SuccessFactors, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

May.27.08 | About: SuccessFactors, Inc. (SFSF)

SuccessFactors, Inc. (NYSE:SFSF)

F1Q08 Earnings Call

May 8, 2008 5:00 pm ET

Executives

Bruce Felt - Chief Financial Officer

Lars Dalgaard - Founder, President and Chief Executive

Analysts

Brendan Barnicle – Pacific Crest

Keith Weiss – Morgan Stanley

Nate Swanson – ThinkEquity

Brad Whitt – Broadpoint Capital

Ariel Sokol – Wedbush

Pat Walravens – JMP Securities

Sarah Friar – Goldman Sachs

Operator

Welcome to SuccessFactors fiscal first quarter 2008 financial results conference call. (Operator Instructions) I will now turn the call over to Bruce Felt, Chief Financial Officer of SuccessFactors.

Bruce Felt

Welcome to SuccessFactors March 31, 2008, financial results conference call. The primary purpose of today’s call is to discuss our first quarter performance. However, some of our discussion may contain forward looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities, and other forward looking topics.

These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially. For a listing of the risks that could cause actual results to differ materially please see our Form 10-K filed with the SEC as well as factors identified in today’s press release.

I’d like to introduce from SuccessFactors, Lars Dalgaard, Founder, President and Chief Executive Officer and I’m Bruce Felt the Chief Financial Officer. Unless otherwise stated all references to spending excludes stock based compensation which are non-GAAP measures, a reconciliation from non-GAAP to GAAP can be found in our press release. Following our prepared remarks we open things up to you for questions and answers.

Today’s call is available via webcast and a replay will be available shortly following the conclusion of the call through Friday, May 16th. To access the press release supplemental financial information or the webcast replay please consult our Investor Relations website at www.SuccessFactors.com/Investor. With that let me turn the call over to Lars.

Lars Dalgaard

The global long term five year strategy we kicked off in 2004 to revolutionize the productivity of the world. It’s just beginning to show its true colors in renewing customers, growth, margin expansion and cash. The four key messages from this call are:

SuccessFactors delivered a strong quarter across all core financial metrics and business markets.

SuccessFactors leads the SAS industry with pure organic revenue growth of 89%. Few companies have ever grown this fast organically at this size which is the engine of long term sustainable value creation.

The whole global team executed a masterful expense management to expand our gross and operating income margins. As a preview of the power of the cash annuity we are building operating cash flow was improved by 67%.

We’re ahead of our plan. We’ll continue to invest and grow aggressively with expanding margins and we’re adjusting our guidance up for 2008.

We want to thank each and every customer and SuccessFactors employee for the hard work, passion and execution that you demonstrate on a daily basis. That has allowed SuccessFactors to create and lead the on-demand people challenge performance paradigm change now will well over three million unique users across the world.

Last week SuccessFactors was listed as one of the best places to work in the greater bay area for the second year in a row. Adding that to the top 25 Americas best places to work award in 2007. It’s an honor.

Through the effort of these people they are able to prove something very unique about SuccessFactors promised on the road show. We’re continuing to expand our business much more aggressively than the industry and any SAS company. That’s proof in the quarter we’re doing so while significantly improving the bottom line not just through over performance on top line growth which we’re doing and model leverage which we’re getting but while getting more and more efficient on expenses and headcount leverage using our own products. The numbers tell the story.

A customer’s own success was evident by them deciding to renew at a greater than 100% dollar rate again for Q1 ‘08 as it was in the last six years. With revenue growing 22% sequentially to $23.5 million and 89% year over year and phenomenal control of cost of goods sold expanding only 2% sequentially after growing 81% for all of 2007 SuccessFactors team executed a gross margin expansion from 53% up to 61%, that’s a 15% improvement over the last quarter and eight point gross margin improvement.

