RightNow Technologies Inc. Q2 2008 Earnings Call Transcript

Jul.30.08 | About: RightNow Technologies, (RNOW)

RightNow Technologies Inc. (NASDAQ:RNOW)

Q2 2008 Earnings Call

July 30, 2008 4:30 pm ET

Executives

Stacie Bosinoff - IR

Greg Gianforte - CEO and Founder

Jeff Davison - CFO and Treasurer

Susan Carstensen - COO

Analysts

Tom Roderick - Thomas Weisel Partners

Tom Ernst - Deutsche Bank

Laura Lederman - William Blair

Terry Tillman - Raymond James

Nathan Schneiderman - Roth Capital Partners

Michael Huang - ThinkPanmure

Brendan Barnicle - Pacific Crest Securities

Keith Weiss - Morgan Stanley

Derrick Wood - Pacific Growth Equities

Horacio Zambrano - Jefferies & Company

Kash Rangan - Merrill Lynch

Rich Baldry - Canaccord Adams

Patrick Walravens - JMP Securities

Operator

Good afternoon. My name is Robbie, and I will be your conference coordinator. Today's call is being recorded. At this time I would like to welcome everyone to RightNow Technologies, Inc. second quarter 2008 earning results conference. (Operator Instructions). Stacie Bosinoff will begin the call. Please go ahead.

Stacie Bosinoff

Good afternoon everyone and thank you for joining us on RightNow second quarter 2008 conference call. Joining me on the call today is Founder and CEO, Greg Gianforte; Chief Financial Officer, Jeff Davison; and Chief Operating Officer, Susan Carstensen.

Before turning the call over to the company, I will read our Safe Harbor statement. During the course of this call we may make projections or forward-looking statements regarding future conditions or events, which may drive our future business, current and new products and services and their performance, the size and strength of our market, our future financial performance and outlook for the company.

These forward-looking statements may include, but are not limited to statements about revenue growth and profitability, our future strategic plans and perceived growth opportunities, market acceptance of our products and other statements relating to our operating results. These forward-looking statements speak only as of today and are based upon the information currently available to us. This information will likely change over time.

By discussing our current perception of our market and the future performance of the company and our products with you today, we are not undertaking an obligation to provide updates in the future. We caution you that such statements are just projections, and actual events and results may differ materially from what we discuss today.

Please refer to the documents we file with the SEC, specifically our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

As a reminder, we are providing a supplemental data sheet as well as an updated investor presentation on the Investor Relations section of our website that contains historical information for easy reference.

With that I will turn it over to Greg.

Greg Gianforte

Thanks, Stacie. Good afternoon everyone and thank you for joining us. Today we are happy to report another strong quarter, as we continue to executive on our land and expand strategy, while delivering true, measurable ROI to our customers.

Revenue in the quarter was $35.2 million, and non-GAAP EPS was a loss of $0.04, both ahead of guidance. Based on this Q2 outperformance, on the top line we are raising revenue guidance for the full year.

Our tremendous track record of making our customers more successful has given us a leadership position in the marketplace. And we remain focused on our core value proposition, which is to help our clients deliver superior customer experiences, while reducing their operating cost. This value proposition continues to resonate with our customers and prospects. And it is why we win our enterprise accounts, and it is why they continue to expand their business with us.

Our customers know that we deliver real value, whether it is by increasing self-service rates, reducing email and call volumes, or making their contact center agents more efficient.

For example, Epson recently deployed our solution for 400 agents in four contact centers around the world. With the help of RightNow agents now resolve 80% of incoming inquiries on the first call. With our Web self-service solution, Epson saw a 26% reduction in email volume within just four months.

We all know it cost less to retain current customers than acquire new ones. In fact, the number one issue amongst C level executives in a recent Gartner Forbes study was retaining customers and enhancing relationships with them. They ranked taking care of customers higher than reducing costs or planning for future growth. And this is all in the context of the current macroeconomic environment.

The importance of delivering a great customer experience has been RightNow's mantra, since I founded the company over 10 years ago. It is top of mind for decision making executives across all of our target markets. We could not be in a better position to help clients improve their customer experience.

We also prove our value by delivering quick and measurable return on investment. I never get tire of talking about the ROI we create for our clients, so I am pleased to report that the Colorado Department of Revenue, a RightNow customer for eight years, just recently won the Nucleus ROI award. 90% of their site visitors are now able to find answers quickly online. This equates to call center volume reductions of about 45%, and a savings of more than $5 million life-to-date.

