Art Technology Group, Inc. Q2 2008 Earnings Call Transcript

Art Technology Group, Inc. (ARTG)

Q2 2008 Earnings Call Transcript

July 24, 2008 10:00 am ET

Executives

Rick Wenstahl [ph] – VP of Finance

Bob Burke – President and CEO

Julie Bradley – CFO

Analysts

Shyam Patil – Raymond James

Brad Mook – MKM Partners

Jeff Van Rhee – Craig-Hallum Capital Group

Nathan Schneiderman – Roth Capital Partners

Derrick Wood – Pacific Growth Equities

Rod Ratliff – Stanford Group

Michael Huang – ThinkPanmure

Presentation

Operator

Good morning, my name is Stacy and I will be your conference operator today. At this time, I would like to welcome everyone to the Art Technology Group Q2 2008 results conference call. (Operator instructions)

I would now like to turn the conference over to Mr. Rick Wenstahl [ph], VP for Finance. Thank you. You may begin your conference.

Rick Wenstahl

Good morning everyone and thank you for joining ATG's investor conference call to discuss our second quarter 2008 financial results. Speaking today will be Bob Burke, ATG's President and CEO; and Julie Bradley, ATG's Chief Financial Officer.

This call, we will discuss information about ATG's future expectations, plans, and prospects that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in our annual and quarterly reports on file with the Securities Exchange Commission. Our SEC filings can be accessed free of charge from the investor section of our website at www.atg.com.

In addition, any forward-looking statements represent our views only as of today, July 24, 2008. These statements should not be relied upon as representing our views as of any subsequent date. While we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

During this call, we will refer to non-GAAP financial measures. A reconciliation of nonGAAP financial measures to the most directly comparable GAAP measure is available in our financial results press release which was issued this morning. A copy of this release can be accessed in the investor section of our website.

Now let me turn the call over to Bob.

Bob Burke

Thanks Rick. Good morning everyone and thanks for joining us. I am going to start off today's call with a recap of our Q2 results and business highlights from the quarter. Then I’ll handle the call over to Julie for the financial discussion.

Q2 was another very strong quarter for ATG. Second quarter revenue grew 29% and product license bookings also grew 29% over last year. In Q2, 15 new companies chose ATG's e-commerce platform solutions, up from 5 in Q1. Among the new and existing customers were Cineplex Entertainment, Epson, figleaves.com, Proctor & Gamble, Talbots, T-Mobile, and Vodafone. We were pleased to see considerable diversity in the business we closed this past quarter. Some examples include an expanded presence in the media and entertainment sector with the publisher Conde Nast, Cineplex Entertainment which is Canada's largest motion picture exhibitor, and Zinio, a global distributor of digital books and magazines.

We had continued expansion into the luxury retail sector with high-end fashion designer, Tory Burch, and luxury jewelry and watch retailer alliance time [ph]. We formed additional relationships in the telecommunications sector with Vodafone New Zealand and T-Mobile in the Czech Republic.

We had a number of significant site launches this past quarter. For example, Chico’s launched its three brands on the ATG platform. Shoe retailer DSW and Weight Loss Company, NutriSystem, also launched new sites. In addition, we launched new ATG ecommerce on-demand sites including Kodak and Games Workshop.

I want to spend a moment on figleaves.com which I mentioned earlier. Figleaves is the world’s largest online retailer of branded intimate apparel and is based in the UK. It is going to re-launch its online store using ATG’s entire portfolio of products, and services. The company’s goal is to create a unified customer experience across the Web, email, call centers, and mobile.

In addition to re-platforming on ATG Commerce, Figleaves will drive customer care by the ATG Commerce service center suite. Further, Figleaves has already implemented ATG Recommendations on its current site and will continue to use this capability on its new ATG-powered site soon.

ATG Recommendations, you might remember, is our on-demand automated recommendations capability that we gained through the CleverSet acquisition in Q1 of this year. The new Figleaves Web store will also use eStara Click to Call, our on-demand offering that provides an immediate and direct connection from the website to the call center.

