Omniture, Inc. (OMTR) Q2 2008 Earnings Call July 23, 2008 5:00 PM ET
Michael Look - Vice President of Investor Relations
Josh James - Chief Executive Officer
Michael Herring - Chief Financial Officer
Brian Fitzgerald - Banc of America Securities
Tom Ernst - Deutsche Bank
Lev Polinsky - JP Morgan
Steve Ashley - Robert W. Baird
Brent Thill - Citi
Michael Huang - ThinkPanmure
Richard Baldry - Canaccord Adams
Chad Bartley - Pacific Crest
Keith Weiss - Morgan Stanley
Kyle Evans - Stevens Inc
Brian Mcgrath - Credit Suisse
Sasha Zorovich - Goldman Sachs
Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Omniture Inc., Earnings Conference Call. My name is Lacy and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Mr. Mike Look, Vice President of Investor Relations. Please proceed.
Michael Look – Vice President of Investor Relations
Thank you, Lacy. Good afternoon and thank you for joining us. Joining me on today's call are Mr. Josh James, our Chief Executive Officer and Co-Founder; and Mr. Mike Herring, our Chief Financial Officer.
During the call, we will discuss Omniture's financial results for the second quarter ended June 30, 2008. By now you should have a copy of our press release, which crossed the wire approximately 45 minutes ago. If you'd like to review a copy of our press release, please visit our website at www.omtr.com.
Please note that we will be referencing both GAAP and non-GAAP financial measures and wish to note that GAAP reconciliation information is provided in the press release and on our website.
Also, we wish to emphasize that some of the information discussed during this call, particularly information regarding our revenue and operating profit margins or profit targets, including expectations concerning GAAP and non-GAAP revenue and revenue growth, GAAP and non-GAAP net income and loss and adjusted EBITDA, business strategy, customer demand, market observations, and future product lines are based on information available as of today.
We believe that some of the statements we will make on today's call, including statements about the expectations I just mentioned, may constitute forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934, and Section 27(a) of the Securities Act of 1933. Accordingly, we wish to caution you that such statements are just predictions based upon current expectations and assumptions regarding future events and business performance and involve risks and uncertainties that could cause actual results to differ materially.
We refer you to the reports that the company files from time-to-time with the Securities and Exchange Commission, which are available on our website and contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or other forward-looking statements.
Omniture undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company's expectations. Following the prepared remarks from Mr. James and Mr. Herring, we will open the call up for Q&A.
Let me now turn the call to our CEO and Co-Founder, Mr. Josh James. Go ahead Josh.
Josh James – Chief Executive Officer
Thanks gentlemen and thank you, everyone, for joining us this afternoon. As you can see from results in our press release issued earlier today, our business continues to perform very well with record revenues and solid execution across all areas. For Q2, we were able to deliver another quarter of strong top-line growth and achieve the non-GAAP profitability targets we shared with you last quarter by effectively managing the acquisitions focusing on customer needs and aggressively driving for sales growth. I want to spend my brief time with you today discussing the compelling highlights of our business and the second quarter.
As we said before, Omniture is not just about collecting data but it is also about what that data enables, real time optimization of marketing spend and real time optimization of the consumer experience. This generates more dollars for our customers because their visitors want to read more of their articles, buy more of the products, interact more with their online support systems, learn more about the automobiles they are selling, or just have a better overall experience. This is what Omniture is all about. Yes, the data is important and we have almost 5,000 customers operating hundreds of thousands of websites that rely on our systems to collect the data. However, our customers don't wake up every morning and think about collecting data. They wake up and think. I need to sell more products. I need to spend my ad dollars more effectively. I need to drive more leads to my dealers. I need to reduce costs in my customer service department. Or I need to get more money from selling advertising on my site. Our customers need online marketing professionals who can deliver real solutions to them who can implement these solutions using industry-specific best practices, who can provide consulting services to take advantage of the specific nuances of their business, and who can help them do this in the dozens of countries they operate around the world, just like HP, Sony, Warner Music, and Wal-Mart all do.
CMO's need independent measurement and allocation in advertising dollars. They need optimization and the customer experience, no matter which channel the customer is using to interact with, including via new media channels such as video and mobile, where Omniture's placing significant investment and focus, as you saw in our recent press releases. The CMO needs to look at their broad organization and have the right hand know what the left hand is doing. Common metrics enabled this. A common platform enables various departments to work together in real time and optimize their businesses jointly. There are so many cases in our customer base where the search marketers don't know what the display marketers are doing, who don't know what their affiliate marketers are doing, who don't know what the landing page optimization marketers are doing, who don't know what the home page merchandisers and site promotion teams are doing. They are not tied together. They are not connected. And generally speaking, none of these teams are connected to the offline initiatives. How can this world exist? The time is right for massive efficiencies, and the companies that find these efficiencies, will have substantial competitive advantage.
Omniture is making this responsible. In this endeavor, the CMO needs their technology partner to be independently minded. She needs her partners to be filled with experts in data driven marketing. She needs to have the confidence that our partner will scale to invest and deliver on integrated solutions, and she needs this partner to combine them all into one suite for the CMO. There is no other company like Omniture, which was born to be the CMO's trusted technology advisor and arbitrator of marketing activity investment. When the new CMO walks in the door, our goal is for that CMO to say, "Okay let's get Omniture installed." I heard several times during the second quarter that no one gets fired for choosing Omniture. We are well on our way to becoming the defacto standards for every CMO.
