Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Vocus Inc. (NASDAQ:VOCS)

Q2 2008 Earnings Call

July 22, 2008 4:30 pm ET

Executives

Steve Vintz - CFO

Rick Rudman - President and CEO

Analysts

Tom Roderick - Thomas Weisel

Laura Lederman - William Blair

Brendan Barnicle - Pacific Crest

Robert Breza - RBC Capital Markets

Brad Whitt - Broadpoint Capital

Richard Baldry - Canaccord Adams

Mark Murphy - Piper Jaffray

Steve Ashley - Robert W. Baird

Terry Tillman - Raymond James and Associates

Operator

Welcome to the Vocus Second Quarter 2008 Earnings Call. The date of this call is July the 22nd, 2008. This call is the property of Vocus, Inc., and any recording, reproduction or transmission of this conference call without the express and prior written consent of Vocus is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of Vocus's website.

I will now turn the call over to Steve Vintz, Vocus's Chief Financial Officer.

Steve Vintz

Good afternoon. We're very pleased that you could join us today to discuss Vocus's results for the second quarter of 2008. Consistent with past practice, I'll cover the Safe Harbor statements, 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 some non-GAAP measures. A reconciliation of GAAP and non-GAAP results is available in the press release we issued today, which is available on our website, at www.vocus.com.

Now I'll turn the call over to Rick Rudman. Rick?

Rick Rudman

Thanks, Steve, and welcome everyone to our Q2 earnings call. I'm pleased to report continued strong financial performance for Vocus in Q2. You'll be pleased to see performance ahead of plan across all three of our key financial metrics, top-line growth, profitability and cash flow.

Revenue came in at $19.1 million, up 36% compared to Q2 last year. Non-GAAP operating income for the quarter nearly doubled, hitting $3 million for the first time, up 99% year-over-year. And free cash flow followed suite at $5.9 million for Q2, which represents a 138% growth compared to Q2 last year.

Our Q2 performance has underscored continued strong demand for on-demand PR management solutions, Vocus's strong competitive position and the leverage in our SaaS business model. Based on the success of Q2 and with the first half of 2008 now behind us, we are again raising guidance for the year to reflect the strong market demand for our products, our continued sales momentum and the overall confidence we have in our business.

Now I'd like to drop down a level and discuss a few key operational metrics that will give you some additional color on the quarter. During Q2 we added 265 net new subscription customers. To put this into context, this is another record high for us and represents 54% year-over-year growth. Our flow of business was well balanced in terms of order sizes, geographic spread and industry segments.

For example, during Q2 we closed business at organizations as small as the Atlanta Symphony Orchestra and MyDivorceSales.com, all the way up to large companies such as CITGO Petroleum, H&R Block and OfficeMax. I think the important takeaway here is that Vocus is clearly a valuable solution for any size organization; small, medium or large. This dynamic is well illustrated by our broad and diverse customer base, and reinforces the large and untapped market potential for Vocus.

Let me take a moment to update everyone on our view of the economic environment. While the macro economy is less than seller these days, we continue to see strong demand for our products and no significant changes to selling cycles, budget restrictions, deal sizes or other metrics related to market demand. In fact, we continue to see steady spending on public relations.

Consistent with a recent study by the Council of Public Relations Firms showing that US public relations firms saw a 7.5% increase in revenue on average for the first quarter of 2008 compared to the same period in 2007. We also continue to get feedback from our customers and prospects, telling us that we offer a compelling price-to-value ratio that makes Vocus a popular solution in any economic environment.

During Q2, we continued to make investments in our direct sales force, adding 14 new net sales reps to end the quarter with 124 quota-carrying sales reps. We added sales reps in all market segments in both the US and Europe, and are now at the high end of our 2008 target range for quota-carrying sales reps. We're also pleased with both the quality of the people we're finding and their ramp times to productivity.

So as we look ahead to the rest of 2008, we continue to see strong demand for our products and an expanding opportunity, underpinned by a large growing and untapped market. And although the overall economy is not in top form, we've delivered better than expected results for the first half of 2008 in terms of both revenue and operating income.

Based on our success to-date and our positive outlook and in order to take advantage of current market opportunities, we'll be hiring additional sale reps in 2008 across all market segments. We now expect to end 2008 with 130 to 135 quarter quota-carrying sales reps. We believe these investments will preposition us for continued growth and success in 2009.

In summary, this is an outstanding and exciting quarter for us. We're extremely pleased with our results for Q2 and our continued momentum as we move through what is turning to be a very successful year.