Talbots represents another cross-sell of the entire ATG portfolio. The women’s apparel retailer will re-platform both its Talbots and J. Jill brands and they will also implement ATG recommendations and eStara. So, just one quarter after completing the CleverSet acquisition, we are pleased to see these companies taking advantage of both our core ATG Commerce platform and our on-demand e-commerce optimization services. I look forward to sharing further examples with you in the future.

Now, looking more closely at our e-commerce optimization services business, eStara had another very strong quarter. We signed 30 net new eStara accounts in Q2 and in addition to those already discussed these cross-sells with ATG Commerce, new eStara accounts included LexisNexis, Louis Vuitton, Philips, and Time Warner. Louis Vuitton and Philips are also pre-existing ATG customers as well as Louis Vuitton. We continue building our partner network, broadening the expertise, and with tiger network broadening the expertise in resources that can be called upon for significant site implementations and related services. For example in Q2, we announced the strategic partnership with global services for Sapient. Sapient is driving to have 253 trained ATG developers on staff by the end of 2008 and is currently working on more than 10 ATG engagements throughout the United States, Canada, UK, Germany, and India. To extend our e-commerce and fulfillment capabilities, we also announced the partnership with fulfillment provider Ozburn-Hessey Logistics. OHL is one of the world’s largest third-party logistic suppliers with 5,000 employees in more than 125 facilities. Joint customers with ATG include DSW, Jenny Craig, and NutriSystem.

This past quarter, we also established a relation with Brightpoint, the largest global wireless device fulfillment company operating on 35 locations around the world. Brightpoint shipped 83 million wireless handsets in 2007 to demonstrate its reach. At the end of April, we held our annual customer conference ATG Insight Live. The record number of attendees had the opportunity to learn about ATG’s product direction to provide input in the future priorities and get a preview of coming product enhancements and solutions offering.

As a specific focus this year, we introduced ATG recommendations to our customer and partner community showcasing the automated personalization technology would gain in the CleverSet acquisition. A key objective was to illustrate how this capability complements the segmentation-based personalization of our ATG e-commerce. At the insight, we also preview the integration of eStara click to call and click to chat with the ATG e-commerce service center. With this upcoming integration, we will provide a complete cross channel e-commerce environmental office as single unified view of customer interactions and promotions across the website and the contact center. We have one organizational update. Our Chief Marketing Officer and Senior Vice-President Marketing Cliff Conneighton will be leaving ATG in September. During his almost five years in ATG, Cliff has been its key strategic leader who has contributed greatly to the company’s current success. I’m sure I speak on behalf of then entire management team when I say we will all miss working with Cliff and wished him the best. With Cliff’s departure, we are now watching a search for a new CMO.

Before turning the call over to Julie, I want to give you an updated view of what we’re seeing in the market. Despite current conditions in the overall economy, our results this quarter again showed no evidence of a slowdown in our business. In fact, we recently reported on the results of the survey we conducted at Insight Live, where more than 96% of our audience told us they planned to either maintain or increase their level of investment in e-commerce and almost a quarter of them believe that slowing US economy might actually have a positive impact on their Web business.

This survey is consistent with recent industry reports that show companies are putting a greater emphasis on improving online business channels to drive overall growth. Just this past Sunday, the New York Times reported continuing growth in e-commerce sales at the same time that in-store results are sluggish. One quoted analyst called e-commerce the bright spot in the economy. The Times also reported that a major credit rating agency will begin weighing Internet sales and strategies more heavily in its analysis of companies, recognizing that the online channel represents a growing portion of sales, and some retailers have already began to call out Web results in their sales report. These market trends continue to play into ATG’s strengths and are helping to drive our business success.

Now, I will turn the call over to Julie.

Julie Bradley

Thanks, Bob. As Bob highlighted, ATG had another strong quarter and strong first-half of 2008, setting us up nicely to achieve our financial goals for the year. For the second quarter, we grew revenue 29% year-over-year and 15% sequentially to $41.9 million. Looking at Q2 geographically, international revenue accounted for approximately 29% of revenue in line with 28% from the year ago quarter. The sum of short-term and long-term deferred revenue increased 37% year-over-year and 12% sequentially to $54.2 million this past quarter.