The best part of this story is that there are lots of other RightNow customers experiencing significant ROI with our solutions as well. Colorado Department of Revenue is actually the fifth consecutive company to win the Nucleus ROI award. Other customers include Nikon, Audiovox, nanoCom and Remington Arms.

The topic of ROI has been very common place in other sort of regular reports. These are the ones that you all publish every quarter from your IT surveys. I have read a number of these reports this past quarter that speak about the cautious outlook for the remainder of the year and how CIOs are laser focused on ROI for every project they greenlight. In stories like Colorado Department of Revenue and others I just mentioned, it means that RightNow could not be better positioned to demonstrate how we can help our clients drive down costs of serving their customers.

We are cognizant that the economy is impacting our customers and may potentially impact our business. That being said though, we continue to remain confident in our business for the second half of this year. In fact, customers are seeking us out to help them during these uncertain economic times.

We signed deals with some great new customers during this quarter, NetGear, Harrods, Nike Europe, SuccessFactors, NutriSystem, and Virgin Mobile Australia. In total we added 73 new customers in the second quarter.

We also renewed and expanded business with LifeLock, Department of Veterans Affairs, Sony Computer Entertainment, drugstore.com, Activision, Sovereign Bank, Hertz Europe and many others.

In many of these deals, with both new and existing customers, we are replacing competitors. We are also pleased with the results from our delivery organization, as evidenced by the increases in our professional services, both revenue and margin.

In our January call we talked about a Q4 deal to replace Siebel at a multinational consumer electronics firm. Now, only six months later RightNow is up and running in six call centers across Europe. And our web self-service solution is being used in 15 countries and seven languages.

We also continue to expand our solutions. In our May release titled, Voice of the Customer, we delivered enhanced survey capabilities, making us the first on-demand CRM vendor with complete multichannel feedback management. With RightNow, companies can now capture the voice of the customers through chat, voice, email and online channels, which gives them valuable insight to enhance the customer experience.

And we are excited about the upcoming release titled, Web 2.0 and Collaboration in August, when we will introducing significant new functionality that will help organizations better personalize customer interactions.

I am still spending a lot of time visiting clients. I have done over 140 customer visits so far this year. I learned something in every one of those meetings, which is helping us to shape our strategy and product direction.

In summary, we are very pleased with delivering another strong quarter. We remain focused on execution and believe we are well positioned to take advantage of our tremendous market opportunity.

Our solutions enable clients to provide great customer experiences. This solves the number one business issue amongst executives today, which is, how to retain and enhance relationships with customers. And we do this while saving them money and providing immediate ROI.

With that I will turn it over to Jeff.

Jeff Davison

Thanks Greg. Revenue in the second quarter was $35.2 million, ahead of guidance. The current revenue for the quarter was $25.5 million compared to $24.4 million last quarter. Recurring revenue increased 25% year-over-year. Professional service revenue was $9.6 million for the quarter, and perpetual revenue was $114,000. The mix of revenue across geographies for the quarter was 67% Americas, 25% EMEA, and 8% Asia-Pac.

Turning to ASPs for Q2, the average first year contract value was $107,000, which is up from $90,000 last quarter and $63,000 in the same quarter last year, a 70% increase. We had six deals over $1 million, and added 73 new customers this quarter.

Approximately 64% of our business was with large enterprises in the public sector. Our solutions enabled 477 million customer interactions this quarter compared to 332 million a year ago.

Strong verticals in the quarter included high-tech, telco, travel and hospitality, and retail CPG. On expenses; note that my comments are before stock based compensation. Gross margin was 64% compared to 63% in Q1. We delivered a 21% professional services gross margin, which is above our expectation and was driven by above plan utilization. We are pleased with the progress of our resource expansion in professional services, both in incremental headcount and partners, and how quickly they have ramped.

Total operating expenses were $24.4 million this quarter, up about 2% from Q1, and represented 69% of revenue. Operating loss was $1.8 million, which represents our sixth consecutive quarter of operating margin improvements.

Headcount at the end of the quarter was 765, up 7% from 718 at the end of Q1, and up 12% from the end of 2007.

Next, on the balance sheet and cash-flow statement. Cash from operations was $8.6 million for the quarter, for a total of $12.2 million year-to-date. We ended the quarter with total cash and investments of approximately $106 million. During the second quarter approximately $6 million of auction rate securities were redeemed by the issuers at par, resulting in approximately $12 million remaining in auction rate securities at the end of Q2. DSOs were 56 days for the quarter compared to 70 days in Q1 and 65 days in Q2. This is a result of record cash collections.