I will now turn the call over to Steve Vintz who will provide us with some additional information on the business. Steve?

Steve Vintz

Thank you, Rick. I'd like to start today by covering some detail on the income statement. I am very pleased to report that the second quarter of 2008 was a 36th consecutive quarter of revenue growth. Revenues for the quarter were $19.09 million, which represents a 36% increase year-over-year and a 7% increase over the prior quarter.

Total active subscription customers increased by 265. As Rick mentioned earlier, this was another record quarter for us in terms of net ads. Please note this number represents our gross customer adds during the quarter less non-renewing customers. We ended the quarter with 2,911 active subscription customers compared to 2,004 at the end of Q2 2007 and 2,646 at the end of Q1 2008.

As we've mentioned before, our customer accounts do not include any transaction-based customers from 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, which excludes amortization of intangible assets and stock-based compensation expense was 83% compared to 82% last year and last quarter.

As we look ahead to the rest of the year, we expect our gross margin to be in line with our 2007 full year gross margin of 82%, due to planned investments in building our international content. However, the expansion in our gross margin over the prior years has put us well within reach of achieving our target long-term range of 84% to 86%.

Operating expenses for the quarter before amortization of intangible assets and stock-based compensation expense were 12.8 million, an increase of 28% year-over-year and 8% over the prior quarter. As a percent of Q2 revenue, sales and marketing costs were 41%; R&D was 6%; G&A was 20%. Sales and marketing expenses were $7.8 million this quarter, which is up from $6.2 million last year and $7.5 million last quarter.

I like to mention to our new participants today that we expense all of our commissions as they are earned in the period of sale rather than amortize the expense over the periods in which we recognize the related revenue. This treatment is different from most other SaaS companies, you should know. As a result, sales and marketing costs may fluctuate period-to-period, based on bookings.

The increase in sales and marketing costs over the prior quarter is attributed to higher sales commissions due to sequentially higher bookings, continued investments in marketing to more aggressively build our brand and growth in our sales force to meet the increasing demand for our subscription-based software.

We ended the quarter with 124 quota-carrying sales reps, compared to 81 this time last year and a 110 last quarter. The aggressive hiring in sales reps during the first half of the year is 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. However, the 124 reps on hand as of June 30, is towards the high-end of our guided range to end the year with between 120 and 125 reps.

As Rick commented earlier, we've decided to accelerate growth in our sales force by hiring more reps then initially planned for 2008. Accordingly, we now expect the number of quota reps at the end of the year to range between 130 and 135. The midpoint of this range puts us at 45% growth for the year. We think this investment reflects the positive momentum and the continued confidence we have in our business.

R&D expenses were approximately $1.2 million this quarter compared to $832,000 last year and $1 million last quarter. G&A expenses were $3.8 million this quarter compared to $2.9 million last year and $3.3 million last quarter. The increase in G&A expenses over the prior quarter was primarily due to higher professional fees, which was due in part to the reversal of the valuation allowance against our deferred tax assets. We won't encounter that later.

In terms of profitability, Q2 non-GAAP operating income before amortization of intangible assets and stock-based compensation expense was $3 million, a notable increase compared to $1.5 million in the second quarter of 2007 and $2.9 million last quarter. Our operating margin was 16% for the quarter compared to 11% last year and 16% last quarter.

The expansion in our operating margin over the past few years is certainly worth highlighting on the call today, because it does demonstrate our ability to drive leverage in our business. In fact, if you look at our trend line since going public, you will see that our operating margin in 2005 was negative 2%. We increased our operating margin to 7% in 2006, 13% in 2007, and the currently estimate is 16 to 17% for the full year 2008.

Vocus is already one of the most profitable SaaS companies in the market today, and we expect to continue to grow our operating margins each year, every year, although the rate of expansion will not be as dramatic going forward as our business continues to scale and grow. We believe the ability to balance significant top-line growth with margin expansion demonstrates strong financial discipline and is a proxy for the potential leverage in our model.

Non-GAAP net income before amortization of intangible assets, stock-based compensation expense and the reversal of the valuation allowance was $4.2 million for the quarter compared to $2.2 million last year and $2.8 million last quarter. Non-GAAP diluted earnings per share was $0.21 for the quarter compared to $0.11 last year and $0.14 per share last quarter.