Operating expenses expanded by 3% sequentially after growing 107% in 2007 producing a non-GAAP operating margin expansion of 32%. Cash flow used in operations was $4 million versus a cash use of $12.3 million in Q4 ‘07 a 67% improvement. As guided we will continue to invest aggressively in 2008. We’re very excited to begin to show the robust margin expansion we’re built to deliver while growing the fastest. SuccessFactors is raising full year 2008 revenue guidance by $3 million.

This strategy is led to continued strength and traction along our three investment actions; all markets, all geographies and all products. The pipeline continues to grow with record levels of demand and interest. First on markets, our small, medium and enterprise markets are the core of our business with the largest percentage of new business came in Q1 ‘08. Please refer to the numerous customer additions in today’s press release.

Our successful SMB investments started three years ago where we by far have the biggest scale of any human capital management company continues to benefit from the ramping and becoming a bigger part of the total business and more profitable. The enterprise business is our bread and butter and to date we have done 75, 10,000 seat implementations and we demonstrate our ability to sell and implement successfully some of the largest business on demand deals ever done.

Our message about how we can help them run their businesses better and more profitably is resonating at the see level across our markets. We’re finding that our message by driving incremental 2% to 3% revenue and reducing costs in the process is being well received. On our Q4 call in February we gave a preview into Q1 by reporting SuccessFactors signed two multimillion dollar deals in two US industries.

Morgan Stanley has joined us as a customer also one of the world’s largest retailers has become a customer of SuccessFactors with the world’s largest planned SAS deployment with 300,000 initial users. We think that’s three times bigger than anything that’s ever been done before. Also a large insurance agency added 24,000 users. SuccessFactors has a history of delivering the largest on-demand SAS deployments in the past years.

Some of these customers have very big immediate ambitions for the total people management needs and they bought seven products in their first purchase from SuccessFactors. For example, enterprise companies across the world like R.J. Reynolds Tobacco Company in the US, Supermercados Internacionales in Latin America and JF Hillebrand in Europe.

Also, in the marketplace SuccessFactors partners contribute approximately 10% of total new business through resellers, referrals, and other partners influence. Part has helped drive new customer names including Gallop that helped us close Stryker Corporation, GEO Learnings with the customer Miller Brewing Company and TriNet in the S&B market with new customers in diesel and silicon systems.

Odes the second part of our expansion strategy the geographic expansion. Given the progress we’ve made on our international and channel initiatives we wanted to spend some time demonstrating these markets willingness to invest now. The European team kicked off 2008 with a great quarter. The European team added new customers in eight countries including Fidelity Investment Management, Grupo Celso and Oddyssey.

Q1 ‘08 was our largest quarter ever for Asia/Pacific. In Hong Kong, Korea and mainland China we had a principle one [Ethes] and [Ethesement] and added new customer in Singapore and the Philippines. In Australia we added Amco and Delta electricity. In Latin America retail store H.E. Butt Grocery Company in Mexico signed an initial 8,000 seats out of a 72,000 total employees potential.

Moving on to the final part of our strategy the products. Our fast up sell and strong rules and top line growth is basically because our application is organically built from the ground up. Our broad application suite is quick to deploy and leverage multi-turn architecture and a single code base.

New product sales outside of performance and goal management was only 7% in 2003 it was essentially all performance and goal management but in the first quarter actually 65% of new customer subscription business was from new products built from our own great development team that were not performance and goal management so 65% of those were coming from new products we had innovated and continue to innovate. It is a very important part of our long term strategy.

During the quarter we continued our innovation with product enhancements released across the entire suite of products. These features were primarily up in and included with their monthly updates. These enhancements are a major factor in driving continuous adoption and uses of our products such as Deep Outlook and Lotus Notes Calendar integration or our Web 2.0 driven employee profile module with an edit in place capability to help employees and managers easily modify their online profile, add tax and access other user ability features that greatly reduce the number of screens and clicks required to keep profiles current.

This is at the core of getting great analytics data if you get people using the system and is really at the core of our success on renewals. With our emerging products the integrated recruiting module now further improves hiring effectiveness. Hiring managers can now access real time contextual analytics correlating historical performance of individuals across organizations with the sources that brought them into the company.