We are beginning to see CMO's rely on this functionality as we've been rolling out our CMO dashboard to various customers and agencies across the world. The advertising industry is in the most transactional period since the advent of television. The rise of the Internet is a medium for advertising and customer communication is disrupting the marketing value chain that has been in place for decades. CMOs must evolve this online trend or become irrelevant. Yes, there is no major company focused on delivering a comprehensive set of solutions to the C-level executive like Omniture. There are multi billion dollar technology companies serving the CFO, the CIO, the VP of Sales and the CEO, but no major technology company has yet coalesced around the CMO, and we believe it is poised to happen now due to the rapid convergence of data, tools and demands for accountability. Omniture is ready to take advantage of this opportunity. As for the most recent quarter and the current state Omniture there are five highlights that make our position extremely compelling. The first highlight that makes the Omniture opportunity compelling is the massive need the CMO has to fill, the vacuum that's created by the lack of a major technology partner, which I just described.
The second highlight is the progress ahead of plan that we are making with the migration of the HBX customers to SiteCatalyst platform. One of our primary operational objectives over the last two quarters has been the successful integration of our Visual Sciences acquisition. We have diligently managed this process, and as described in the press release earlier today, we are extremely pleased to announce that more than 60% of the HBX Web Analytics customers' annual contract value has committed to transition to Omniture SiteCatalyst. One additional by product of upgrading to the SiteCatalyst platform is that of those HBX customers who have completed their transitions to SiteCatalyst, they have on average purchased an incremental 20% of the value of the original contract and additional Omniture products and services during the migration process.
Now as we've mentioned before, this is the fourth time Omniture is acquired the user base of the competitor and our track record is proving that the SiteCatalyst platform is a highly attractive migration path for these customers. In fact, in regards to the Instadia customer base which was acquired early last year, we have retained more than 90% of the annual contract value.
The third highlight that makes Omniture compelling is the suite. Omniture is the only company in the world that offers the critical pieces required to compete in this complex digital marketing environment. Omniture has acquired and built several new products over the last 18 months and we are seeing solid success integrating those products into the Omniture product suite and selling them to our rapidly growing customer base.
The power of the platform and the take rate on the market appropriate products that we have acquired and built have led to an astounding statistic. Due to these new products the average deal size for new customers has increased by over 50% compared to just 12 months ago. This has resulted in dramatically driving sales bookings to record levels and in Q2 we again saw bookings at a higher level than we have ever seen in our company's history. Our sales people along with our account managers are very busy meeting the needs of our current customers, who are asking for additional products. We believe that we have struck the right balance and that we have a healthy percentage of our bookings coming from new customers and a healthy percentage of our bookings coming from our installed base, validating our belief that CMOs need a real platform and need many additional products that leverage their SiteCatalyst data to successfully run their businesses.
The fourth highlight that makes Omniture compelling is Omniture's undeniable leadership. Omniture now has over 28 customers paying more than $1 million a year and over 70 customers paying more than $500,000 a year. This comes from a broad group of industries including media, technology, financial services, telecom, travel, retail and consumer products and others and includes companies from every region we operate in. These are meaningful businesses making meaningful investments and clearly getting meaningful returns.
Our win rates continue to be above 75% for new customers against our competitors and we continue to perform very well from a competitive replacement perspective at a 5:1 ratio. We have a long list of competitors but Omniture’s leadership position and ability to invest in this growing market gives enterprise customers comfort that they can make a long-term bet on our platform without having to worry about how their partner will fund development or whether the partner will be able give them critical high value support required or whether the partner’s data centers are stable with industry leading in world class uptime or worry about their partners long-term financial viability, whether their partner will ever reach financial sustainability or be able to find another round of financing to support continued product development as market needs to grow and change, or wonder what ulterior motives the free analytics providers may have with their data that is being provided to them for free.
It is true that many of our competitors compete with us on price because that’s all they have to compete with us on. And we believe that kind of competition actually works in our favor. Some tools are even free, as many of you know, which we do not view as negative in fact, the company with the purported best free analytics tool, placed the major order with Omniture in the second quarter, and that is probably the best testament of all to the differentiation of Omniture from the free analytics tools.
Interestingly enough, we believe the reason these companies provide free analytics tools is so their customers who advertise on their platforms can convert visitors more effectively so they can afford to pay more for advertising. Well, that’s exactly what we do. We help our customers convert visitors more effectively, except that we do it for enterprise customers and mid market customers and the providers of the free analytics tool will do it for the long end of the tail. Actually we believe that over time we will develop closer partnering relationships with a major search engines and advertising platforms since our goals are so similar. If they are confident in their technology, they should want their customers to have objective analytics that encourage more spend on the most effective platforms.
The fifth and final compelling highlight of Omniture is the growth opportunity. Annual contract value bookings during the second quarter increased nearly 75% over the same period a year ago establishing new company record for bookings in a single quarter. Despite challenging economic times our comprehensive suite of integrating solutions, clear market leadership and strong execution have enabled us to continue grow our business at a brisk pace.
During the second quarter, we added more than 250 new customers. This is the ninth consecutive quarter in which we have been able to organically add more than 200 new customers to our customer base and the third consecutive quarter where we have been able to add more than 250 new customers with less than 10% of these coming from our competitors. This supports our assertion that the markets mix remains highly under penetrated with substantial room for customer growth.
As of June 30, we had nearly 4,700 unique customers, notable additions during the second quarter include finish line, classified ventures, gamefly.com, TV Guide Online, Circuit City, Reliant Energy, Shutterfly, Sega of America, Vermont Teddy Bear Company and Owens Corning. International customer additions include AirChina, Malaysia Airlines, Commonwealth Bank of Australia, Yahoo! Japan as you saw recently in our press release and Wal-Mart Brazil.
Total revenues for the quarter were a record $71.6 million on a GAAP basis and $74.9 million on a non-GAAP basis. These revenues results were at the upper end of our guidance range and represent increases of 114 and 120% over the same period a year ago respectively.
Organic growth which we define as revenue growth excluding the revenues from acquired Offermatica and visual sciences customers remained above 50% on a year-over-year basis as we were able to sign up a number of large enterprise customers including Yahoo! Japan, Circuit City and Shutterfly, while at the same time continuing to successfully up sell into key accounts like ComCast and MSN. In fact we are pleased to announce here that MSN has extended the term of their relationship of Omniture for an additional two years. Many of these relationships are now paying us annually in advance emphasizing our leadership in the marketplace.