As discussed in the press release we issued today, we recognized a $5.7 million income tax benefit during the quarter, which was a result of the reversal of the valuation allowance against our US deferred tax assets. This benefit is comprised of the $4.9 million reversal itself, which we've excluded from our non-GAAP results, and approximately $700,000 of tax benefit, which flows through our projected tax provision for the current year.

The non-GAAP EPS guidance we provided during our last call of $0.12 to $0.13 per diluted share did not assume the reversal of the valuation allowance, and therefore, assumed a pro forma tax rate of 27% or $900,000 of tax expense for the quarter. The impact of this change in tax rate on earnings was a benefit of $0.08 per share in Q2.

In terms of the balance sheet and cash flow, we closed the quarter with $81.4 million in cash, cash equivalents and marketable securities, up from $73.1 million at the end of Q1. We generated $5.9 million of free cash flow this quarter compared to $2.6 million last year and $5.1 million last quarter. Investments in property and equipment were $666,000 during the quarter.

The cash receivable increased to $10.6 million from $8.7 million last year and DSOs for the quarter were 50 days, which is below our expected range of 55 to 60 days for the quarter due to strong collections. Deferred revenue totaled $37.5 million at the end of the second quarter, which represents an increase of $9.3 million over last year.

Now let's turn to guidance for the third quarter and the full year 2008. For the third quarter of 2008, revenue is expected to be in the range of approximately $19.6 million to $19.8 million. Non-GAAP EPS, which excludes the amortization of intangible assets and stock-based compensation expense, is expected to be in the range of $0.18 to $0.19 per share, assuming an estimated weighted average 20.3 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 1%.

Amortization of intangible assets and stock-based compensation expense is expected to be $0.17 per share. GAAP EPS is expected to be in the range of $0.01 per share to $0.02 per share, assuming an estimated weighted average 19.5 million basic and diluted shares outstanding.

For the full year 2008, revenue is expected to be in the range of $77.3 million to $77.8 million. Non-GAAP EPS, before amortization of intangible assets, stock-based compensation expense and the reversal of the valuation allowance, is expected to be in the range of $0.73 per share to $0.75 per share, assuming an estimated weighted average 20.1 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 1%.

Amortization of intangible assets and stock-based compensation expense is expected to be $0.67 per share and the tax benefit related to the reversal of the valuation allowance is expected to be $0.26 per share for the full year. GAAP EPS is expected to be in the range of $0.32 per share to $0.34 per share, assuming an estimated weighted average 19.2 million basic and diluted shares outstanding.

Now to provide further clarity on the impact from the rise of tax rate for 2008, our guidance today assumes a total tax liability of approximately $100,000 or a pro-forma effective tax rate of 1%, which is significantly lower than our previously guided rate of 30%. The lower tax rate positively impacted earnings per share by $0.08 in Q2 and is expected to positively impact earnings per share by $0.06 in Q3, $0.08 in Q4 and $0.22 for the full year 2008.

The lower tax rate is attributed to the reversal of the valuation allowance. According to the accounting rules, any valuation allowance reversal related to projected current year income must flow through the current tax provision. As a result, we will recognize a $2.6 million tax benefit related to the reversal of the valuation allowance, which will be recorded as a reduction to our 2008 tax expense in Q2 through Q4.

In other words, how do we reverse our valuation allowance? On December 31, 2007, we would be projecting $2.7 million in tax expense or an 18% pro-forma effective tax rate for the full year 2008, and not a $100,000 of expense or a 1% effective rate. Please consider the 18% effective rate for 2008 as your baseline rate when modeling taxes for future years. It's also very important to know this positive change in tax rate today impacts only our tax expense for 2008, and is not expected to impact the cash tax we'll actually pay for the year.

On a cash basis, our non-GAAP cash tax rate is expected to remain unchanged at 5% or approximately $800,000 of cash taxes for 2008. Free cash flow is expected to be in the range of $19.7 million to $20.7 million, which includes investments in property and equipment of $1.8 million for the year.

In summary, we're very pleased with the results of the quarter, and based on the continued momentum and confidence we have in our business, we are pleased we're raising revenue, earnings per share and free cash flow guidance again this year.

As I discussed earlier, our non-GAAP EPS guidance does not include stock-based compensation, amortization of purchased intangible assets and the reversal of the valuation allowance. In the press release we issued today, we provided our guidance both on a GAAP and non-GAAP basis for earnings per share for the third 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). Your first question comes from the line of Tom Roderick with Thomas Weisel.