Product license booking defined as product license revenue recognized plus net change in deferred license revenue was $15.7 million. This is a 29% increase over second quarter 2007. This past quarter, 62% or $9.7 million of our product license bookings were deferred and will be recognized ratably. The increase in deferral percentage is a reflection of our success in cross-selling our e-commerce optimization services that Bob discussed earlier.

For the second quarter, license average sales price or ASP was $449,000 representing the top-end of our previously stated range of $350,000 to $450,000. We had 5 seven-figure license deals booked in the quarter. One of which, although deferred and recognized ratably, represents 10% or greater of quarterly revenue.

Product license revenue was $12.3 million for the second quarter. This includes our product license bookings of $15.7 million plus the net increase in product license deferred revenue of $3.4 million. As previously communicated, the amount of product license bookings that are deferred and recognized ratably will vary on a quarterly basis for the deal mix in the quarter. Considering this success we’ve seen, cross-selling our ecommerce optimization services, we now expect that on average for full year of 2008, greater than 50% of our product license bookings will be deferred and recognized over approximately 8 to 10 quarters.

Recurring service revenue which includes supportive maintenance and on-demand recurring services grew 24% year-over-year and 10% sequentially to $22.9 million this past quarter. Year to date, recurring services grew 22% over the first half of 2007 which is slightly below our expected range of 23% to 24% annual growth. With stronger than expected product license bookings increasing cross-sells and typical holiday seasonality, we remain confident in our previously-stated revenue growth range.

Our support and maintenance business grew approximately 14% year-over-year which is slightly ahead of our annual guidance of 10% year-over-year growth due to higher license bookings, strong renewals, winbacks an acceleration of previously deferred revenue. Based on the year-to-date performance, we believe we are on track to achieve our previously stated annual guidance. This past quarter, our on-demand recurring services revenue which includes ATG commerce on-demand and our e-commerce optimization services grew 37% year-over-year and 7% sequentially to $11 million.

Year to date, revenue grew 37% over the first half of 2007 consistent with our previously stated guidance of 35% to 45% annual revenue growth. Recurring services gross margin was 60% for the second quarter compared to 64% in the first quarter and 71% in the second quarter of 2007. The year-over-year decline is primarily due to our continued investment in people and infrastructure to build out our on-demand services including additional expenses incurred to integrate the CleverSet acquisition. For full year 2008, we expect overall recurring services gross margin to approach the mid 60s.

Professional and educational services revenue for the quarter was $6.7 million, a 5% sequential increase and a decrease of 12% compared to the year ago quarter. In 2008, we began seeing the benefit of investments in our partner enablement initiative as the number of ATG trained in reference of our partners that will be increased. As a result, we obtained a shifted implementation to our partners ahead of our original forecast. The success of this initiatives increases overall scale in our overall e-commerce business and has significant long-term benefit in terms of business mix.

In a short term, we anticipate lower professional service revenue compared to 2007 while with leverage partners instead of generating relatively low margin professional services via contractors. Therefore, for full year 2008, we expect professional and educational services revenue to be down 5% to 10% from 2007 level.

The professional and educational services gross margin was 3% for the second quarter compared with negative 9% in the first quarter. We expect the benefits of investments in our Partner Ecosystem to resolve improved margins in future quarters. However, based on year-to-day gross margins of negative 3%, we are lowering our professional and educational services gross margin expectations for 2008 to breakeven to 3%. GAAP gross margin was 61% for the second quarter up sequentially from 59%, and up slightly from 60% year-over-year. For the full year 2008, we expect to see GAAP gross margin in the low 60s.

Non-GAAP net income grew to $3.4 million or $0.03 per diluted share in the second quarter compared to non-GAAP net loss of $81,000 or breakeven on a per share basis for the second quarter of 2007.

Operating expenses for the second quarter of 2008 increased 11% to $25.4 million versus $22.9 million in the previous quarter and $22.7 million in the second quarter of 2007.

For full year 2008, we continue to expect R&D expenses will be approximately 19% of revenue, sales and marketing will be approximately 33% of revenue and G&A will be approximately 11% of revenue.

Our headcount increased this past quarter to 471 employees from 460 employees in March 31. We expect 2008 ending headcount to be approximately 525 to 550 employees. The majority of the headcount growth is in sales, R&D, and service delivery.

Capital expenditures or CapEx for the second quarter was $1 million or just over 2% of revenue. In 2008, we continue to expect CapEx to be less than 5% of revenue.

Now, let’s look at the balance sheet. Our balance of cash, cash equivalents, and short and long-term marketable securities at June 30 increased 12% to $52.7 million from $46.9 million on March 31. The percentage of our accounts receivable that are less than 60 days old was 91% exceeding our target range of 85% to 90%. Days sales outstanding or DSOs were 87 days up from 86 days in the first quarter including that change in deferred revenue modified DSOs were 76 days, down from 83 days in the first quarter.

Second quarter cash flow from operations remain strong. Cash flow from operations was $7.3 million or 17% of quarterly revenue.

For 2008, we continue to be confident that cash flow from operations will be in the range of $28 million to $32 million.

In considering revenue guidance, we analyzed our assumptions around a very strong pipeline and our estimates of product license bookings that may be deferred and recognized ratably. The mix of revenue recognize versus deferred may vary. However, we do believe our overall business is growing faster than originally forecasted. Originally, we have forecasted that product license bookings would go approximately 10% to 20% year-over-year.

Based on our progress year to date, we now believe product license bookings will grow annually by approximately 15% to 22%. With the rollout of ATG recommendations furthering cross-sells, we now expect greater than 50% of license bookings will be deferred and recognized ratably. Since the amount of product license bookings that are recognized ratably may vary, we conclude that our original revenue and profit guidance range remains appropriate. Therefore, we are reiterating our 2008 previously provided revenue and net income guidance that are summarized in a press release issued this morning. We look forward to updating you on our future progress.

I would like to remind everyone that the guidance stated throughout this earnings call is based on our projections as of today, July 24, 2008. We do not undertake any obligation to update these estimates after today’s call.

With that, Bob and I would like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Shyam Patil.

Shyam Patil – Raymond James

Hi, good morning.

Julie Bradley

Good morning.

Shyam Patil – Raymond James

Could you guys talk a little bit more about the five large deals in terms of how many were deferred, what on-demand components they included geographically, how they were spread out, and by vertical if you can as well?

Julie Bradley

Hi Shyam. There was seven – five seven-figure deals and four of the five were deferred and will be recognized ratably, and each one of them has eStara or automated recommendations component with it.

Bob Burke

And from the vertical perspective, Shyam, this is Bob, it’s pretty diverse. It includes technology, retail, telco and also the consumer products this past quarter. So, it’s pretty widely distributed.

Shyam Patil – Raymond James

Okay, great. Could you also talk about the linearity in the June quarter in terms of total revenue and then also for the larger deals?

Julie Bradley

Sure. A lot more of our revenue is recurring and ratably recognized, so we’re not as impacted by linearity. However, we did have 15 new customers that bought product license this quarter, so there is more stages in the process in getting a new customer paperwork completed. However, they were all within our expected range of being signed within the quarter.

Shyam Patil – Raymond James

Okay. And then, it seems like 3Q always draw a lot of attention in terms of being backend loaded. Do you expect this September to be more back-end loaded quarter than June? Could you talk about what trends you are seeing in July?

Bob Burke

So, we still continue to see strength in the pipeline and demand as we enter July. You are right, seasonally typically, especially in some of our international locations, we tend to have more activity that happens in very late August and September. So, typically in terms of product license bookings, it tends to be more back-end loaded than some other quarters, but Julie mentioned, obviously with more of our revenues coming in a more recurring ratable fashion, that has less impact than it has perhaps in last – in prior years.

Shyam Patil – Raymond James

Okay. And just my last question. It looks like online sales growth is – it is still more than four times total retail sales growth, but it has decelerated meaningfully from last year and I was just wondering if you could comment on what kind of correlation you expect that to have with your license bookings growth and why?

Bob Burke

Yes. So even though that some of retail sectors have slowed – pretty slow by the way, we are involved obviously in a lot of new industries and verticals in terms of selling. And when people look at retail, there really is, I think, a number of drivers beyond just what people have seen traditionally. First of all, obviously, there is the younger generation that continues to move into that mode of buying, there certainly is more international growth as people have international brands and portfolios. People are expanding the product categories as well. So, it is not just incrementing what is actually sold online in terms of the existing product categories or even inside of the existing verticals. I want to share it too that people have to show growth somewhere and they have to show investment and I think that is one of the things that we saw evidence this last quarter that, though I have several examples where people were actually in a mode of reducing their stores, but at the same time actually investing in e-commerce.

Shyam Patil – Raymond James

Okay. Thank you.

Operator

Your next question comes from the line of Brad Mook.

Brad Mook – MKM Partners

Hi, guys. Nice quarter. Julie, a follow-up question, I understand the product license bookings guidance being lifted but the revenue guidance remaining unchanged. But when does that the hire bookings growth favorably impact cash flow?

Julie Bradley

Potentially, I’m usually with – so year to date, we have about $14.4 million in cash flow from operations. We typically see inverse seasonality in cash flows, so a quarter following a strong bookings quarter. We typically see higher cash flow from operations. So, I think it’s based on the trajectory we’re on. We would expect to see strong cash flow from operations in the third quarter. And at this time, we think we will revisit our annual guidance at that time.

Brad Mook – MKM Partners

Okay, alright. Fair enough. And then one thing in the product license bookings, it looked like the portion of product license deferred revenue that was recognized was high – even higher this quarter than it was last quarter and I think you said last quarter that that was a bit of an anomaly. Can you go into that a little bit?

Julie Bradley

Yes, sure. A few million of dollars of the license revenue recognized this last quarter from deferred revenue came from deals booked early in 2007 kind of at the start of our business model transition. So, as – and it was just this past quarter that we had met all of the – completed all the components in order to recognize that revenue. So, it was accelerated into Q2 instead of kind of booked ratably throughout the last 12 months. And on a normalized run rate, it’s probably more in the $3 million per quarter but that may vary.

Brad Mook – MKM Partners

Okay. Should we expect to see more of this kind of accelerated now that you’re in this phase or does that dissipate a bit?

Julie Bradley

We’re hoping it dissipates a bit as I look through the portfolio of deals that are sitting in deferred revenue. Most of them have started ratable recognition. This just happens early to – one of the every early deals.

Brad Mook – MKM Partners

Okay. And then two other questions, your headcount assumption, you kind of ticked it down a bit for the end of the year relative to last quarter. I think last quarter, you targeted 515 now you are looking 525 to 550. Is that just reading into that harder talent, harder to get good talent, or is that just a reduction in terms of your absolute needs or what’s going on there?

Bob Burke

Yes. This is Bob. It really is kind of a reflection. We’re halfway through the year and if you just look at how many people we could hope to add in the net basis between now and the end of year, we’re just trying to be more realistic. We still have the need for 550 employees and so it’s more of a finding the talent issue.

Brad Mook – MKM Partners

Okay and you’re being – you are obviously being selective there in terms of your adds?

Bob Burke

Indeed.

Brad Mook – MKM Partners

Yes, okay. And then the other question, interest income appeared to drop in the quarter. I don’t know if there’s anything in that number but it seemed a little bit unusual given your cash balance and –

Julie Bradley

Right. So, interest income was relatively flat sequentially but in the past, we have had a foreign exchange gain included in that line. And this past quarter, we were foreign exchange neutral.

Brad Mook – MKM Partners

Okay.

Julie Bradley

But if you are getting at the question about our overall investments, they are invested in order to preserve the value and there is no impairment.

Brad Mook – MKM Partners

Okay. All right, great. Thanks.

Bob Burke

Thank you.

Operator

Your next question comes from the line of Jeff Van Rhee.