Now turning to guidance;. we are raising revenue guidance for the full year to be in the range of $141 million to $143 million, with recurring revenue growth of approximately 25%.

We are tightening the range on earnings, and expect full year non-GAAP EPS to be a loss in the range $0.07 to $0.11, and GAAP EPS to be a loss of $0.26 to $0.30. For the third quarter we expect revenue in the range of $36 million to $37 million. We expect non-GAAP EPS to be a loss in the range of $0.01 to $0.03, and GAAP EPS to be a loss of $0.06 to $0.08.

There are a few additional notes I would like to make. We are forecasting 33.8 million shares outstanding for the third quarter and the full year. We expect stock-based compensation to be approximately $1.5 million for Q3 and $6.2 million for the full year.

On interest and other income to reflect both the decline in rates earned on investments and foreign exchange impact, we expect approximately $500,000 in Q3 and $2.5 million for the full year. We expect tax expense to be $250,000 for the full year.

In closing, we had a strong second quarter, which gives us confidence for the second half of the year. Our ASPs are up 70% year-over-year, indicating success in our land and expand strategy.

We had strong cash from operations in the quarter. Our operating margin continues to improve. We expect to return to non-GAAP profitability in the fourth quarter.

I also wanted to invite you to our Analyst Day on October 6th in Colorado Springs at the Broadmoor Hotel. As usual it is in conjunction with our worldwide user's conference, and we encourage you to come and talk with our customers. It is a great way to learn more about our solutions footprint, attend our partner expositions, and learn more about our clients. If you would like more information about the Analyst Day please contact the Blueshirt Group.

With that I would like to turn the call over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go first to Tom Roderick with Thomas Weisel Partners. Mr. Roderick your line is open please check your mute function.

Tom Roderick - Thomas Weisel Partners

Thank you, hi guys, and good afternoon and thanks for let me grab the question here. I noticed you had a handful of big deals in the quarter and 64% of deals are coming from large enterprises. Can you talk a little bit more just about the land and expand strategy. What is happening with sales cycles out there for you as the economy has gotten a little bit tougher? And how are you finding the close rates on your big deals here? Thanks.

Greg Gianforte

Okay. Sure, Tom. Land and expand is really at the heart of the way we go to market. Actually it plays very well in the current economic environment because the land and expand strategy does not require a customer to make a huge investment upfront. Through early success and quick ROI, we earn the right to come back and do the follow-on business. It is really that land and expand strategy, combined with the broader product suite that we have, that has allowed us to support, for example, these higher ASPs, which we saw climb 70% year-over-year.

As I mentioned, I have been out with clients a lot. At least related to the topics that we are talking to customers about, we have not seen impact of the economy on our particular sales cycles. And by keeping the deal sizes relatively small, relative to traditional enterprise type transactions, it is a lot easier for the customers to pull the trigger.

Tom Roderick - Thomas Weisel Partners

Then in terms of the professional services strategy, I noticed that the ratio of revenues coming from professional services is up over historical levels. Do you have to adjust or resize some of the size and experience within the professional services organization? What are you doing to build that team out as your ASPs go up and as you do more seven figure deals here?

Susan Carstensen

Tom, it is really a couple of different factors within the pro services team. We are expanding the team directly, but we are also using these larger call center transformation projects and expansion opportunities to get more partners involved. For example, in North America we have got about 20%, 25% extra capacity few partners we have trained up.

So, as they move forward and build out some of their practices, we have segmented the work that we expect to do and be the absolute experts in it, and then some of the work the partners can do.

Operator

Thank you. (Operator Instructions). We will go next to Tom Ernst, Deutsche Bank.

Tom Ernst - Deutsche Bank

Good afternoon and thanks for taking my question. So, to follow-up on that last point, it looks like a lot of the, or a good portion of the upside in the quarter was on the services side. Is this supporting strong subscription business? And as you look towards the raise up you have done in the numbers, is that comprised, should we think of that as an acceleration in terms of your services or in the subscription?

And maybe just generically, how is the bookings momentum? If you do not quantify it, just what are you seeing here as it has developed over the last three months please?

Greg Gianforte

Good question Tom. We are certainly seeing more services. It is all attached to software subscription sales. So, we would not have the services if we did not have the software sales. I think you see that as you look at upticks in deferred revenue and some of the other numbers, the fundamental business is very strong. I think some of that uptick is related to the fact that we are doing bigger projects in larger organizations. There is a little more complexity attached to them.