Tom Roderick - Thomas Weisel

Hi, Rick, hi, Steve. Good afternoon.

Rick Rudman

Hey, Tom.

Tom Roderick - Thomas Weisel

Wanted to see if you might be able to drill in a little bit more on the various pieces of the business that help to drive the upside on both top-line and bookings this quarter. Particularly, if you could talk a little bit about the small business addition, traction on PRWeb and international this quarter that would be helpful. Thank you.

Rick Rudman

Okay. Thanks, Tom. I would describe this quarter like last quarter, as very well balanced, and with strong bookings coming across the board, so all areas of the business did well. International, PRWeb what people call are kind of our core business. SBE, our Small Business Edition, also had a great quarter and continues to ramp up nicely and we're excited about where it's pointing us in terms of in expansion of our total available market.

Tom Roderick - Thomas Weisel

When you look at where you want to put the upside in sales heads, Rick, where do you want them to reside? Are you going to staff the SBE Edition faster or can you speak to which segments in the business you're looking to put the extra 10, 15 heads that you're looking to the business here above your original plan? Thanks.

Rick Rudman

Sure. Without sounding like a broken record, I would have to say, once again, it's across the board. So, I guess, our original guidance was 120 to 125. So we're talking about an additional 10 reps, and you'll probably see a couple in SBE, and some more in the mid market, a couple overseas. So, it's really going to be spread out across the board, because each market segment today still represents a great opportunity for us.

Tom Roderick - Thomas Weisel

Okay. Steve, just in terms of the tax valuation reversal, so we've seen that, we understand the impact here for '08, can you give us a sense as we think about our models for '09 on where the effective tax rate takes us to? Should we still be thinking high 30’s corporate tax for '09?

Steve Vintz

Yes. And just to give some context here, I think on our last call we were expecting a 30% pro forma effective tax rate for 2008. And at that time we said, don't change estimates for '09. As like currently, I think the Street is at 30% for 2009. We would reiterate that while we have not provided guidance for 2009, there is nothing that we would want to change there.

So the baseline rate as we end 2008 is 18%. We see that going higher in 2009, I think 30% are regional estimate this time. And on a cash basis, as I mentioned earlier, we're at 5% for the year for 2008, and I think as probably a proxy for 2009, the cash tax, reducing the cash tax rate half of what the booked tax rate will be. I think it'll probably be in the ballpark.

Tom Roderick - Thomas Weisel

Perfect. That's helpful. Thanks. I will turn it over others. Thank you very much.

Operator

Your next question comes from the line Laura Lederman with William Blair.

Laura Lederman - William Blair

Yes. Great quarter. Just a few questions. One, obviously, it's a great quarter, any weakness anywhere, even in financial services or brokerage? Or is it really not a single vertical market that's even impacted by the economy?

Steve Vintz

Well, the short answer is we're just really not seeing any material weakness out there. And keep in mind, as we have talked about this before, we found very vertical. No one vertical really represents significant part of our business. No one customer represents more than 1% of our revenue. It's now very diversified, business with revenue coming in from Fortune 500 companies and revenue coming in from mid-sized companies, and revenue coming in from companies with revenue of $2 million or $3 million a year, all the small businesses of the world.

So with this type of diversified portfolio, we feel that really helps us to sell in this environment. Also keep in mind, our average selling prices are pretty modest for a big company, a large Fortune 500 company, our average selling price is about $40,000 to $50,000 a year. So we're still really under any type of budget scrutiny out there. And then lastly, as we've said, and this is reinforced by the survey that was done, you know, PR agencies, their revenue was up.

So PR spending would appear to be a lease holding steady, if not increasing a little bit. And we're just seeing in this marketplace, the value that you get from a Vocus subscription, you are running your whole PR department on our software once again, against a very modest cost. And those were all the factors that we think are helping us to continue to sell at a normal pace with normal sales metrics, even given the tough economy.

Laura Lederman - William Blair

Can you give us a sense following up on your diversified customer base? If you look at bookings in the quarter since you are approaching more smaller customers, is better look at booking then existing customer base, kind of a sense for the breakout large company, small company and medium company on both the revenue and also a number basis. I mean we're trying to get a sense of how balanced business is in those three categories?

Steve Vintz

Yeah. There are probably two cuts on bookings. First is new versus renewal. Approximately two-thirds of our mix is from renewing customers and one-third is from new customers that we add during the course of the quarter. And then if you look at revenue, in terms of the market opportunity, we talk about large market, mid-market and small market.