The learning and development module was extended to showcase individual’s preferred future roles within a company and the company’s required to get the person there so they can go and take an action in getting it done. All this valuable information is readily available for other talent sourcing processes such as Succession Planning and recruiting running two unification visibility into talent.

Renewals and top line profitable growth is a direct correlation with the constant innovation in our existing and new products. Bringing a new paradigm to the customer experience software that is always fresh and useful and with an interview better than consumer web experiences. The Wall Street Journal recognized that on April 22, 2008 featuring a full page article where SuccessFactors was mentioned and quoted the most in how we are consumerizing and exciting our customers with constant innovation.

As you heard, we have done over 75 releases over the last six years and that is what brings that innovation to bear. Our all markets, all geographies, all products approach provides significant diversity of revenues from more than 60 industries across 156 countries and 22 languages for a balance portfolio in this economic climate.

Finally let me finish with touching on the acceleration of our model beyond these three key investment actions from renewals and up sells due to our dedication to making our customer successful. A lot of customers the companies have grown fast but often at the expense of their customers. From the first day we’ve distinguished ourselves by taking measurable customer success as serious as sale and paying every single employee in the company for it.

In Q1 the fantastic SuccessFactors profession services team implemented an extraordinary 279 customers spanning North America, Europe, Latin America and Asia/Pacific, across all market segments. This is over go lives per business day. It’s hard to pick a couple to mention but here are a few stand outs.

Operating in 35 countries Sigma-Aldrich purchased four SuccessFactors modules. The first implementation phase was the single module but the project was so smooth they added two more modules during the initial phase and accelerated the roll out of the fourth module by six months. The initial roll out was for 2,000 US employees but Sigma-Aldrich increased employment to 8,000 seats in Europe for French and German employees.

Secondly, SuccessFactors enjoyed a significant go live out of Europe with Nokia Siemens Networks, one of the world’s largest network communication companies with 60,000 employees. Nokia Siemens rolling out integration performance go alignment and compensation in 97 countries in a few months. The customer and SuccessFactors partnership here was a marvel to watch.

Another great story is that CadburySchweppes where we helped the company drive alignment for 11,000 of its employees in 10 languages in business units in Europe, the Americas and Asia/Pacific. Again a great partnership with our customers and SuccessFactors implementation force.

While successful implementations drive renewals and strong products unnecessary to create a strong cash annuity stream for the long, long term. Only at that point will you be welcome to do up sell that make our recurring customers even more profitable. You can’t get to up sells when you don’t have successful customers. That is why it is so important that our professional service team is so excellent as is our customer success team making these customers successful every day.

We increased up sell from 14% in 2003 to 31% of new business in Q1 ’08. Here are three examples that tell the story well. SuccessFactors continued to expand its relationship with Textron with great account management. In 2001 Textron became a SuccessFactors customer with 1,200 users of performance manager. In 2002 Textron purchased 3,800 additional users of PM as well as the French and German language packs.

In 2003 they added total goal management and renewed all three modules through 2006. In 2007 Textron added our succession planning module for five more languages and for all 35,000 employees. In 2008 Textron added our career development module and signed a three year extension for all five modules for 35,000 employees worldwide. What a great partnership we’ve had the Textron.

MacLeod you would say is an interesting story and existing clients since July 2002. They were acquired by PayTech holding Corporation in January. We told you earlier that we only typically lose clients when they are acquired. In this case PayTech decided they would advance with their own Oracle platform for human resource and PM. After hearing about the success achieved with SuccessFactors from our champions at MacLeod they decided to roll SuccessFactors products out within PayTech instead.

This up sell resulted in an addition 4,000 seats and the value we provided survived the acquisition scenario. Finally the mid market team secured a great up sell opportunity at NASDAQ an existing three year old customer signed for another three years and purchased approximately 2,000 seats of three other products to cover their acquisition of the OMX, Philadelphia and Boston exchanges.