Fortunately, the services stuff is coming at reasonable margin for us. But it's supporting growth in the underlying subscription sales.

Tom Ernst - Deutsche Bank

And so, I mean just to make sure I am not putting words in your mouth, the momentum you feel like if it's picked up in terms of booking new subscription business, even though the subscription business this quarter didn't show the uptick towards services, is that right?

Greg Gianforte

Well, we said at the beginning of the year, we expected about 25% growth in recurring revenue. We're right on target on that. So, to say it was an uptick, I am not sure. I think we are on target for what we thought at the beginning of the year, 25% growth in recurring revenue. The professional services have grown to support the subscription business we are selling. So, again, I am not trying to dodge your question, but you maybe reading a little too much to say it was a big uptick. We had a very strong quarter. The services is necessary for us to deliver the subscription business we sold.

Tom Ernst - Deutsche Bank

That helps clear it up. Thank you.

Greg Gianforte

Yeah.

Operator

We'll go next to Jeff Houston with William Blair.

Laura Lederman - William Blair

Hi. It's actually Laura Lederman. Can you hear me?

Greg Gianforte

Yes.

Laura Lederman - William Blair

Okay. Thank you. Just a few quick questions. One is you mentioned that there is no sign of weakness due to the economy. Are you seeing any weakness even in financial services or retail? And also, the competitive environment, Salesforce won that big MyAssist deal. Are you seeing them anymore in call centers? Once again thanks for taking my question.

Greg Gianforte

I am sorry, Laura that last question you asked about specific competitor, and it just went past me.

Laura Lederman - William Blair

I am sorry. Salesforce won that MyAssist deal. I was wondering if you are seeing them anymore in the call center space? Or is it really replacing still Clarify and Remedy and seeing Siebel and new deals? Thank you.

Greg Gianforte

Let me answer the competitive question first, and then I will go back to your first question about financial services. At a macro level we have not seen any real changes in the competitive landscape. Our primary competitor continues to be the call center incumbents. That's mostly Oracle Siebel. And we win there mostly because our stuff is easier and goes in faster and costs less to own. So, those are pretty compelling advantages for a client. And there is a fairly high level of frustration amongst existing Siebel customers. They have to get ready to decide they are going to stop throwing good money after bad. But once they get there, we get the business.

I would say that, across the board, we have seen an uptick in our competitive win rate. To the extent that that those numbers are, they are not exactly a crystal ball. But in the numbers we track, we have seen an uptick. And I would attribute that primarily to really our focus on our target customers and RightNow 8, those two things together. So, we have seen kind of across the board an uptick in competitive win rate, which we are really encouraged about.

And in particular related to Salesforce, we do see them in deals. I wouldn't say it's been a significant change for what we've seen in the past. Generally, our focus being on the customer service automation side, and their primary focus being on sales automation, somebody is generally in the wrong place. And our competitive win rate in our target market is very high. So, that's kind of on the competitive landscape.

On the question about financial services, I mean, we did business with financial service institutions in Q2. I don't think it was disproportionately lower or higher than what we've seen in prior periods. I would say, as you know, financial services has never been a primary market for us. I think it's a market that represents good upside potential to us. But it's been hovering between 6% and 8% of our total revenue. And we did some business in financial services last quarter, but really no change there.

Laura Lederman - William Blair

And one final question, before I pass it on, which is -- congratulations on the six large deals. Were any of them like multimillion, any mega-deals, if you will, however, you define mega-deal?

Greg Gianforte

Of the six large deals I would not describe any of them as mega-million dollar deals. They are pretty consistent with the types of large million dollar plus deals we've done in the past.

Operator

Thank you. We'll go next to Terry Tillman with Raymond James.

Terry Tillman - Raymond James

Hi. Good afternoon, guys. Thanks for taking my questions. The first question just relates to, I mean, it's notable the uptick in seven figure deals. And in the past, you guys have talked about some of these partnerships. You put out some press releases. Are these partnerships more just for the excess capacity in terms of the service organization? Or are they actually helping influence some of these larger deals, or will they in the future?

Susan Carstensen

Yes. When we think about our overall partner strategy there is really four key areas. And I would say the majority of them are tied to kind of partner influence revenue. Anyway four categories there is the outsourcers, the Convergys, the West, Teleperformance. They typically would be bringing us into deals.

In the system integrator side, to date, I would say we've leveraged them primarily in terms of excess capacity and on the delivery side. But the program is to first get them ramped up and they may create their practice, and they drive more influence and bring us into more deals. That's second category.