Approximately 50% of our revenue is in that large market, 30% of that revenue is in the mid-market and then 20% is in that small market. That small market, we include not only transaction revenue from PRWeb, but also the new small business addition opportunity that Rick spoke of earlier. So as result, we think that provides a healthy balance not only across the marketing pyramid, but also in terms of new customers and existing customers. And directionally over the…

Laura Lederman - William Blair

What kind of -- I am sorry, go ahead.

Steve Vintz

I was just going to comment, directionally, over the course of time, we do see that mix changing. Obviously, we're growing all of our key market segments, but more pronounced growth in that SMB market. So what you'll see is that revenue shifting more or so from that large market, more into the SMB. And as a result, you could see maybe a 60 to 70% mix of revenue in the SMB market and a 30 to 40% revenue dollars coming from that large market, which will in turn, to connect the dots, change some of our financial metrics.

For example, ASPs, they typically range on a blended basis $20,000 to $25,000. That could drop less than 20,000, not due to pricing pressure, due to shifting mix of business. Renewal rate is the same thing. Renewal rates could be lowered a little bit because larger customers with larger dollars have a higher renewal rate, and as a result, you could just see due to changing mix of business, the renewal rates shift a little bit. So overall, positive impact on the company in terms of dollars, in terms of growth, but you're to shifting mix of business.

Laura Lederman - William Blair

Yeah. Shifting to international, could you give us a sense of how that's going and what it is as a percentage of revenues?

Rick Rudman

International continues to do very well on a year-over-year basis for the quarter, about 70%, which is typically where it has been. I think 70 to 80% as generally what has been running. So as we've said before, international is actually the fastest growing segment of our business that continued in Q2. We were signing up just like in the US. We sign up some very large international or European-based companies and we sign up a lot of mid-sized and smaller European companies. The sales force over there started the year at about 10, quota-carrying sales reps with plans to take that up to about 20 to about double it. So once again, it’s supporting the notion of a 70% year-over-year growth.

Laura Lederman - William Blair

Thank you. I will pass it on. Great quarter.

Operator

Your next question comes from the line Brendan Barnicle with Pacific Crest.

Brendan Barnicle - Pacific Crest

Thanks so much. Rick, I was wondering if there is anyway to look at how much of your business is benefiting from being an on demand SaaS model in this economy. How much of that's helping pace, versus just the market segment of applications that you're going after? Is that the only way to look at that?

Rick Rudman

That's a toffee, I think. I don't know that I want to speak for the SaaS industry. From my perspective, it's much more about the type of application we're selling and the average selling prices of our application. If we are selling, we're selling an application that helps people drive Top-Line revenue and it's also generally believed to be one of the cost effective means of marketing. So, it's just a great fit in top of economic times for people. It's a great return on investment. The average selling prices are lower.

So, I think that it's much more a function of that than being a SaaS company. I guess there are other SaaS companies out there today that may be selling bigger ticket items or items that don't drive the Top-Line, that are maybe struggling, I don't know. But I think it's much more a function of the industry that we're selling into and the average selling prices. Now, it doesn't hurt, but we all know that the SaaS model, inherently, is a great return for investors, and they don't have to buy hardware and they don't happen to invest in people to run and install operating software and all the rest of that. So, that certainly helps us well.

Steve Vintz

On the financial side, Brendan, this is Steve, the only comment I will add there is that the SaaS model has changed the entire economic equations for software, and in particular has allowed us to address the market we probably could not [or like] to address by dramatically lowering our customer acquisition costs. So, if you look at our transaction-based business with PRWeb, the fact that we have 20,000 plus users, most of which are small customers, those are customers we, otherwise, have if we had a very different business model. So, in that regard, it allows us to attract smaller customers at margins that are very attractive.

Brendan Barnicle - Pacific Crest

Great. And then, Steve, as a follow-up to that, when we look at the renewal rates, you have given us these renewal rates, but have you ever broken out what the renewal on revenue is, did I miss that or did we cover that earlier?

Steve Vintz

What we typically see is a revenue renewal rates track between 85 and 90% and account renewal rates track between 80 and 85%. So, that's what we see on average.

Brendan Barnicle - Pacific Crest

And then just, lastly, anything new, Rick, you mentioned there wasn't much change on the competitive front, but with all the changes going on [just beyond] anything change over there at all?