To fill the pipeline net promotership is a key driver of our success. In Q1 our product demonstration on line event customer presentation [inaudible] we sold more than 7,000 registrants in over 1,500 leads. We conducted eight field marketing events in Q1 with nearly 500 registrants. These are great events as customers and prospects are able to hear directly from current customers on how SuccessFactors is helping them to transform their work forces.

These are obviously in addition to our global user conference and give people access across the world in smaller formats and can talk about real deployments with real success. As many of you know SuccessFactors Global User Conference is the first week of June in San Francisco and speakers will include the number one experts with Stanford Worden in our space and as a first CEOs and COOs and other people leaders from our customer group revolutionizing the workforce.

Customers count on us to deliver world class best practices and at boot camp was so heavily requested that we had to double the capacity. You’re invited and we look forward to discussing our global strategy for revolutionizing the way the world works by building a very rich cash annuity business. Bruce why don’t you go deeper into that and discuss new guidance for Q2 and raised guidance for ’08.

Bruce Felt

We had a strong Q1; we experienced strength across enterprise and SMB and benefited from increased international contribution. As Lars mentioned our modules outside of performance and goal management continue to sell well, contributing an even greater percentage of our new business than in 2007. Our up sells remain strong and our customer retention rates continue to exceed 90% while dollar renewal rates exceed 100%.

The two large deals we closed in Q1 accounted for approximately $3.7 million of our new business. We recognized very little revenue from these two multi year deals in the quarter. While we expect to close mega deals periodically however they do not happen every quarter and predicting the timing of such closings is difficult.

First quarter revenue was $23.5 million a year over year increase of 89% and a 22% sequential growth. Our Q1 revenue benefited from the non-recurring impact of $1.2 million recognized in the quarter primarily from the early termination of a customer contract as a result of an acquisition. On spending total spend for Q1 ‘08 was $41.5 million a 3% sequential increase from Q4 ’07. This is a continuation of the actions we took in Q4 to begin to leverage the investments we made in 2007.

We aggressively managed headcount and spending. We experienced significant gross margin improvement in Q1 ’08 at 61% compared to 53% in Q4 ’07 and 59% in fiscal 2007. By utilizing the professional services capacity that we hired in the later half of 2007. We play to hire more professional services personnel throughout the balance of the year however even with the additional hiring we expect gross margin improvement for the full fiscal 2008 year compared to 2007.

Sales and marketing expense increased sequentially only 1% as we allowed our sales force to ramp as noted in our Q4 call we significantly expanded the sales force during 2007 and hired into our 2008 needs. R&D declined by 2% mostly due to seasonality of incentive compensation expenses as headcount increased during Q1. G&A expenses increase sequentially by 18% mostly due to additional third party costs associated with being a public company primarily in the accounting tax and legal areas.

For Q1 ’08 EPS our GAAP loss per share was $0.37 and our non-GAAP net loss was $0.34 which excludes stock based compensation expense of $1.8 million. We’re using 51.7 million weighted average shares outstanding during the quarter. Cash flow and the balance sheet cash flow used in operations was $4 million a 67% improvement from Q4 ’07 of $12.3 million and also better than the $7.2 million cash used in Q1 ’07.

Q1 benefited from aggressive expense management, higher collections from our strong Q4 partially offset by our annual bonus and fourth quarter sales commission payments. Additionally we benefited from an improvement in our day sales outstanding. Our deferred adjusted DSOs improved from 82 days in Q4 ’07 to 78 days in Q1 ’08. We measured DSOs on a deferred adjusted basis which means we divide accounts receivable by the average daily invoicing for the quarter. We used this metric since invoicing is what drives accounts receivable and not revenue.

Q2 is expected to be our most negative cash flow used in operating activities quarter for 2008. Due to Q1 being our seasonally lowest invoicing quarter while our spending in Q2 is expected to increase as planned. This means that the second half of the year is expected to be stronger than the first half on a cash basis. Even though Q2 is expected to our most negative cash quarter we do expect to drive improved operating margins over the balance of the year which includes the Q2 quarter.