While these sales did not impact current period revenues, they give us confidence that we can achieve our financial goals for the balance of the year. One of the drivers of our growth is the Greenfield opportunity in the marketplace. Of the top 10,000 sites on the web, approximately only 20% are using objective third party tools to measure and optimize online performance. Of the top 200,000 sites the penetration is much less. Omniture continues to be one of the fastest growing softer companies in the world and in addition to the opportunity to deploy the platform, the cross selling opportunity is remarkable. We see that over 25% of our customers have purchased more than one Omniture product, and that second product is represented by good traction from four different products.
The adoption across Omniture’s products is broad and is being demonstrated by our more sophisticated customers, which tend to be the early adoption in our market. Of the 25% have over two products from Omniture over 150 customers have at least three Omniture products and dozens and dozens of customers have four, five or even six products.
Imagine the opportunity over the next several years, especially in light of the fact that we believe in addition to the current products that we offer, there incremental five or six more products that Omniture will build or buy. These are products that our customers are asking for and they will eventually become part of the broader CMO suite. Congratulation to our employees, our partners and our customers. We are ahead of our integration target of visual sciences we have increased the average in customer deal size by over 50%. We successfully met our financial guidance target and we are well positioned to continue as one of the fastest growing softer companies and to create a multi-billion dollar company, that is the de-facto technology partner for all CMOs.
I would now like to turn the call over to Mike Herring our Chief Financial Officer, who’ll go over financial result in greater detail.
Michael Herring – Chief Financial Officer
Thank you, Josh. We are excited about the second quarter results and believe we are well positioned for the rest of the year. I like to start down, start by breaking down Q2’s income statement a little further. Total revenues for the quarter were a record of $71.6 million on the GAAP basis and $74.9 million on non-GAAP basis.
Product revenues for the quarter totaled $64.6 million on a GAAP basis, non-GAAP product revenues were $67.9 million and represent increases of a 118% over the same quarter last year, and 7% over the prior quarter. Professional services revenue totaled $7 million in the second quarter. That’s an increase of 144% over the same quarter year ago and 16% over the prior quarter. Product revenues are still the dominant portion of our revenue base comprising approximately 91% of non-GAAP revenue, and we expect this approximate distribution to continue going forward.
We are also realizing the benefits of our significant investments in international market, as European and Asia based websites are increasingly adopting the best speed online business optimization technologies. These are markets we have invested in for years to develop the necessary infrastructure and product sales and support. So geographically US revenues now total $52 million or 73% of total revenues within international revenues totaling $19.6 million or 27% of total revenues for the second quarter.
Now turning to margins Q2 non-GAAP product gross margins were 68%, down from 72% in the first quarter as we made significant CapEx investment in our network capacity ahead of major contract signing at Yahoo! Japan, Comcast and MSN and others and as we begin major internal project to consolidate portions of our network operations to new data centers in Dallas, Texas and Northern California.
This extra investment in new data centers and the transition to those data centers resulted in a significant duplicative expense in the second quarter that is temporary and will not affect our long-term gross margin targets. We have completed the first transition and the second will be completed in the third quarter. So, the dampening effect on our gross margins in this project will persist through the balance 2008, but not into 2009. We already built and need investment in our operating plan and thus they’re factored into our earning targets for the fourth quarter and for the year.
Non-GAAP gross margins and professional services for the quarter remained essentially flat with Q1’08 gross margins at 52% resulting in a combined Q2 non-GAAP gross margin for the company of 67%.
This is a good time to remind everyone that in our deferred revenue business model large contracts such as Yahoo! Japan, the Microsoft and Comcast contract expansion require significant upfront investments in capital equipment before revenue can be recognized. Once implementation is complete, revenue is then recognized on a deferred basis over the length of the contract. Investments in the path need to accommodate growth come ahead of revenue and thus fluctuations in product margins are typical for a fast growing fast businesses. We view these developments as very positive in terms of the long term health of our business and our ability to improve margins with continued increase scale and we are firmly committed to long term product gross margins greater than 70%. We’ve made significant stride in our capital strategy to support our large customer base and have been steadily improving gross margins overtime to efficiency improvements in an infrastructure and we expect to continue the future progress on that front.
Operating expenses in the second quarter were $52.8 million on a GAAP basis and $42.7 million on non-GAAP basis or 57% of total revenues. That is down over 300 basis points from 60% in Q1 as we have been able to realize operating expense synergies from the Visual Sciences acquisition while continuing to carefully manage our expenses in order to meet operating margin goals.
Sales and marketing expenses in Q2 ’08 was 35% of revenue, down once again from 39% in Q2 of last year and slightly down from the 37% in the prior quarter due to the acquisition synergies and increase scale in the team. Despite this leverage we continue to invest for growth by expanding our direct sales force increasing total worldwide quota bearing sales rep by 11 from 133 to 144.
On a non-GAAP basis R&D expense declined from 11% to 10% and G&A expense declined from 13% to 12% of revenue as we continue to realize operating cost synergies from the Visual Sciences acquisition. Our continued focus on managing operating expenses in order to achieve stated operating margin targets while delivering maximum revenue growth enabled us to post a non-GAAP operating margin of 10% for Q2 inline with the guidance that we provided last quarter.
GAAP net loss for the quarter was $6.5 million or $0.09 per fully diluted share and was significantly better than what we guided to on our Q1 conference call. This variance was a result of a large non-cash tax benefit we recorded in connection with the reduction in acquisition related tax liability. Non-GAAP net income for the second quarter was $7.3 million or $0.10 per fully diluted share. Our Q2 non-GAAP net income result was at the low end of our guidance range and reflects the decline in interest income as we realized lower than expected interest rate yield on our cash and short term investment.