Third category, we're seeing some nice traction is with some of the technology partners. And so, that could be on the front-end, if you are doing customer care solutions, you may bring in a technology partner on the E-Commerce side. You could be bringing in some of the integration platform vendors, RMA solutions, things like that. So, the technology partners, we influence business for each other.

And then the fourth category of partners is we have some more direct resellers, primarily in the countries that we aren't direct. So, it's both.

Terry Tillman - Raymond James

Okay.

Susan Carstensen

The most interesting part about the partners these days is we're seeing some good traction with partners bringing our pilots to market. Given our strategy of land and expand, it's also most effective if they can follow on that and use the same strategy, and go on and land in their target accounts. Then we can help them expand with a broad breadth of solutions.

Terry Tillman - Raymond James

Okay. And just, Jeff, a question related to the services margin. It is better than I expected. I mean how should we think about, I mean, could it build off of this in the back half of the year? Or are there some seasonal factors that could temperate it? Thank you.

Jeff Davison

Yes. Thanks. We were really pleased with the 21% professional services margin. I think in Q3 you'll see something pretty similar. Q4 historically, we've seen the margin a little bit lower just because of the holidays and vacations, and getting project scheduled with customers. So, that's how I would look at it for the rest of the year.

Operator

We'll go next to Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

Hi, thanks very much. A few quick questions for you. I was hoping you could address contract duration. Any notable changes during the quarter or expected changes?

Jeff Davison

Not really, there was no significant change in the contract duration. It's still right around 20 months. So we haven't seen that change much over the last three, four quarters.

Nathan Schneiderman - Roth Capital Partners

Any meaningful changes in pricing?

Susan Carstensen

No.

Jeff Davison

No.

Greg Gianforte

No.

Nathan Schneiderman - Roth Capital Partners

Okay. And then, I gather that would be on kind of the same product basis, but ASPs have gone up. Is that mostly driven by additional users per customer? Or is it more additional modules?

Greg Gianforte

Yes, Nathan, it's a combination. If you think back three, four years ago, our product suite was much more limited. Particularly with the introduction of RightNow 8, the introduction of feedback management, and our push into larger enterprises, the deals are just bigger. It's a combination of we have larger expansion opportunities when we target on the right kind of customers. And we've been adding those to our, we have been landed in those accounts. So, it's really related to the breadth of solutions today and our focus on the target market that we know where the opportunity is.

Nathan Schneiderman - Roth Capital Partners

Okay. And then a final quick one for you. You had suggested in the past that RightNow 8 would get you more at-bats because it's a more capable product. So, I was just wondering if you looked at the at-bats you are getting now versus maybe a year ago. How are they comping? Thanks very much.

Greg Gianforte

I'd say that we have seen an uptick. Particularly, we've seen in the last call, 90 to 180 days, more referrals from the analyst firms, from the Fosters and Gartners of the world in large part, because as we've been able to deliver proof points around RightNow 8 in these call center transformations, many organizations are going through those and we're seeing an uptick in referrals. So, that's certainly given us more at-bats.

Operator

Thank you. We'll go next to Michael Huang with ThinkPanmure.

Michael Huang - ThinkPanmure

Thanks very much. Good afternoon. Quick question for you. Can you talk about the level of proof-of-concept activity in Q2 and how that compares with Q1, maybe both as a percentage of sales cycles that you are running and also in absolute number? And then how long are these pilots running for? And what are conversion rates? Thanks.

Susan Carstensen

We don't talk about the exact metrics around, I think you called them proof-of-concepts, we call them pilots. We have given some color on it in the past. The activity remains pretty consistent, and it's about a third of the new customer rate. The typical duration for an e-service pilot might be 30 to 60 days. And that's what we would like to start with, because that can prove a real tangible ROI. You can get that into production really easily. So, 30 to 60 days and the conversion rate remains very high.

Michael Huang - ThinkPanmure

My follow-up would be, when you look at the total expand opportunity within your installed base, and I am not sure if you do analysis on this, but how does that total expand opportunity compare with a year ago, given the fact the you guys are working with some larger enterprises now?

Greg Gianforte

What's changed in the last year is people look at RightNow as a viable replacement for their Seibel deployment that has a lot of hair on it. Or their Clarify deployment that's just long in the tooth. Or their massive system that needs to be replaced. And we could do those replacements a year ago. A year ago RightNow 8 was out a quarter. And now it's been out a year and a half. So we can point to proof points. So, the high ground in the account as far as we are concerned is the agent desktop. That's the ground we have to occupy.

And our calling card is the e-service stuff because it's complementary to existing CRM deployments they have in place. We come in that way. We prove our value. We earn the right to take away the agent desktop business. And that's really the big difference from a year ago. And that's why the expansion opportunity is bigger. And that's reflected in the ASPs, because the transactions size for a call center transformation is larger than an e-service transaction.

Susan Carstensen

I would say the other difference from over a year ago is, as we have gotten much better at focusing on the right target accounts and the right target verticals, these would be organizations with millions of consumers. The opportunity is much greater in those target accounts, than I would say the historical customer base.

Operator

Thank you. We'll go next to Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks so much. With the land and expand strategy, a lot that has been the success of Pro Services. Can you give us an update, and I apologize if I missed this. I got on a bit late, on hiring on the Pro Services side, and what the plans are for the remainder of the year? And then, you would also have some other plans for aggressive hiring. Just give us an update on those numbers.

Jeff Davison

On the hiring, we're 7% above Q1. We are 12% above the end of the year. At the start of the year, we talked about growing at 10% to 15%. So we're re quite a ways near the goal. There is going to be more hiring the rest of year. It just doesn't going to be as aggressive as it was the first part of this year. And specifically on Pro Services, that hiring was more front-end loaded, which you are seeing in the revenue. The hiring the rest of the year will be, there will be Pro Services, but it will be across the board as well.

Brendan Barnicle - Pacific Crest Securities

Great. And then any color just on implementations on RightNow 8, any issues you have come up against, or any things that made it particularly successful?

Greg Gianforte

Yes, I would say that, we shared last quarter that we had reached our one year goal of getting over 50% of our clients live on RightNow 8. We continue to do RightNow, so at this point the majority of our clients are on 8. They are in production. These are large scale deployments. We're past any transients that might be associated with a new product really, a new architecture being introduced to the market.

Operator

Thank you. Next, we'll go to Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley

Thank you. Nice quarter. I just want to ask you a little bit about your transaction mix, and how we should be thinking about a really good performance in big deals, with six deals over $1 million, 70% increase in ASP. I am looking at that against, perhaps, like some of the deferred revenue metrics or the current revenue, plus change in net deferred metrics, which are definitely much lower than that 70%. Are we looking at something like a shift towards more or fewer larger deals driving you guys revenue on a going forward basis? Or is this just a one quarter event?

Jeff Davison

No, the uptick in the ASP was 70% over last year. Last quarter I think it was a 60% increase or something like that. So, we've definitely been seeing that go up as a result of land and expand. Large deals obviously are driving that. Six over $1 million this quarter, I think it was four last quarter. It's five in Q4. So, that number isn't immediately jumping. I guess what I would say is the level of deals or transactions that are between $1 million and say $250,000, that's increasing. And that's really driving this ASP up. And that's really how the land and expand strategy works for us. So, it's a great success with land and expand, and you're seeing it reflected in the ASP.

Greg Gianforte

I would just add that understand, we did six deals over $1 million. The average ASP was still 107. We do hundreds and hundreds and hundreds of transactions every quarter. So, we give deals over $1 million as an indication really of larger deals, mission-critical commitments that clients are making. But this is still a very high volume, very robust revenue stream from hundreds and hundreds of organizations every single quarter. So, you just keep that in mind when you think about that number.

Keith Weiss - Morgan Stanley

Okay. What's the offset of that 70% growth in large deal ASP? Because, your bookings aren't growing at 70%. So, is it smaller, like the deals under $25,000 are getting smaller or there is fewer of them or--?

Greg Gianforte

Yes, I think I'd say there is fewer of the small deals and more of those medium to large size deals, with the emphasis on the medium size.

Operator

Thank you. Next, we'll go to Derrick Wood with Pacific Growth Equities.

Derrick Wood - Pacific Growth Equities

Hi, thanks. What percentage of customers have upgraded to 8.0 now? And curious if you've been able to analyze what the kind of percentage uplift is on revenue when they do upgrade and deploy new modules?

Greg Gianforte

Okay. So, we shared last quarter that we are over 50%. That was really a metric we gave all of last year as an indication of market acceptance. We continue to upgrade clients. We're not going to be providing a specific number on a go-forward basis. But suffice it to say, we continue to get broad adoption, and more and more clients have moved there. Now of our top clients, we have well over 70% of our clients there. And in terms of the up-sell opportunity, once clients are on RightNow 8, they start thinking much more seriously about an agent desktop replacement. So, that's the number one opportunity that stares us in the face.

Secondly, RightNow 8 includes all of the enterprise feedback management capabilities and particularly with the announcements we made in May around voiced customer, we now have a multi-channel capability across the board for collecting feedback and making that feedback actionable within the business. And this upcoming release in August really introduces some very advanced Web 2.0 capabilities for changing the way companies personalize their interactions with clients across their entire web experience.

We are excited that we introduced that in beta form back in May. It goes generally available in August and pretty excited to get it out. So to answer your question, the up-sell opportunity, we would call the expansion opportunity, once we get people on 8 is significant.

Derrick Wood - Pacific Growth Equities

In terms of the desktop deployment, can you share with us what the ASPs tend to be?

Greg Gianforte

I do not have that number right in front of me. It's kind of blended in with all the transactions. I think it's evidenced in this increase in ASPs you've seen over the last year.

Derrick Wood - Pacific Growth Equities

And finally, you guys stated that utilization is going up on professional services. Just curious where this is happening. Is this more on the upgrade side or more around new deployments in the call center?

Susan Carstensen

The bulk of the professional services work is really around new deployments and then expansions, not like the upgrades per se. And so, we're really seeing across the board performance by the team in both the implementation and expansion opportunities, consulting opportunities.

Operator

Thank you. We'll take our next question from Horacio Zambrano with Jefferies & Company.

Horacio Zambrano - Jefferies & Company

Hi. I am for Ross MacMillan. Just a question on your international performance and how you feel about the growth you are seeing there. And what kind of investments you are making in Europe and in Asia-Pac to continue to better that?

Susan Carstensen

We've had some terrific growth with international this quarter, at like 33% of revenue, with the backdrop of accelerating North American growth as well. From a huge investment perspective, we've made investments in our primary regions in Europe. We've been investments in our primary markets in EMEA. It's just continuing to add fuel to the fire and leveraging further partner relationships. But over time, we are at 33% now. So you got a little more long-term perspective. We expect it to be 40%. And so, we'll continue to grow there.

Horacio Zambrano - Jefferies & Company

Okay. And is there anything you can give us in terms of what you might expect cash flow from operations to come in for this year? I know you are running a little bit ahead of last year.

Jeff Davison

Sure. We guided to $25 million to $30 million in cash from operations at the beginning of the year. We haven't changed that guidance.

Horacio Zambrano - Jefferies & Company

Okay.

Jeff Davison

Results now we are half way there to the low end of that.

Horacio Zambrano - Jefferies & Company

Great, thanks.

Operator

Thank you. We'll go next to Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Hi, thank you very much. Two questions. One is, it looks like we've probably completed a good phase of the model transition from a combination of perpetual in subscription to subscription only. And when I look at the margin potential that you guys have exhibited in prior years, we've seen a peak margin of 7% to 8% on the operating margin side. And since you have had this five or six quarter stretch to really manage your business model transition, I am just curious how long do we take to get back to that peak margin?

Because I would imagine that recurring subscription revenues are probably more profitable. You probably have a good handle on your sales and marketing expenses and productivity, and the investments needed to really keep growing your business. So my first question, I guess is since we're done at the model transition, when are we going to start to get that margin benefit? And at what degree could margins rebound potentially over the next one to two years?

And second is a follow-up, maybe I will pause with the first one and then ask you the second question. Thanks.

Jeff Davison

Sure. Yes, we're really pleased with the margin improvement we've seen. We agree the transition is over. I am glad to hear you say that. That's good. On the margin improving, it will come over time. Gross margin right now it's being hampered a little bit because the Pro Services mix is a little bit higher. Over time as that comes down, we shift things off to partner, we'll see more of the software margins, as well as the gross margin.

And you are right, on operating expenses, we'll continue to grow the company while keeping those expenses in check, which then we will continue to see the operating margin improvement. We look for long-term margin targets of 15% to 20% at the operating level. And that's really out there a three to five-year target for us, with getting towards that each year.

Kash Rangan - Merrill Lynch

Got it. So could we not expect a snap back into those nine to your peak margins? Because you had arguably by the end of this year, you will have had eight quarters to manage through this transition. So, one would imagine you to be able to keep your expenses controlled and letting all the revenue upside, or revenue growth filter through to the bottomline. I mean I completely appreciate the 15% to 20% over the next three years. But, I am just wondering what the ramp is going to be like. Do you get off to a quick start and then keep growing slowly on top of that, or is it more of a linear builds over the next three years?