Rick Rudman

Not really. They still probably would be classified as our number one competitor. They are selling a variety of different solutions out into the marketplace. They announced a new release, as some of you know a couple of years ago, and that finally made it out into the market earlier this year. It's still unclear where that product is in terms of rolling out to their existing customer base and whether or not that's even happened yet. But, even regardless, putting all that aside, we still believe that we have the best product for the industry, the most comprehensive and best integrated product, and we all believe that we don't foresee any changes to the competitive environment.

Brendan Barnicle - Pacific Crest

Okay. Thanks a lot guys.

Rick Rudman

Thank you.

Operator

Your next question comes from the line of Robert Breza, RBC Capital Markets.

Robert Breza - RBC Capital Markets

Hi, good afternoon. Steve, maybe just a high level question, given the change in tax 90 days, maybe can you just tell us what you learned in the last 90 days to have the switch relative to the tax rate? Was it a new perspective or what changed to make the reversal happen?

Steve Vintz

Well, this is something that we actually anticipated. So, on our last call we talked about approximately $4.5 million of tax expense for the year. And that provision did not assume the reversal of the valuation allowance. And according to the accounting rules, when you calculate provision on a full year basis, you cannot assume; first, the reversal of the valuation allowance, and second, the resulting tax benefits associated with that reversal.

However, we did indicate on the call that it was likely that we would reverse all or a portion of the valuation allowance related to US deferred tax assets. So 90 days later, we did reverse all of the valuation allowance associated with the US deferred tax assets. When you reverse the valuation allowance, the mechanics of the tax provision change. You now get tax deductions associated with stock-based compensation. I mean, the stock-based compensation expense creates a deferred tax asset that you no longer have a valuation allowance for.

So, as a result, it in essence lowers your projected tax income for 2008. So, none of it was a surprise to us. We are very pleased to report reversal of the valuation allowance and the new effective tax rate on a normalized basis is 18% or a little less than $3 million in tax expense.

Robert Breza - RBC Capital Markets

Got you. And then, Rick, as you indicated in your prepared remarks, you're just not seeing really the environment. Clearly, you guys are stepping on the gas in terms of adding sales resources to kind of take the market opportunity here. Where do you see the business going forward here as you're adding reps across the board, expanding internationally? I mean is it just really a matter of just staffing up the firm and moving it forward or what else do you think you really need to do?

Rick Rudman

I think it's actually a very simple story and very straightforward. I think we have a great product suite that meets the needs of a very large market. I do think it's primarily a function of just adding more sales reps to address this very large market opportunity. And I think you'll see us once again add them in all market segments. I think there is growth in all market segments, although I do think there is probably more growth on a year-over-year basis.

On a percentage basis, there is more growth in the mid market, in the small business market, in the PRWeb market and in international. I mean those are probably the four areas that I would highlight as having potentially the highest growth rates as the company moves forward, but they are all viable. We're in a great position to have a market and a business that has multiple products and multiple revenue streams that all offer great potential for growth.

Robert Breza - RBC Capital Markets

Great. Nice quarter.

Operator

Your next question comes from the line of Brad Whitt with Broadpoint Capital.

Brad Whitt - Broadpoint Capital

Hi, guys. Good afternoon. Thanks for taking my questions. Just a couple of quick ones here. Steve, looks like you spend about $1.5 million in CapEx year-to-date, so it sounds like with your guidance you expect that to drop-off pretty substantially second half?

Steve Vintz

Correct.

Brad Whitt - Broadpoint Capital

Okay.

Steve Vintz

Due align with…

Brad Whitt - Broadpoint Capital

All right. And looking at the cash flow, based on your free cash flow guidance, it looks like maybe you'd expect Q3 to be down from this quarter as well.

Steve Vintz

In terms of free cash flow?

Brad Whitt - Broadpoint Capital

Correct.

Steve Vintz

Directionally, yes.

Brad Whitt - Broadpoint Capital

Okay. That's just a seasonal, just a typical seasonal pattern?

Steve Vintz

That is correct. And then, in terms of seasonality, Q4 which will be up noticeably so because of the big renewal base in the quarter.

Brad Whitt - Broadpoint Capital

Got you. Okay. That makes sense. And then are you noticing -- I know you're hiring sales reps so fast that maybe there is no noticeable seasonality there. But as far as bookings, you still expect that just to continue trend up expect for obviously it dips in Q1 compared to Q4 because of renewals, correct?