We expect to realize this margin improvement even while growing the business at market leading levels. because of our aggressive expense management while still maintaining market leading growth rates we’re in an even better position than we were last quarter to beat our goal of becoming cash flow positive from operations in Q3 2009.

On the balance sheet total cash and cash equivalents and marketable securities ended the quarter at $86.4 million. At the present run rate SuccessFactors will have more than sufficient cash to fund our operations through the point in time that we achieve positive cash flow from operating activities. Strong sales of our solution suite resulted in a record quarter for deferred revenue for business that has been invoiced but revenue not yet recognized our deferred revenue on the balance sheet finished a record of $112.8 million up 99% than the $56.8 million a year ago and increase $11.8 million from Q4 ’07.

On our outlook we are initiating guidance for the second quarter of 2008 we expect revenue for Q2 ’08 to be in the range of $24 million to $25 million which equates to approximately 63% year over year growth and 10% sequentially if you would adjust the Q1 ’08 results for the $1.2 million of non-recurring accelerated revenue noted earlier. Excluding the impact of stock based compensation expense we now expect Q2 ’08 non-GAAP loss per share to be in the range of $0.39 to $0.41.

The estimated average weighted, average share count for the quarter of approximately 52 million shares. For the full year 2008 we now believe revenues are expected to be in the range of $104 million to $106 million up from a prior guidance of $101 million to $103 million, coming into fiscal 2008. Non-GAAP loss per share including stock based compensation expense is now expected to be in the range of $1.55 to $1.59 better than our initial fiscal ’08 guidance of $1.63 to $1.67. This estimate assumes the weighted average share count for the year of approximately 53 million shares.

By any measure our Q1 was a great quarter. I’ll now pass it back to Lars for closing comments.

Lars Dalgaard

We think this is a $16 billion market opportunity. We think its less than 13% translated. The 300,000 seat opportunity demonstrates how Greenfield this market really is. We’ll continue to invest in this market opportunity with the right people and technology and in getting our customers successful. We’re leading one of the most attractive markets available today and its gives such unique high returns and sales growth and has such a promising cash contribution profile over time.

With that let me turn the call back to our operator and open things up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brendan Barnicle – Pacific Crest.

Brendan Barnicle – Pacific Crest

Impressive results on gross margin and its looks like that’s going to continue. I just wanted to be a little bit clearer on it. Bruce you said to expect it to be better by the end of the year. Do you think it accelerates even off the same rate that we’ve been at through the end of the year because if you stay at that rate we’d be significantly higher than where your gross margins were a year ago?

Bruce Felt

We weren’t saying that we keep the same accelerated pace but what we did say is that we expect it to improve from where it is now so that we do have a net improvement over 2008 compared to 2007.

Brendan Barnicle – Pacific Crest

With the changes, improvement in the expense controls you guys are getting better leverage. Anything you pulled back on in terms of investment as a way to be more defensive in this changing macro environment to assure this kind of continued improvement in the margins.

Lars Dalgaard

As we discussed early on its something that started back in 2007 its something we’ve planned on for five years and we just feel this is the right investment level and it puts us in a position to continue to grow aggressively while expanding margins both through the model leverage but certainly also just through really considering careful investment in headcount and expenses through our own company.

Brendan Barnicle – Pacific Crest

Last quarter you also shared with us a couple big deals that had closed already even at this point in the quarter. Care to share anything like that about Q2 so far?

Lars Dalgaard

Thank you for the question but as we said last time that’s an exception and we just wanted to show that this is a very, very attractive market where people are very willing to buy and we feel we’ve proven that.

Operator

Your next question comes from Keith Weiss – Morgan Stanley.