Jeff Davison

I think you are going to see us turn the corner to the profitability on a non-GAAP basis. And then you're going to see linear improvement. It is not a real snap back.

Kash Rangan - Merrill Lynch

Okay. Okay, that's good to know. And also, secondly...

Jeff Davison

Go ahead.

Kash Rangan - Merrill Lynch

Secondly, on the deferred revenues in the balance sheet, I am just curious how should we think about the deferred revenues? I mean they have been stuck in a range over the last four to six quarters. We're not seeing a ton of growth in the last four to six quarters in the, call it, $108 million to $114 million range. How should we think about the seasonality or the cyclicality of deferred revenues given the continuing model transition? That's it for me. Thanks.

Jeff Davison

I think the further we get away from the old model, the deferred revenue is a little clearer. We've pointed everybody to look at the net deferred revenue. And the net deferred revenue is up 28% year-over-year. Over last year, we're pretty happy with that. And I think you'll continue to see the deferred revenue climb as we just continue to execute here.

Greg Gianforte

And really just looking at deferred revenue, it ignores the kind of lingering impact of the financial model change we made, because we're not adding stuff in there as fast as it is coming off on the income statement.

Susan Carstensen

Because of the off-balance sheet...

Greg Gianforte

Because of the off-balance sheet. Yes.

Susan Carstensen

That's why you look at the net deferred.

Operator

Thank you. Next, we'll go to Rich Baldry with Canaccord Adams.

Rich Baldry - Canaccord Adams

Thanks. I am just wondering, broadly speaking whether bookings are still tracking, sort of, close to your actually reported revenue mix geographically? Or if there is some skewing that gives credence to that rise to the 40% long-term international? And it would be remiss in going through another quarter without asking again, given the shape of the balance sheet, whether you would look at something like a balance sheet buyback? Thanks.

Susan Carstensen

On the first question, the revenue mix by regions will lag the bookings mix a little bit, right because it's coming from off the balance sheet and the new bookings go in, both off and on balance sheet. But the 40% target on the international is a longer term. We're seeing a good mix of business across North America, EMEA and Asia-Pac. That's the second question.

Greg Gianforte

Yes, on the stock buyback, if we didn't have good use for that capital that would make a lot of sense. But we're not planning one at this point.

Operator

Thank you. (Operator Instructions). We'll go next to Patrick Walravens with JMP Securities.

Patrick Walravens - JMP Securities

Thank you. Hi, guys. So I am wondering if you track, what we call like maybe the internal growth rate. So if you aren't adding new accounts just that installed base, what kind of growth you are seeing from that?

Greg Gianforte

To help us with the question here, could you rephrase that?

Patrick Walravens - JMP Securities

Sure. We're starting to see with some of these other on-demand companies, they basically provide what they call the sort of internal growth rate. Just what rate is your installed base growing at? So just in terms of the new products that they take down right, and the amount of additional spending those installed customers are doing versus the growth that's coming from you actually going out and having sales reps sign-up new accounts.

Jeff Davison

I guess I would look at the stat we gave last quarter. In the first three years the company spend six times their initial purchase with us. That would be one measure that we give that would indicate that for you.

Susan Carstensen

But, yes, we haven't broken out kind of the internal growth rate on the expansion versus the new.

Patrick Walravens - JMP Securities

Is it something that you track yourselves or not really?

Susan Carstensen

We do, but in a different structure.

Patrick Walravens - JMP Securities

Okay. So I'll just skip to my follow-up which is how are the retention rates holding up? I mean are you seeing some companies go bankrupt? Are you seeing business failures? Are you seeing people cut back on usage within the installed base just because the economy is slowing?

Jeff Davison

We've seen the retention rates remain where they have been, which is right around 88% of the customers. And as for bankruptcies, I can think of one that we experienced with a pretty well known company in the last six months. But, otherwise, I am not really seeing any other bankruptcies. So the churn is again those small companies that really aren't in our target.

Patrick Walravens - JMP Securities

Okay. Thank you.

Operator

Thank you. And at this time, we have no further questions. I would like to turn your program back over to Mr. Gianforte for any additional or closing comments.

Greg Gianforte

Okay. Well, thank you for joining us today. Again, we were very, very pleased to deliver a strong quarter in Q2. We remain focused on execution and really believe we're well-positioned to take advantage of this tremendous market opportunity in front of us. So again, thank you for joining us today.

Operator

And that does conclude today's conference. You may disconnect your lines at this time.

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