Steve Vintz

Yes. I think, directionally, we expect bookings. If you look at the second half of the year, there is some seasonality to consider for PRWeb. Again, I can see as much pronounced growth Q3 over Q2 in terms of bookings. However, you'll see a large increase in bookings on a sequential quarterly basis in Q4 just due to the strong renewal base. So, Q3 somewhat in line with Q2 in terms of bookings and then more pronounced growth in Q4.

Brad Whitt - Broadpoint Capital

Great. That's very helpful. Thanks. Thanks a lot for taking my questions.

Operator

Your next question comes from the line of Richard Baldry with Canaccord Adams.

Richard Baldry - Canaccord Adams

Thanks. With roughly 50% of your, 50% growth in your quota sales reps in the last year, could you maybe talk about the time to ramp that you've seen typically over the past gate where sales productivity is today? Thanks.

Rick Rudman

Yes. Well, so keep in mind, quota-carrying sales reps are hired into different areas of the business. So we have large market, mid-market and small business sales reps and then within that we have sales reps focused totally on new client acquisition, which we often call hunters. And then we have other sales executives that are managing territories with renewals and upgrade up sales. So, the quotas really vary significantly across the entire sales force.

But I think what's important to know here as you kind of stated, you have to be careful simply to tie the growth rate of the quota-carrying sales reps to some assumed growth rate in bookings. Because that would assume that all quotas were the same and they are not. So for instance, if we hire a lot of SBE reps, small business reps, they obviously carry a lower quota. And so, you're going to see that show up differently in bookings and if we are hiring the same number of large market field sales reps. So, with all of that being said, I think generally our approach is that we like to see sales rep headcount be slightly ahead of bookings growth, which is slightly ahead of revenue growth. And that's our model as we go forward.

Richard Baldry - Canaccord Adams

And with roughly $24 million in cash added to the balance sheet over the last 12 months and you are now little over $80 million, could you maybe talk about your priorities with that? And if, or when, at some point you look at something like a buyback of that program to continue to enhance shareholder value? Thanks.

Rick Rudman

Yeah, I think our perspective at this point is that it's probably a little early to be looking at anything like that. We are still out looking at potential acquisitions. And although we haven't found anything recently, we did acquire PRWeb. That was a $28 million acquisition and if we were to find another one or two companies like that, then we think we are exactly where we want to be in terms of cash on the balance sheet. So at some point down the road, if no other acquisitions materialize and the cash continues to build then obviously, that's something that we will have to sit down and take a look at. But we think that's a little premature at this point.

Richard Baldry - Canaccord Adams

Thanks.

Operator

Your next question comes from the line of Mark Murphy with Piper Jaffray.

Mark Murphy - Piper Jaffray

Thank you. I am a little surprised that the strength of the bookings growth. Just considering that you have such difficult year-over-year comparison. Could you, perhaps, just walk us through the dynamics there? Where there any unusually large transactions in the quarter? And also, in terms of the linearity, did the quarter start out particularly strongly or finish very well or perhaps both?

Steve Vintz

Hi Mark, this is Steve. So, as Rick mentioned earlier, a strong performance in the quarter was a combination of a lot a little things, strong performance in the US and international, strong account sales, strong new sales, strong performance not only in the SBE segment but also the mid and large market. So to summarize, there is no single event or transaction which really propped up our revenue growth. It's a combination of lot of little things, which in aggregate produced a noticeable beam on the top-line. And that's more of what we have seen over the past couple of quarters.

Mark Murphy - Piper Jaffray

And Steve, how about on the PRWeb side, is there any update in terms of what kind of ASPs you are realizing?

Steve Vintz

In terms of ASPs, when the average customers spend we've about 20,000 active user of PRWeb and the average customer spends over $400 a year and that's a combination of them doing probably three to four press releases during the course of the year. So, there is really no change in terms of the key financial metrics in PRWeb. It is a transaction-based business for us. So, the revenue that we earn is from customers who open an account or decide to send the press release in that particular quarter, consequently there is less visibility. And as we look out to second half of the year, we are mindful of the fact that there are the slow summer months, there are holidays, so we think our guidance reflects that as well.

Mark Murphy - Piper Jaffray

One last one. How much interest are you seeing from the customer base in managing PR just across some of the new or emerging types of channels or mediums like blogs, social media, you know Facebook, YouTube, all those kinds of channels out there in the world?

Rick Rudman

Well, we certainly see some of that, and in fact, our news monitoring service includes the ability to monitor blogs and a number of our customers are interested in that. Our PRWeb press release service incorporates the ability to include a YouTube video, which is fairly popular among our base. So, we've integrated aspects of where people might cross social media or social network into our application.