Keith Weiss – Morgan Stanley

I wanted to ask you a little bit about the profile of the new customer. If you look at your billings like the revenue plus change in deferred that grew very strongly up like 109% granted it was helped by some very large deals in the quarter but even if you look at revenue per customer over the 200 new customers it seems like the customers you added this quarter were larger than usual is that a fair statement? Is that saying anything about the current market opportunity?

Bruce Felt

We did have the benefit of these large deals that’s true. Even if you take them out though you see that’s a very strong quarter. What we’re experiencing generally and this is across all the segments are larger deal sizes. I think you just notice what we’ve been experiencing and are highlighting it here today.

Lars Dalgaard

Deal sizes and pricing is going up.

Keith Weiss – Morgan Stanley

If we look at the net new customer adds of 200 in the quarter that was up only about 30% year over year which is significantly below bookings are you guys expecting that to accelerate is that something that’s going to bounce around quarter to quarter just depending on the profile of you’re closing the quarter?

Bruce Felt

That’s a hard one to predict because it’s a function of the mix of the S&B business versus the enterprise and also somewhat geographically influenced as well. It can change from time to time depending on how the mix changes. We have overall seen larger deal sizes in all the segments which is why we made the statement earlier but the mix certainly can change in any particular quarter.

Lars Dalgaard

You saw about that we were able to expand on our up sell in existing accounts and we’re also able to expand more products from each account.

Keith Weiss – Morgan Stanley

On capital expenditures it looks like your CapEx spend was down significantly in the current quarter was it an unusual quarter and could you give us any kind of color on where you expect that to return to over the remainder of the year.

Bruce Felt

I guess we’d have to say CapEx was practically zero. As we had mentioned before what really drives CapEx, what drove it in the past was not customer acquisition it was really the amount of hiring that we had in outfitting these new employees. I will say however that we do plan to make some infrastructure investments this year to widen our capacity to service our customer so do expect that but to have almost zero CapEx just pretty much highlights the way our model works its not customer acquisition intensive but again I do highlight we do plan in Q2 to make some investments in our data centers but it won’t be out of range from our historical kind of investment in that area.

Operator

Your next question comes from Nate Swanson – ThinkEquity.

Nate Swanson – ThinkEquity

Going back to the profile of the new customers is it possible to break out the 200 new customers by SMB versus enterprise?

Bruce Felt

We have not been making that breakout so the 200 is just at the level we report.

Nate Swanson – ThinkEquity

In terms of the two big deals that you signed in January, Morgan Stanley and the other one, did those go live during the quarter?

Bruce Felt

We delivered in the quarter and we commenced work there’s usually just different degrees of milestones that need to take place. I don’t believe at this point in time they are fully live.

Lars Dalgaard

So no significant revenue recognition if that’s what you’re asking.

Nate Swanson – ThinkEquity

I’m trying to get a sense for the $3.7 million of new business I think that came from those two deals is that correct?

Bruce Felt

That’s correct.

Nate Swanson – ThinkEquity

That went into deferred?

Bruce Felt

That did go into deferred revenue.

Nate Swanson – ThinkEquity

Is that first year or is that contract value over the life of the contract.

Bruce Felt

That is invoicing which is first year and so the total contract values will be significantly larger than that that tends to be two to three times the size of the first year invoicing.

Lars Dalgaard

Both signed multi year deals.

Nate Swanson – ThinkEquity

Your expectation would be to begin recognizing more significant revenue from those in Q2?

Bruce Felt

Q2 should have a full quarter of recognized revenue for those deals.

Nate Swanson – ThinkEquity

In terms of gross margin they bounced around a little bit in terms of the $1.2 million of early termination revenues were there costs associated with those that when into gross margins or should we back that out to get more of an apple to apples basis?

Bruce Felt

That would not have been gross margin costs. The costs that would have been associated with that would have been the deferred commission expense that would have been capitalized and associated with that deal. That would have been the only expense that you would see that was a result of that.

Nate Swanson – ThinkEquity

That would have gone through sales and marketing?

Bruce Felt

Yes it would.

Nate Swanson – ThinkEquity

I wanted to be clear on your comments around the Q2 cash flow and operating margins. I know you said that operating margins would improve but I’m wondering is that year over year or sequentially from where they were in Q1.

Bruce Felt

We’re saying that the operating margins would be better than what we reported in Q1 which were better than what we reported in ’07 as well. We do see improved margins for the balance, the next three quarters. The aggregate of those three quarters will have a better margin that we reported in Q1 and also what we reported for all of ’07.

Lars Dalgaard

You can see that Q1 ’08 whereas you’re absolutely right that gross margin has bounced around in Q1 ’08 it’s higher than it was in all of ’07. So it’s net net up.

Operator

Your next question comes from Brad Whitt – Broadpoint Capital.

Brad Whitt – Broadpoint Capital

Did you comment on percentage of bookings from outside the US?

Bruce Felt

We did not comment on the international contribution was.

Brad Whitt – Broadpoint Capital

Was it last year roughly 10% is that correct?

Bruce Felt

That’s correct.

Brad Whitt – Broadpoint Capital

And you expect that?

Lars Dalgaard

I think we’ll go ahead and comment it hasn’t significantly changed.

Brad Whitt – Broadpoint Capital

As we look at the seasonality of your cash flow it seems possible to me that you could actually be cash flow positive in this fourth quarter of this year does that seem reasonable. The way that your bookings flow 40% of the bookings come in the fourth quarter?

Bruce Felt

Let me just step back and just remind you and the audience that we’re in complete control of when we reach profitability and cash flow positive. We’ve put our target as Q3 ’09 however as a reasonable target given the amount of vestment that we would like to make in order to continue to grow the way that we have been growing and to frankly just to be able to capture the Greenfield market as aggressively as possible.

I think through this quarter demonstrated that we can produce significant margin improvement quickly and we will continue to do that but we are still keeping the Q3 2009 as the target and as we mentioned if we keep this up we have a pretty good chance of beating it.

Brad Whitt – Broadpoint Capital

I don’t know if you care to comment on, there was a big merger in the space this week from a competitive standpoint do you think that changes anything at all?

Lars Dalgaard

I don’t think it changes anything. We’re growing three times as fast as they are 90% over 30% and we’re just separating ourselves out from this field. Very much a recruiting play, we’re very much a play that addresses the entire operation and goes strategically to address all buyers in the company from CEO throughout the company and not a recruiting company but we do sell recruiting products where a customer wants us to do it.

Operator

Your next question comes from Ariel Sokol – Wedbush.

Ariel Sokol – Wedbush

The first question is can you speak to how the enterprise business is performing relative to the SMB business. Clearly you’ve had a good quarter but the degree of are you seeing any issues as related potential to economy any potential challenges in enterprises or the environment for selling?

Bruce Felt

We don’t provide specific color to any of the segments but I just can say our enterprise business is just very strong. We just are doing a very good job, it’s under Jay Larson, and he’s doing a fantastic job. Our suite messaging very well received and our value proposition which is we can improve the top line of our customers 2% to 3% we can help retain their top talent, we can help reduce costs and we can help shed the business of those that aren’t producing. That’s just very well received today and it’s particularly well received at the large enterprises today. Again a very strong enterprise performance this quarter.

Lars Dalgaard

That really is the bread and butter of our business and all these other investments are for our strategic long term future and we’re very happy with our progress.

Ariel Sokol – Wedbush

You’ve talked a bit about aggressive expansion of headcount what was the headcount at the end of Q1 2008 as it relates to Q4 2007?

Bruce Felt

It was a little bit under 700 as of Q1 as of the end of Q1 as opposed to about 735 Q4.

Ariel Sokol – Wedbush

What explains the variance?

Lars Dalgaard

We hired a lot of people in Q1 we just fired more. We’ve been on a very aggressive hiring spree for a long time and we’ve used our own products to find out the people that weren’t going to be part of the future. Jack Welch warned me about, he was right; you’ve got to be very careful. It’s great that we have the right products to decide who gets to stay and who doesn’t.

Ariel Sokol – Wedbush

The last question would be thinking about the sales force home many quota carrying sales people did you have in Q1 versus Q4?

Bruce Felt

The information we gave in Q4 was that we had between 150 and 200 quota carrying sales force. We still have between 150 and 200 quota carrying sales force. I’ll say even within our adds what Lars said even with this aggressive management of expenses which I think is somewhat unusual for such a fast growing company and our aggressive management of headcount so that we’re extremely well positioned to continue to grow at market leading growth rates.

Lars Dalgaard

We’re continuing to hire across the business including sales reps when we find great talent.

Operator

Your next question comes from Pat Walravens – JMP Securities.

Pat Walravens – JMP Securities

I am wondering as you go forward are you thinking at all in terms of shifting the balance of your sales resources. Where is that heading to for example is it more towards mid market, more towards the enterprise?

Lars Dalgaard

I was lucky to be at Warren Buffet’s event Saturday in Omaha and I remind myself of when he talked about the reason he invested in Coca Cola was because he thought the biggest potential was still in the US. That’s kind of how I feel about our business. We still have so much core opportunity just in our first business we ever built, Enterprise US. We’re putting a lot of resources into that. We have asked for permission to and been allowed to invest very selectively across all geographies, all markets and all products and we’ll continue to do that where we see the opportunity for long term rewards.

Pat Walravens – JMP Securities

Are you finding that selling into the mid market as opposed to small or enterprise has sort of different requirements and what are those?

Lars Dalgaard

Yes, fundamentally different that’s why we have two different internal divisions where we have Jay Larson running the enterprise who of course took $362 billion and had 1,100 people doing that. We have Paul Albright running the SMP business and we have that again split into small and medium where we have the ex VP of sales.com running the small business and in the medium business we have Peter running it that came from JD Edwards.

Its fundamental different deal sizes, its fundamental different volume, its fundamental different speed, its different pricing and its different parts of the product that sell more. You can’t do that just by having the same guy lead it all. There’s too much activity, there’s too much intensity. To do this well in a way that becomes profitable over time the customers become successful you can renew them and you can up sell them you’ve got to have people that do this for a living and focus on that every day.

It takes a long, long time to build that but that’s what we’re very far ahead in doing.

Operator

Your last question comes from Sarah Friar – Goldman Sachs.

Sarah Friar – Goldman Sachs

If I come back to the question about the shift in the competitive landscape you guys have taken this quite organic growth strategy which is obviously paying off given how many products came from beyond your core. How do you think about it longer term that trade off between organic versus inorganic growth unless others getting more active from an M&A perspective is that something you’ll consider?

Lars Dalgaard

I admire VMware and SalesFirst.com for the organic growth they did without any acquisitions. I have spent a lot of time doing very big acquisitions at Unilever for five years. Net, net there’s not a lot of acquisitions that work out for any company. It’s typically one out of ten. It can really bog you down and it can destroy all the great things you’ve built.

In our case we obviously always keep an open eye but the reality is our biggest interest is in great technology and great geography expansion maybe and potentially content but that would be where we would focus all of our efforts typically on acquisitions as we think about it today. If it ain’t broke don’t fix it. We’ve got great growth organically and we are plenty occupied with that great growth opportunity.

Operator

There are no further questions at this time.

Lars Dalgaard

We’re really proud of what the whole company did it’s been a long time in waiting. We started the company in 2001 and we built it to be one of the cash flow richest company’s ever built, that’s our long term strategy. We’re built for the very long term and I’m just very proud of what everybody has done here and we will continue to grow very aggressively while giving fantastic margin expansion, that’s our long term goal and we’ll continue to that as Bruce described in great detail.

Thanks to all our customers and thanks to the investors who have trusted us and we’re happy to begin to prove the story to you guys. Thank you very much.

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

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

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!