Adjusted EBIDTA for the quarter was $13.7 million or 18.3% of non-GAAP revenue. This result was also inline with our guidance range and represented the ninth consecutive quarter of positive adjusted EBIDTA.
Looking at customer metrics, transactional volume across our entire customer base continues to increase as we captured over 886 billion transactions during the quarter. Our network now consists of more than 12,600 servers and more than 16,500 network devices. Total nominal customer retention across all products and customers during the second quarter was slightly below 95% as we transitioned Visual Sciences business into Omniture. As Josh pointed out, our experience to-date migrating acquired HBX customers to SiteCatalyst has been ahead of plan and today we are achieving a greater number of these customers than we had modeled. But, we are also transitioning out some of these customers for a variety of reasons. However, a SiteCatalyst standalone retention rate remains well above 95% for the quarter. We are not seeing any meaningful impact or different trends than we’ve seen in other quarters with regards to free analytics product. In fact as Josh mentioned they continue to serve as good awareness and lead generation for upgrades to SiteCatalyst and other Omniture products.
Turning now to our balance sheet, our cash and total investments at the end of the quarter totaled $83.5 million basically unchanged from the level at the end of first quarter. Accounts receivable in Q2 was $98.2 million, an increase of $16.2 million from Q1's AR balance, this results in a gross DSO of a 119 days and as a classic example of why gross DSO is a poor way to measure SAS company. Strong sales in the quarter combined with significant success selling annual prepaid contracts punctuated by significant prepayment employees to Microsoft in conjunction with the two year contract extension caught the big jump in AR but also a big increase in deferred revenue of $23.8 million, a 36% greater increase than the AR increase. Net DSO which backs out deferred revenue out of AR before running the calculation is a more typical and appropriate measure for subscription based companies and in the second quarter Omniture's net DSO decreased to 50 days from 60 days in the first quarter. This progress is a clear indication that collections are good, AR is healthy and the increase in AR balance is due to a shift to annual prepaid payment terms.
Now turning to cash flow, we generated $16.3 million in cash from operations in the quarter. CapEx for the quarter totaled $17.9 million with a fifth of that CapEx related to the previously described data center expansion and additional fifth towards office expansion and the remainder directed towards growth investment. As a result adjusted free cash flow for the second quarter was the negative $1.6 million. We intend on continuing to invest in our network infrastructure both driven by the growth in customer demand and the desire to improve our network’s ability to grow through increased and more efficient capacity as I mentioned earlier when discussing gross margin.
During the second quarter we begin efforts to consolidate portions of our network infrastructure to new data centers, we expect this and other projects to last until the end of the year and cost about 4 or $5 million or less then 10% of our total network CapEx budget for the year.
Lastly our primary source of investment continues to be our employees and we ended the quarter with 1,045 full time employees and as I mentioned previously total quota bearing sales reps now total a 144 worldwide as of the end of June.
Now turning to guidance, we look forward to continuing to deliver on expectations of our customers, partners and investors. Our expectations for the third quarter and the balance of the year are as follows. For the third quarter of 2008, we expect revenue to be in the range of $76 million to $78 million on a GAAP basis and $78.5 million to $80.5 million on a non-GAAP basis. We estimate GAAP net loss per share in the range of $0.12 to $0.11 and non-GAAP net income per share in the range of $0.10 to $0.11. We expect EBITDA to be in the range of $14.5 million to $15.5 million. We are projecting an EBITDA to continue to increase in the third quarter while EPS will remain flat due to continued low interest rate yield and depreciation growth related to the CapEx investments previously described.
For the full fiscal year 2008 we reaffirm our revenue guidance from last quarter with GAAP revenues in the range of $295 million to $300 million and non-GAAP revenues in the range of $308 million to $313 million. We anticipate our GAAP net loss to be in the range of $0.47 to $0.42 per diluted share, an improvement over prior guidance due to the tax benefit adjustments we discussed earlier. We are reaffirming our non-GAAP EPS and EBITDA guidance for the fiscal year 2008 of $0.41 to $0.46 per diluted share and 59 million to 63 million respectively.
We expect operating margins in the third quarter to remain consistent with the second quarter at 10% and also reaffirm our fourth quarter non-GAAP operating margin target of 12%.
In conclusion, we have high expectations for ourselves at Omniture and we are executing towards meeting those expectations with focus and discipline. I would like to thank all Omniture employees for their past and continuing commitment to our customers into the company’s vision.
And with that, I would like to open the call for questions and we would request that you limit your number of questions to one. Operator?
(Operator Instructions). Our first question will come from the line of Brian Fitzgerald with Banc of America Securities. Please proceed.
Thanks guys, could you talk about the up-sells you are seeing in the quarter, is this getting any more difficult from the last couple of quarters where you saw decent up-sell growth, I think last quarter you said up-sell from HBX transition was 16%?
Yeah, we’re seeing. We are continuing to see very positive results there in fact that number is continuing is actually climbing. So, part of it is getting all of these customer over to the SiteCatalyst platform that's certainly important and we’re extremely proud of the fact that we are at 60%. We certainly didn’t expect to be here at this point, it doesn’t have a big reflection on our financial statement but it’s just something that is very important to us and something that clearly we are focused on internally. So, its nice to see that we’re ahead of schedule and that in our sales team and account management teams the fact that they have been able to still go out there and sell record bookings while we’re doing that is pretty impressive. And I think it’s really a big reflection of the impact that our summit had. A lot of customers come out and learn about these different products and that’ really accelerated, not only the growth that accelerated the pace that people are moving over to SiteCatalyst, but also really peak their interest in these incremental products.
Great, thanks guys.
And our next question will come from the line of Tom Ernst with Deutsche Bank. Please proceed.
Good afternoon and thanks for taking my question. So, you mentioned a couple of things that I think are interesting. Firstly the annual contract bookings growth is 74%; and then secondly the big deal signing and you have coached us since prior to coming public that you do bear expenses coming in so coming into this big deal. So, the question is with 74% bookings growth; how does that look to you on an organic basis or pro forma basis or however you think of it and what do you walk away with in terms of the inflection of the momentum of your business in terms of new bookings?