With that been said, I think I would still characterize it as being in the earlier stages and I think the whole notion of that type of social media has been going through some ups and downs in the industry where some months the industry is somewhat enamored by another months. They appear to be questioning what the real value of some of those things are going to be on the way they do public relations. So, we are staying ahead from a technology standpoint and incorporating those features into our products and services to make them available to our customers, and I think the jury is still out on where that will all end up.

Mark Murphy - Piper Jaffray

Okay. Thank you very much.

Operator

(Operator Instructions). Your next question comes from the line Steve Ashley with Robert W. Baird.

Steve Ashley - Robert W. Baird

Sorry if I missed this, but did you provide any kind of quantitative revenue numbers for PRWeb and maybe growth year-over-year in the period?

Steve Vintz

Hi, Steve. This is Steve. We said on average that PRWeb represents anywhere from 15 to 20% of our total revenue and this quarter was no different.

Steve Ashley - Robert W. Baird

And can you tell me if you issued your press release this time of this [financial base] through PR Newswire, as you historically have?

Rick Rudman

No, we did not issue the press release through PR Newswire. We issued it over PRWeb

Steve Ashley - Robert W. Baird

Great. Thank you so much.

Operator

Your next question comes from the line of Terry Tillman with Raymond James and Associates.

Terry Tillman - Raymond James and Associates

Hi, guys. Thanks for taking my question. Rick, first question just relates to the Small Business Edition product. Could you maybe specifically give us the number of new adds. I think last quarter was like 36 and first month it was like 12, so maybe a specific number. And then, secondly, I know you put the product out there based on some packaging of some of your resisting tools, and I thought it was about $3,000. Have you seen any kind of demand for maybe even more functionality, whereas maybe ASP actually starts to rise a bit?

Rick Rudman

Okay. Well, first of all, I'll provide a little bit more color on that. We don't really break units out in our business between large, medium and small. I'm happy to give a little bit more color commentary this quarter because I think it's important for everyone to understand where we think that market segment is going in terms of a total available market for that. And actually the units -- it was actually in Q4, the first quarter, we started selling -- we did about 12 units, and then in Q1 it was about 24. So the 36 was really you are talking about is cumulative through Q1. So with 12, 24, and then in Q2 about 60 units.

So, you can say that the demand is strong and I would characterize the market is being as good or better than we expected in terms of people being receptive to the product. In terms of the product itself and the functionality that you talked about on the ASP, we actually, from the first quarter out, did get some feedback from the market that they did want to see some increased functionality or what we might call add-on modules to the small business addition. And we, in fact, launched those add-on modules in Q1. And I won't go into the details of them but essentially the base price of $3,000, you can now add-on one, two or three add-on modules that are $1,500 each, and in fact, we have had uptick of those and the average selling price have gone up. And I think in Q2, it was probably closer to about $4,000.

Terry Tillman - Raymond James and Associates

Okay. Thanks on that. And then, Steve, just question in terms of you guys have had I think a strong balance between revenue growth, bookings growth and then just a profitability playing out in the past, and it sounds like you're being opportunistic in the back half of the year, adding some more sales reps just based on continued strong demand. Is there any potential change of foot in the future? And I know you are not giving specific '09 guidance at all, but could there be any shift in the future on that kind of balancing act between revenue growth and going for revenue growth and just the ongoing margin expansion? Thanks guys.

Steve Vintz

The only comment I'd like to make there is that as I mentioned earlier, we're already one of the most profitable SaaS companies in the market today and we expect to continue to grow our operating margin each year, every year. And that's something that's important to us, although the rate of expense will not be as dramatic going forward and as our business continues to grow in scale.

So we believe the ability to grow the Top Line significantly by approximately 25% and expand our operating margins, free cash flow margins at a rate higher than that, as we have done in the past, demonstrates the kind of financial discipline that we think reflects that how we manage the business and its also proxy for the potential leverage in our business going forward. So as we look out, one of the things that we want to do is maximize opportunity given the large untapped market that we're currently addressing. At the same time, we want to make sure we make progress in the margin.

Operator

(Operator Instructions). There are no further questions in queue. Steve, do you have any closing remark?

Steve Vintz

We just want to thank everybody for joining us on the call and we look forward to speaking with you again since. Thank you very much.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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!

Source: Vocus, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts