year to the extent of about $0.02 per quarter. With that background, we baked in sort of in our guidance the impact of Vidavee. So with that background, we expect second quarter 2008 total revenue to be between $45 million and $50 million. And for license revenue to be 23% to 28%, with services revenue driving the remainder.

We expect a gross margin of 60% to 62% depending upon the mix of business in the quarter. In terms of operating expenses, we expect R&D to be approximately 18% to 19% of revenues, sales and markets to be between 31% and 33%, and G&A to be approximately 10%. Second quarter 2008 GAAP net income is currently expected to be between a loss of $0.05 and a profit of $0.05 per share on a diluted basis assuming 24.3 million shares outstanding.

We expect the adjustments we make to go from GAAP to non-GAAP to remain fairly consistent over the next few quarters, and after making those adjustments, we expect non-GAAP net income per share of $0.06 to $0.16 on a fully diluted basis.

With that, let me turn the call back to Christy. we'll take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Nathan Schneiderman from Roth Capital Partners. Your line is open.

Nathan Schneiderman - Roth Capital Partners

Hi. Thanks very much. Hi, Mike. Hi, Pat.

Mike Aviles

Hi, Nathan.

Nathan Schneiderman - Roth Capital Partners

Hey. I was wondering if you could drill down a little deeper on some of the issues that caused problems during the quarter, so as you did your analysis, can you talk about what particular problems you felt you experienced in North America and then maybe drill down on the financial services vertical.

What was your exposure overall, and how much did you think those problems on a dollar basis hurt your results in the quarter?

Mike Aviles

Yes. So I think there's three things that we can look at, Nate. One is the sales effectiveness in North America, some competitive dynamics that were out there and general economic conditions. But from a North American perspective a couple of things happened. We had some disruption on the services side that took a lot of focus and attention away that we had to go deal with. So it's a strong piece of our business. It's growing, so we needed to address that.

Financial services as you know, is one of our strongest verticals at Vignette. And I think everybody's well aware of some of the issues that are going on in the financial services sector which started Q3 of last year but also in disruption in Q1.

So then another factor was again, some transitioning of key roles in the Company to upgrade our performance and get more consistency. So when you start adding these things together, a number of these things, it really was isolated or much more concentrated in North America. And we saw results of that here.

Nathan Schneiderman - Roth Capital Partners

Okay. Maybe if you go a little deeper on the stability of sales. I saw that your number of quota reps declined from 53 to 50. I assume by your comments you had additional churn beyond that. So if you could just give us an update on where you are, and how you feel you're positioned running into Q2 versus how you were running into Q1?

Mike Aviles

So I'll make a few comments, and I want to add on. As I mentioned in my remarks, Nate, this is not a capacity issue. That's become very clear to us, so it's not about the number of AEs. It's about making the RAEs much more productive and making them much more effective. And that's in terms of enabling them to be more effective and then also marketing, giving them a lot more air cover and lead gen associated with it.

So in terms of the number of AEs. In the back half of last year, we started to realize that increasing the number of AEs was not going to be a productive use of investment if we couldn't enable them. So we are seeing them as well as we come into Q1, where we need to get much more consistent performance across the AEs that we have.

We have good people, we are hiring good people, so it's not like they are not good, they are not working hard, they are not intelligent. As you know our space is competitive, our products are complex, so it takes time to ramp them up.

Nathan Schneiderman - Roth Capital Partners

Let me ask you a question on the guidance. I was curious if you could. The $45 million to $50 million was the same guidance you gave for Q1, but the $0.06 to $0.16 is quite a lot different than the $0.13 to $0.21 even though your headcount looks like it declined sequentially if I got the right numbers. So I was wondering if you could speak to that. It sounds like given that you have had some churn in the sales organization and a lot of new management there.

Why do you feel you're going to be maybe other than at the very bottom end of that range? Did your second quarter start out strong, maybe deals slipped that closed, or just anything you can speak to on the revenue side, why the confidence you can be there and on the EPS side, why it's so much lower than last quarter. I understand that $0.02 cents of that is the hit from Vidavee, but still there is a quite a difference.

Pat Kelly

Yeah. Let me take that one, Nathan. I think there was a couple of things going on. So obviously, we're disappointed in the license number from Q1. We really don't believe that we're going to see that as kind of a new base. I mean we think we can do a lot better than that. So obviously, we are forecasting and guiding to a better license revenue number than we had in Q1 in Q2.

And at the same time, we've got to be a little bit cautious and realistic around our expectations in terms of what we are able to generate. As Mike alluded, we've got a little bit of challenges in the marketplace now. We know that clearly in terms of enablement and productivity is taking longer than we thought.

So to get to your EPS question, the mix that we're guiding to, the percentage of license is lower than we would have had for Q1, and I think it's primarily that mix, that shift in guidance around the mix, that's sort of pulling down our EPS projection along with a couple of cents, as I mentioned for Vidavee.

So to summing it up, we certainly expect to do better in Q2 from a license revenue perspective, but we have kind of guided to a lower level of mix and that is driving the EPS.

Nathan Schneiderman - Roth Capital Partners

Okay. And my final question. I'll drop off. I just wanted to verify that the 24.3 million shares. I wasn't clear if that was for your guidance. Was that basic or diluted? And then Mike, you mentioned competition is being a factor, I was hoping you could drill down there. Is this the market just getting a lot tougher with the big players, Oracle, IBM, EMC, et, cetera? Thanks very much.

Mike Aviles

Yeah. So the number is fully diluted, Nathan. You want to take the competition?

Pat Kelly

Yeah. On the competition perspective, Nate, yeah, what we saw was some aggressive pricing in Q1, more aggressive pricing than normal. And the competitive landscape is still pretty broad, so it's not like we're seeing one particular competitor out there all the time, but spread across a lot of different people, but certainly lot of competitive pricing pressure.

We saw that from BEA, and a lot from the Oracle side and Scalent and BEA activity that was going on out there. So in general, I think it's a function of the competitive landscape plus the economic conditions that people are facing in Q1.

Operator

Okay. Your next question comes from Mark Schappel from Benchmark. Your line is open.

Mark Schappel - Benchmark

Hi, good evening. Mike, regarding the challenges you ran into in the financial services sector, was the shortfall centered on the work flow and imaging side of the business, or was it more on the traditional web content side of the business?

Mike Aviles

So it was on the web side of the business, we see more of that. If we looked at our results over a period of time that the imaging work flow business has held steady where the challenges have been more on the next-generation web side, and financial services was the one sector that we could look at across the globe that really stood out.

So as I mentioned before, Mark, most of the issues we faced on license were concentrated in North America, but then if you look at financial services, the lack of performance in financial services on a global basis was noticeable for us and financial services is one of our top verticals.

Mark Schappel - Benchmark

Okay, thanks. And then returning to the prior competitive question, are you beginning to see some of the startups software and service vendors out there showing some of your sales engagements, and would these guys have lead to some of the pricing issues that you are seeing there currently?

Mike Aviles

No, we are not seeing that so much. We are seeing mainly the traditional competitors, so the IBMs and Microsofts of the world, the Interwovens, the Fat Wires, the Tridions, BEAs, Stellen, that type of stuff across our various product lines.

So we are not getting a lot of pressure from SAS-type companies, but certainly across the wide spectrum we saw plenty of competition and plenty of pricing pressure. And as Pat mentioned, there was this kind of vacancy of the mid-sized deal, and I think that's because a lot of deals were driven to very low price points during Q1.

Mark Schappel - Benchmark

Thank you. That's all.

Mike Aviles

Thank you.

Operator

Your next question comes from [Scott Burge] from ThinkPanmure. Your line is open.

Scott Burge - ThinkPanmure

Hi, gentlemen. This is Scott Burge with ThinkPanmure for Nate Swanson. I hope you are both doing well today.

Mike Aviles

Hi, Scott. How you doing?

Scott Burge - ThinkPanmure

Great.

Mike Aviles

Yeah.

Scott Burge - ThinkPanmure

I have two quick questions for you. The first one, it wasn't clear from the question that was previously asked. Some of the license revenue from Q1, do you feel it was more companies that are just looking to delaying purchases and pushing it out to maybe this quarter or next quarter, or was it more or say losing deals from the ineffectiveness of the sales staff you spoke about?

Mike Aviles

Scott, I think it's a combination of all factors, so some of my remarks I said factors both inside and outside the business. We are not ones to make lots of excuses, right? So we are not blaming on a lot of external conditions. The management team at Vignette takes a lot of accountability. We know that we have lots of influence, lots of control. And if we execute well, there is plenty of opportunity out there for us.

So we like to kind of put the blame squarely on our own shoulders, and right back at us. And having said that, you cannot ignore what was going on in the marketplace in Q1, you cannot ignore that financial services is a big sector. And as I've said repeatedly is, we did see a concentration of the issue being license revenue in North America and financial services as a whole across from a vertical market perspective.

Did I answer your question, or was it more to it?

Scott Burge - ThinkPanmure

No. That's perfect. Thank you.

Mike Aviles

Yeah.

Scott Burge - ThinkPanmure

And the second question is just because I don't have it in front of me, is how much do you have left on your current stock buyback program if any?

Mike Aviles

Well, I think, I'm not sure I have the exact number. Hang on just a second, we'll get that. Hold on a second.

Scott Burge - ThinkPanmure

Sure, that's fine.

Operator

And your next question comes from --

Mike Aviles

Yeah. So, Mark, we have $45 million left.

Scott Burge - ThinkPanmure

Okay.

Mike Aviles

$45 million left in the share buyback program that's authorized.

Scott Burge - ThinkPanmure

Okay, great. Thank you.

Mike Aviles

Go ahead.

Operator

And I apologize for the interruption there. And your next question comes from Brian Murphy with the Sidoti & Company. Your line is open.

Brian Murphy - Sidoti & Company

Thanks for taking my question.

Mike Aviles

You bet, Brian.

Brian Murphy - Sidoti & Company

So you know you guys had strength outside the US this quarter. I was wondering if you could give us some color on what you think is driving that. I know you've had some changes in field leadership, and sort of a focus on revitalizing EMEA, If you could speak to that?

Mike Aviles

So it's an excellent question. And the day we get everything hitting at the right together, we're going to have some tremendous results at Vignette. So in EMEA, we brought in a new GM Germany Dick Cahill early in the quarter. And Dick has had a significant immediate impact in really improving our execution and our general coordination and management and leadership of the entire EMEA team that's revitalized.

Also and earlier last year, we made an investment in Latin America. We brought in a GM there who is doing a nice job in pulling that business together. We saw some good momentum both in EMEA and in Latin America particularly during this quarter. So that's one factor.

The other one is, I think a lot of the stuff we are doing around products. So the Telco, Media Entertainment is an important vertical for us. And it's a real point of distinction for us at Vignette. So some of the things that we have been doing around the digital services hub, the new products that are coming into play there, the integration of the products, we are seeing good traction in the Telco Media and entertainment space.

So if we saw downside pressure in financial services, we saw positive things in Telco Media and Entertainment.

Brian Murphy - Sidoti & Company

Okay, great. And, Mike, just broadly, where do you see the innovation in the space right now. And how do you characterize the pace of innovation? And is it more occurring sort of around the edges of core functionality maybe in search and analytics like you mentioned video. And if it is, is the competitive set different there for that type of functionality?

Mike Aviles

So I have got Somesh Singh here and I have got to give him a little time, because he has worked hard in this area in putting out a lot of products and enhancing. So I will give Somesh a little time to answer your question, and then I'll join on.

Somesh Singh

Thank you, Mike. The primary innovation here is from our perspective is in video space. And what is happening is because of the capabilities that the video brings for rich experience the new models are emerging allowing the capabilities of video. And the second thing with video is that integration of video into the core content management capabilities.

So if you recall, Mike, in his opening statement talked about the fact that as video is becoming one of the key ways of communicating and for companies to really create relationship with their customers. It is becoming very complex for folks to actually take that video and do something with it, as far as management is concerned.

We are seeing a lot of innovation going on from that side, lot of innovation going on between social networking capabilities and once again, the rich experience that customers are really looking forward to.

So what you're seeing in more consumer side of the business, like MySpace and YouTube, et, cetera capabilities that is becoming mainstream, and the requirements for technology is very different once it becomes part of enterprises. And we see a lot of innovation in that space.

Mike Aviles

What I would add on to that is. It's a great question and to answer it properly, you got to look at a lot of different things. So certainly, Web 2.0 capabilities is something that's driving the marketplace. The consumer is driving the Internet and taking control of the Internet.

Some enterprises and some verticals are responding to that and catching up and getting ahead of it. Some are way behind. I think some vendors are responding to that, I think some vendors are way behind it is independent software vendors.

So last year at Vignette, we said we are an innovation company. We have to get back to product innovation. And I think over the last certainly 12 or more months, we have shown a lot of effort and investment to enhance our products, as well as to deliver new ones.

And Web 1.0 was about information delivery. Web 2.0 was about user participation, Web 3.0 is about intelligent sites. So a lot of the innovation that we're seeing in the market place is coming from these adjacencies and these smaller companies. It's not the bigger more established players.

Brian Murphy - Sidoti & Company

Got it. Thanks very much for that. And just to drill down on some of the integration issues. This adjacent sort of functionality, is this stuff that can be bolted on to a legacy system, or would there require the customer to upgrade the core functionality?

Somesh Singh

Yeah. Our platform, the beauty of our platform is its extensibility. So while that is also what has driven complexity in the past, our effort has been to simplify that. But at the same time take levels the capability to integrate these adjacent capabilities. So I say, yes. It can be integrated with core platform and that's the strategy we are on.

Mike Aviles

Yeah. And I think Somesh is a modest guy, so the time he's been here is a relatively short period of time, he's been here 14 months, if not if that much. And if you think about the progress that we've made around our products in the past 14 months, I think it's been pretty incredible. And we talked about integration, we talked about usability, we talked about functionality, skip level upgrades, cloning, this is all stuff that under Somesh's leadership, we've been able to drive. Now, we just got to get our sales force in front of it.

So I feel very good about what's going kind of from a customer satisfaction perspective, from the stability of the products, the functionality, the integration, all that stuff you are seeing improvements. And you're seeing it in the numbers. You see it in maintenance renewal rates, you see it in the growth of our services group. You see it in our margins of our services group.

Now, we really need to really arm the sales force. And it's sales and marketing effectiveness, right? Marketing has to take a lot of responsibility for this. And to really put them in a position where they can compete and they can win out there.

Brian Murphy - Sidoti & Company

Great. Sounds like you are in a very interesting space here with all the innovation and disruption. I'm assuming the time to market is very important here. Could you just give us a sense of how you feel you're doing? I mean are you on time to market with products, or in some cases do you think maybe you are a little early and that might present an adoption issue?

Mike Aviles

I'll give you my view and Somesh will give his. We're late. As an innovator in the marketplace this is something we should have been on years ago. So we can talk about the progress that's been made over a very short period of time. But over many years I think we lost an edge that Vignette that we are now starting to get back.

And part of it is, we've got to get past some of the challenges that we had over the years. And that's why I talked about the initiatives around the cost of deployment and the complexity reducing the cost of deployment, reducing the complexity, making it more usable. These are initiatives to take away friction of why we think we're not getting the sale.

So in that sense, I feel like we are behind and we're catching up quickly. Somesh, is there anything you want to add?

Somesh Singh

No. That's very well said, Mike. Most of our innovation is really being driven outside in, and by that what I mean is that we are seeing needs for things that customers are asking for and customers are looking for somebody to solve.

And that's where we are focused our energies right now. So we are not in a situation where we are evangelizing a new market. We are in a situation, we are trying to make things easier, faster and more fun for our customers to use.

Brian Murphy - Sidoti & Company

Thanks for that. I'll ask one more question and hop off. Mike, assuming the field enablement initiatives workout sort of the way you planned, what kind of targets do you have in mind in terms of the sales force productivity?

Mike Aviles

Yeah. So the answer to that question is not if, it's when, right? When they workout, so just a matter of time that it will workout. So we don't put out numbers. I don't think we put out numbers in terms of productivity per rep and stuff, so from a quota perspective, we'd like to have upwards of 60% of all our AEs hitting quota. That would be a good number to shoot for.

If we can get them to 80% or 100%, that would be outstanding. But I think that 60% of our field AEs beating quota would be a good measure for us to go after. And then we've also talked about the partners.

Partners represents, in my opinion, the biggest leverage point for vignette. We got a great group of partners that we also need more productivity from. And we have to enable our own people, in an ability to be able to enable the partners, but we've said, we put out goals that we want to try to generate 50% of our revenues from partners to partner influenced deals.

Brian Murphy - Sidoti & Company

Great, thank you very much guys.

Mike Aviles

My pleasure.

Operator

There are no more questions in queue. I now turn the call back over to Mr. Aviles.

Mike Aviles

Okay. Thank you, operator, thank you all for joining the call today. And so not much to say. But you are never as good as your numbers. You're never as bad as your numbers. We are disappointed with the quarter we had in Q1. It overshadows many of the positives things that we think that we have going on at Vignette.

We are determined, we're focused and we're going to get after it. So we look forward to updating you on our progress and results next question. Thank you so much.

Operator

Thank you. This now concludes your conference call for the day. You may now disconnect your lines.

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