So I think Mike answered some of the specifics behind that but you are right there are some expenses that are front loaded in these types of big deals; in some quarters we have a bunch of big deals and some quarters we don’t. This quarter we happened to have a bunch of big deals and there is, you know, bunch of big deals in the pipeline right also; and in fact our pipeline this quarter, we were I think as far ahead as we have ever been in terms the pipeline that we need to meet the objectives that we have internally from the quarter perspective. So, we are actually feeling pretty good about it. You know, the next couple of quarters from the sales perspective also, and from relative to four quarters ago, you know, most of that is compared to organic because we don’t look at the ACV of what these acquired companies have. We are just comparing our ACV now compared to the ACV that -- our annual contract that we generated four quarters ago. So, it really is pretty significant and with some of those big deals like for instance, Yahoo! Japan with the couple other deals that we haven’t been able to announce yet, but that we closed, we will be sitting in there and operating those kind of – we’ll be operating some pilots and have bear all of those expenses for a month or for two months and have all of the CapEx associated with that. And then when we get a big up sale like some of the once that Mike mentioned, even though we are getting big prepays for, really making a lot of tremendous progress there, as you see in the balance sheet, we also have pretty big expenses associated with those. So its all good news but it does have an impact on our – on our financials for a temporary period of time.
If you are asking comparing year-over-year, it’s hard to compare because we were still working through on efficiencies in version 13 in Q2 of last year. That said on an apples-to-apples basis we are adding CapEx at a higher efficiency this year as we were - versus last year because we continued to improve our efficiency. And about the 60% of our CapEx sent in Q2 that was related to growth capital was exactly as you mentioned, it related to some big deals that came that we needed to get capacity in place in order to handle them going forward, and we called out a few of those deals specifically on this call.
And we have some - Tom, we mentioned one of things we talked about in the call and we have got a few dozen customers that are paying us more than a $1million a year. And this quarter we had a renewal of the customer that’s paying us $4 or $5 million a year and we’ve got, and we’ve got a prepay for that. So, we’re starting to see a lot of success on the prepay front too, and that’s really only started to take place over the last quarter or two.
Okay. And just to follow up on what I asked. How does that boil down to your momentum in annual contract value bookings. Is this a stronger quarter then you have had recently? Weaker quarter? Or the same?
This is the strongest quarter we have ever had. So, I think it’s - we’ve got this acquisition that were digesting. And as Mike talked about it a little bit where our SiteCatalyst retention is still well north of 95% so, very, very healthy. One of the healthiest quarters we have ever had from retention perspective. And, we hear a lot of charter out there about some of the free tools. The actual number one upgrade that we – that we get, the number one competitive displacement that we have is the free tools, So they’re serving this tremendous lead generation for us. And yes that’s something we are – that’s something that we are pretty excited about. So from a momentum standpoint it’s – there’s going to be a few quarters of assurance from the HBX customer base but it’s well ahead of what our expectations were when we felt like what we need to get to justify the deal. But that being said, with the momentum that we are have we are very excited about the future. We really haven’t seen – we haven't seen much of the slowdown. Clearly from a bookings perspective we haven’t seen a slowdown at all.
Okay, thanks again.
And our next question will come from the line of Imran Khan with JP Morgan. Please proceed.
Hey, it’s [Lev Polinsky] dialing in for Imran. One quick question that we had over here was, if you could help us understand a little bit better how bookings break down in terms of the new customer bookings versus adding the additional lines. I know you said you had a lot of success adding the additional business lines for existing customers. And then you said over a quarter of customers had signed on for more than one product. Can you give an idea of how that -- how that’s looked in previous quarters just to give us a better understanding of the trend?
Yes, so the percentage of customers that we now have on these incremental products is it’s been accelerating very rapidly. So, there been a lot of progress there, which is why we were so excited about that. That number that we disclosed is 50%, our average deal size right now is 50% larger than it was 12 months ago. And that dramatically changed about a quarter ago. We didn’t talk about it last quarter, we weren’t – we wanted to make sure that it wasn’t just the launch of additional product that we acquired. But we are actually seeing more and more progress with these. And we’ve got several businesses that are doing more than $25 million in revenues now. So these products are becoming significant. And we are seeing a lot of traction from them. So, we are feeling very good about the story about the fact that our customers want the data, but they want to make money off the data and that’s what these incremental products are allowing them to do. So, it’s kind of playing out the way that we wanted it to play out.
Just to maybe get a little more granular, you know, we mentioned the average deal size is 50% higher you know, in Q2 ’08 than it was in Q2 ’07. And that’s an apple-to-apples in like a number of customer standpoint. So, when you are talking about new customers, existing customers, bookings are up year-over-year from, on apple-to-apples same number of customer standpoint. And but obviously we are hitting record bookings in large part because selling significant amount of cross sales into our existing customer base, as well as obviously alongside our core platform in the original sale.
And we are looking at one of the things that we disclosed to all of you is the number of new customers that we get. And we have had a lot of questions about that also. Last quarter we didn’t touch on that enough, in hindsight. So a lot of the chatter and questions that we had afterwards were about, looks like the customer base is slowing when we had record bookings. This quarter we tried to be more clear about that. We think we struck to right balance of our bookings percentage that comes from new customers and our bookings percentage that comes from up-sales to customers. And actually, if you look at the data, if you look at the new customers plus the number of contracts that we are getting for cross selling our products, that number is climbing pretty rapidly and its climbing relative to the way that are booking are climbing. And like Mike said our bookings climbed 75% year-over-year. So, we’re seeing a lot of progress there and its not going to have 100% direct correlation because we are still going through that acquisition and cleaning some of those customers up. But there is a lot of progress that’s happening there, that’s going to be sustainable.
And our next question will come from the line of Steve Ashley with Robert W. Baird. Please proceed.
Hi guys. Actually this is Jack Miller filing in for Steve. I was just wondering a question on deferred revenue. The nice increase in long term deferred, I was wondering if that was all due to the MSN deal or if you have seen more customers going towards paying from multiple years up front. And then also on deferred, how much of that deferred revenue sequential increase was due to Visual Sciences maybe filling in some of the deferred revenue that had been written down?
Yes very little of it is related to deferred – the Visual Sciences piece of it. And no it’s not all related to a single contract. We have seen significant progressing in getting get multi year prepays, at least for the base level of product availability. And that’s something we push hard on our sales people at the beginning of the year. I think it makes everything easier for the customers as well as certainly for their company. And we have had really nice uptake in that program. So, it’s been across multiple customers and, certainly you know the growth of current deferred revenue is definitely from a lot of different customers driving at.
And our next question will come from the line of Brent Thill with Citi. Please proceed.
Thanks Josh, can you just bring up to speed in terms of the traction outside the US and what you are seeing in the particular different geos?
Sure yeah. We have continue to see a lot of progress there. We invested pretty early, the Utah is an interesting place. We are in the middle of United States but we actually here the headquarters I think we speak over 60 different languages and so there is a pretty good global mind set here, believe it or not, in the great state of Utah. And we continue to increase the percentage of revenue that are coming from outside the United States. I spent this summer I spent a month overseas visiting with customers and with partners and we’re seeing a lot of traction over there Yes. We’ve talked to this before. You can’t go into a country with 1 person with 2 people and most of these - in the big economies, you have to got a going with 5 to 10 people if you are really going to be successful. And that’s why the scale that we have is so important. And it is there is we are now in countries where we are operating by ourselves and seeing a lot of progress there. And we feel like we are three, four, five years ahead of anybody else that might potentially come in. So, continuing to see a lot of progress there. And the other thing that’s interesting is if you look at the number of products that are being purchased we talked like 25% now of our customers having more than one product. If you look overseas that number is significantly different, significantly lower. So, in addition to the opportunity there because in many of these places we are one of the only big companies that are there. We also have for the most part only sold one product to most of those customers. So, there is a lot of up sale opportunity that is going to be coming also.
And our next question will come from the line of Michael Huang with ThinkPanmure. Please proceed.
Thanks very much. So, first of all can you help us understand, how the large deals that you signed in Q2, hit the revenue line in ‘08 because you know obviously with success there and the record bookings, how come you are unable to revise up your revenue targets for the year, and then to the degree that (inaudible) you could comment on EPS. So, the record bookings performance just to be clear, the record booking plus major wins, that drove the conservativism of the EPS target, correct?
Yeah, it definitely is a piece of it, I would say that, I mean the record bookings are achieved because of these large deals in parts certainly and a lot of them are up sold on existing customers. So, there is a lot of different moving pieces, the Yahoo Japan deals are big deal its, hope you go to the press release it's a portion of their properties and its similar to the way, we adjust other very large conglomerate properties in the past or we get it primary property that really show what on the schedule and then we move through that. So, we have high goals for ourselves, we projected pretty strong revenue growth this year, and felt like with everything come together, we had a good chance to continue to hit our numbers and that was a big part of it. On the EPS side, there is a combination of a few things, I think we kept the EPS for the years at the same even with everything the timing of large customers, I think that we can manage our expenses appropriately to still meet those numbers despite things like some very large customers and things like lower yield sub 2% yields on cash and short term investments, which hurting anybody who is holding cash and good calculative beginning of the year, certain yields on that number.
And Mike its not that we don’t plan for some of these big ones. We don’t know when they are going to come but we are getting to the size now where we have got enough big deals in the pipeline we might. We are in a plan of few of them coming through and so that’s -- so this isn't necessarily of a surprise to us. We are extremely excited when that do happen and we know that there once like Mike was just referring we got at MSN. We got the MSN four to five years ago, and we started with MSN Shopping, and then we kind of went from there. Where now we have I think all of MSN and some of the Microsoft properties. And if you look at Yahoo Japan, where you got Yahoo, Japan is Yahoo shopping and so this -- that not only is there is some nice upside for us by the timing of that and getting that now but there is also just a lot of opportunity not this year per se, but next year and the year after that and the year after that, that’s how these really big deals go. And as far as not upgrading and increasing the revenue guidance, there are some things that we are just kind of working through this acquisition, it’s four different businesses going on just inside of the Visual Sciences business and whether its clean to taking an opportunity to clean up some of those stuff that we didn’t like. Getting rid of the some of the customers that we don’t necessarily want to work with. There are some of those things that kind of offset some of the upside to some of the big deals and then the last thing I would say is these big deals looks very, very hard to predict when the revenue is going to come through and so you sit there with the servers and you wait and you wait, and you wait and then all of a sudden a big chunk hits, but that can definitely take several quarters versus coming over the next two months.
Great. Thank you very much.
And our next question will come from the line of Richard Baldry with Canaccord Adams. Please proceed.
Thanks. In the past you have given sort of a relationship between bookings and CapEx I think it somewhere in those level of $0.30 and a dollar for annual contract value. Can you talk about whether that still holds and then maybe all your CapEx plans for the full year and maybe if there is a certain impact that are plus or minus on large deals versus average size deals? Thanks.
Sure, so with large deals there tends to be higher percentage so, instead of $0.30 and a dollar maybe at $0.40 or $0.50 on a dollar. So, the portion that was related to growth capital in Q2 I mentioned it was about 60% of that CapEx, it was about 11 million or so, of the CapEx that was spent -- maybe it was a little more than 12 million or so in Q2. So, it generally apply to that. I would say that $0.30 averages out over multiple quarters and I don’t want to get in a position where I'm telling you exactly what percentage that is then I'm telling you exactly what bookings are but, that percentage generally holds across our customer base when. We do sign these big customers we tend to be a little more capital intensive in order to get expand some one like Comcast or Microsoft as the business deal. In terms of updating for the year I still think it depends a little bit on how things go in the back half of the year. Originally we were talking 40 to 45 million I think we were definitely at the top end of that range based upon bookings from this last quarter and depending on how those ramp you could even get a little bit higher than that but, I don’t -- I’m not going to put a stake in the ground that it’s going to be significantly higher than 45.
And our next question will come from the line of Chad Bartley with Pacific Crest. Please proceed.
Hi, the only question I had at this point was Mike can you update on us your target pro forma gross margin? I apologize if I missed that, that’s a pretty…?
In Q4, our exiting gross margin -- gross margin or operating margin?
Gross margin question?
Okay, so our target one? So, our target is 70%, its been 70 to 75% in kind of steady state models looking at a year or two for as long as we’ve been talking about that numbers. So, it goes back 2.5 years. And we still are marching towards that and I think actually, this is the drop we had from Q1 to Q2 as I mentioned is a temporary one driven by some shifts in data center, it’s investments and a few large customers but we were well on our way to achieving that, actually we are in that zone, that’s in Q1, I think we’ll be right back there in beginning of 2009.
Okay. So, just to be clear I think last conference call you had indicated full year performance gross margin would be 70%, is that now not going to be the case or will it be lower than that because of these investments?
Yeah, I felt like this year through the year, our gross margin is going to hover around 70%, we are little bit above that from a product standpoint in Q1, we were a little bit below in Q2. I think through Q3 and Q4 we could still average out at around 70%. But it depends on; there is a lot of moving parts in these models that we are talking about. When you are growing this fast, it's a SAS environment, the number one thing is you get the system up and software running and keeping customers happy and that comes ahead, I can adjust operating expenses in sales and marketing and such in order to make sure I hit margins but I don’t adjust expenses around meeting customer demands in order to hit gross margin numbers.
And when you look at SAS companies, no one has an infrastructure like we do and no one comes close to the infrastructure that we have with close to a trillion transactions every quarter in 16,000 different network devices, these data center moves that we are doing are pretty big undertakings so, we are definitely trying to make sure that we are being conservative and not impacting customers, and we did very, very large move this last quarter and had approximately zero impact on our customers. So that’s the priority and then there is going to be some temporary stuff here and there when those types of thing is happening, but overall it is not going to affect gross margins for the long haul. I mean really -- we should really think the network operations team at Omniture because they did a phenomenal job this last quarter in really having a very smooth transition especially compared to when you look back four, five years away, we used to do things and tell our customers that we are going to be down for five hours compared to now, they don’t even know about it, it’s pretty impressive.
And our next question will come from the line of Keith Weiss with Morgan Stanley. Please proceed.
Thank you, guys. Josh, I had a question for you on some of what you are talking about how Omniture is evolving to become the platform for the overall platform for CMO. Does that imply that going forward you guys are going to start increasing your focus on perhaps some of the offline channels as well to be sort of that full solution providers. Perhaps at going a little bit of sort of the product strategy, the Visual Sciences was looking at prior to you guys acquiring them?
Yes so I think some of the offline stuff is certainly interesting. We always said that that’s not where many of our customers are driving us. There are some groups inside our customers that are very interested in offline data like with call centers and those sort of things. That's not necessary the CMO, that’s the analytics that we get from Discover OnPremise product is really very interesting and it helps understand how the online channels performing with those offline channels and that’s something that we are certainly interested in but we still see the online channel being the biggest part of our business for quite sometime and we’d love the fact that we have Discover OnPremise to help us continue to explore and understand the synergies and help bring together different parts of an organization we have some of our base customers where it’s really consolidating functions inside their businesses because they can now look at how their Sunday -- the drops they make in Sunday newspapers, how those are affecting sales in the store depending on the placements and where those things are showing up in the Sunday drop versus where they are showing up -- sitting on the shelves and how that’s driving revenue and we are looking at that business the same way that they are looking at their online business and where they are placing products on the page. So, it’s pretty exciting stuff if not the primary focus of Omniture the primary focus is still bringing together all the different online channels because there are so much opportunity there but certainly over the next several years you are going to see a lot of offline channel involvement in our strategy.
Thanks. And then -- somewhat related. Can you give us an update on Genesis and how that’s going as far as adding partners?
Yes, sure so, we continue at partners at approximately the same rate, we’ve got a bunch of -- we’ve got a next version of genesis that will be coming out I think in Q3 so it is slated for right now, should be in beta in Q3 and so we are certainly excited about that, that’s going to increase our ability of adding partners and we won’t be the constraint. So, we will able to add hundreds and hundreds of partners and I think that’s what going to happen because we’ve got a backlog of hundreds and hundreds of partners they want to become a part of our network. So, we are seeing that strategy play out and we are having to go through and pick and choose the ones that seem to be the most relevant and we would rather not be the gatekeeper interpreter of that we’d rather open in up and allow them to whatever they want and see where the market takes us and see where these scrappy companies take us and we are going to see that start to happen in Q3. So, I’m appreciate you are asking that question because I wanted to give you that update.
Thanks, it sounds great.
And our next question will come from the line of Kyle Evans with Stevens Inc. Please proceed.
Hey guys, this is actually Carter Malloy on the call for Kyle. Actually related to the last question that you have talked about kind of building and buying tools earlier, can you talk about just what types of tools are a priority for you and your customers and/or expected product updates on the Genesis?
Yes, nothing more than what we have said before, but I will reiterate that. The way we think about our business is we help our customers manage the marketing spend, we help our customers convert their customers more effectively whether that’s from an ecommerce standpoint or from serving them the content that they want to see and third thing is to provide all the analytics. Those are the three main thrust of our strategy and you will see acquisitions in all three of those areas I think over time. And we’ve already brought new products at a minimum and we’ve launched built or bought products in each of those three areas. And you will continue to see that and then you know, the other thing that we talked about from an acquisition strategy is, there is international footprint that we certainly like doing and that's been successful for us with the scale that we are at now buying other analytics vendors like Instadia. There is domestic consolidation which you know, we have pretty much done. There’s not really any relevant companies left there that we see the free tools lot more than anything else. So, we kind of feel like the domestic markets -- the domestic markets wrapped up in terms of relevance and then the third thing is just bringing these additional tuck-in tools that end solutions that we can then go and selling to our customer base. Because we’ve been much more successful than we actually anticipated being there as we described, 50% increase in the average deal size for a new customer over the last few quarters. It’s just tremendously exciting and you know, our customers are telling us what to buy and asking us to build these new things. So, we are excited to continue to do that and look for the right opportunities that we can then spread into our customer base and continue to build up the suite because we believe we are the only company that’s really has the opportunity to do that.
And our next question comes from the line of Brian Mcgrath with Credit Suisse. Please proceed.
Hi, guys. Most of my questions have been asked and answered by now. But we talked a little bit about the increase in ASP’s, I don’t think you talked about what the main drivers of those were? Is it just larger initial deployments or you are getting more bundling on the initial sales or maybe you can talk a little bit about that?
Yeah, its more bundling, it’s 100% bundling. So, it’s these incremental products that we have and like I mentioned on the call it’s not one product, it’s a common Asian pretty healthy and equal combination of Discover both On Premise and On Demand of search center and of the test and target products. So, it’s really exciting to see because, you sit there and you look at your most advanced customers and they are buying four, five, six products. And then you’ve got just 25% that have bought 1 and there is not any consistency and which ones they are buying. You know, we can ride that pony for a long time and so, we are trying to make sure that we are keeping these customers happy because what happens is the more complex these installations and these relations become, the more they are leveraging this data to optimize their businesses and really have provide their customers with better experiences and precompetitive advantages so they can afford to pay more money for that key word that’s the relationship that is an extremely healthy relationship and we are just seeing the beginning of that. Because, I think over timeframe we are not going to care where they get the data from because this is going to be the SiteCatalyst data plus the whole bunch of data from other places, and we are going to take all that data and we are going to help them use it to optimize around their business that’s we are headed, that’s what we are all about, that’s who Omniture is and, I think we are just scratching the surface on that and that's something that we need over the next few quarters really communicate to everybody and help everybody understand.
This is not a web analytics company, anybody that thinks that is drastically underestimating the opportunity that Omniture has, any body that gets caught up on the customer -- to the new customer count is drastically underestimating and not understanding the real opportunity that exist here first to go these customers and sell six, seven, eight, nine, and ten products over time, and when we hear customer say, what I got here, I needed to bring Omniture with me and you are going there and you sell three to four different products in the first sale, and you have the deal that your mid market company. Your mid market rep use to sell a deal and it was 25,000 bucks and he has ability to sell a dealer to $100,000, you know we are really happy reps. When you got happy reps, you attract the best reps. When you attract the best reps then you win the hand to hand combat which is what we are doing, that is why we make the statements but. Those other companies just aren't relevant any more. So, we are really excited in just about the opportunity and think we are in a great position.
Along those lines and when you gotten in and you made an initial sale then you go in and you sell more you up sale, and I know, you mentioned that MSN and Comcast required an incremental investment CapEx because renewal included an up sale. You get more you call it efficiency on the CapEx you spend on these renewal up sales than you do on a new implementation of a large customer.
No we have got this scale down, where we don’t -- there is a not a ton of overhead for an account its really -- our team has done a great job matching it so that we don’t have to invest a lot of overhead, it's just for every incremental page for every incremental pages there is incremental server capacity that's required, so it matches pretty well and I guess if you look at one either way but we liked that model because we don’t ever have to go if you build it they will come, we don’t build it until we have the contract and that means on the really, really large deals there is temporary impact to our financial statements, but we know what's the impact is going to be over the life time of that contract and its an extremely positive, its an extremely positive impact.
If they are non SiteCatalyst up sales or cross sells then the capital intensity is much lower, there we had been its really SiteCatalyst, it is good data platform that drives the CapEx.
Right, that makes sense. Thank you very much, that was helpful.
Thank you, Brian.
And our last question will come from the line of Sasha Zorovich with Goldman Sachs. Please proceed.
Thank you. So my question would be specifically which you mentioned Josh in your comments earlier on and that was regarding the pricing environment, but could you tell us a little bit more about that sort of specifically on how has it been in the quarter, what has been sort of the trajectory there been, is it becoming more sort of a price competitive that has been the case before and why that would be the case.
No, its not becoming more price competitive. Competitors get more desperate, we are definitely seeing that you know because they are out there with one product and they slap some names on some other products they can try to say that they have two or three products, but if a customer looks at those more than a few minutes they understand that they really have one product. So they are sitting there, fighting against the free stuff trying to see that ways to show that they have got momentum in the market place, and it’s just a really difficult environment forum and then they go to our customers and they say our potential customer and they drop the price, and they lose all their credibility. So, we really feel like we are in the best position we have ever been from a pricing perspective and we mentioned on the call for every -- there is a very little churn, whenever there is a churn. We’ve got pretty good statistics and detailed data for every dollar that we have returned to a specific competitor at a minimum we are taking a $5 back. So it’s a really healthy environment for us right now and its because we have had investors that have been willing to believe in the story and allow us to grow and recreate a suite, and have a solution that no one else has that allows the customers to really understand that we are going to be able to grow with them over the next 5 or 10 years and that's what's interesting because they got to get this data platform and they have got to get everyone singing from the same sheet of paper and that’s kind of the environment that we are in right now. So thank you everyone for your time and for your questions and we look forward to seeing you on the road at the Investor Conferences over the next few months. Thanks everyone.
Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.
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