Jeff Van Rhee – Craig-Hallum Capital Group

Hey, guys, very nice quarter. Bob, you mentioned – you pointed at a bunch of different verticals where you had some considerable success in the quarter. As the year rolls up, when you’re all done, do you think we will see based on pipeline a meaningful shift in terms of the splits among verticals?

Bob Burke

We may – telco continues to remain strong for us and that was true obviously last year as well, but we are seeing continued strength in that and that is not only here but on an international basis. The one that I think that has kind of come on this quarter and last quarter as well is media and entertainment, so that’s one that I think may show up as a higher sector than perhaps in past years.

Jeff Van Rhee – Craig-Hallum Capital Group

And as it relates to that, I guess, as you look at pipeline, talk to pipeline in a couple of ways if you would, just in terms of pipeline coverage to forward estimates and also pipeline mix, are there other any notable lessons at this point although early in terms of geographies, anything changing geographically, anything changing by vertical, any notable outliers although early?

Bob Burke

No, our portfolio and mix inside of our pipeline continues to be very strong overall. Like I said, there are some new verticals that have showed more strength like media and entertainment, that continue to be the trend as telco. We still see great strength though in terms of retail, so that sector even though obviously has had challenges in the greater economy still is a very strong sector for us.

Jeff Van Rhee – Craig-Hallum Capital Group

And I guess as it relate to pipeline coverage?

Bob Burke

We still enjoy greater than 3x.

Jeff Van Rhee – Craig-Hallum Capital Group

Okay. And then lastly, Julie, you touched on professional services, you kind of gave the growth range and you talked about the gross margins. Just talk about the reset in terms of expectations. You had some pretty performance there, I know there is a lot of variables and you went through it, but you went a little quick, so just talk about professional services gross margins go forward.

Julie Bradley

Sure. This will be a decline in bowing [ph] the gross margins for a full year is really a reflection of just our year-to-date performance. We do expect to see improvement from our investments in our Ecosystem – our Partner Ecosystem in the back half of the year but not as such a significant pay that we would be able to get back up to that 5%, so that is why we ticked it down a little bit to either breakeven or 3%.

Jeff Van Rhee – Craig-Hallum Capital Group

Okay. So in terms of – I mean, you made very good progress there, real nice improvement this quarter, but in terms of the ramp back to the much higher levels as we exit this sort of period where we have been training a lot, no expectations in the back half of the year for next year in terms of where you ultimately think that goal is, say, in’09?

Julie Bradley

Yes. I think we will see continued improvements throughout the back half of the year. We did have a negative 9% in Q1. I think that was when we look at the portfolio of work that’s being done. It is going to be a tough hurdle to get to in just a couple of quarters, but we do believe that through the investments in our Partner Ecosystem, that ATG professional services will be profitable in 2009 and beyond.

Jeff Van Rhee – Craig-Hallum Capital Group

Okay. I will leave it there. Thank you.

Operator

Your next question comes from the line of Nathan Schneiderman.

Bob Burke

Hey, Nathan.

Nathan Schneiderman – Roth Capital Partners

Hi. Thanks very much. Hi, Bob. Hi, Julie. A handful of quick questions for you. I was just – Julie, I was hoping you could give us a little more detail on the big deal exposure side. I heard you say that your largest deal was a ratable deal but still contributed 10% plus of revenue? Did I hear that correctly or any more details?

Julie Bradley

No. It is included in our bookings number, 15.7, but it will be – it was deferred and be recognized on a ratable basis and the size, when we look at making the determination, is it a 10% deal or is it a seven-figure deal, we look at it as if – as compared to the revenue that was recognized. So, none of the 10% deal is in the revenue but just from a size comparison, it was equal to 10% or greater of the revenue that was recognized of the 41.9.

Nathan Schneiderman – Roth Capital Partners

Okay. So it is more than $4 million of bookings.

Julie Bradley

Yes. More than $4 million of bookings relates to that one deal that is in the 15.7.

Nathan Schneiderman – Roth Capital Partners

Okay. And then, just on the bookings, as far as I understand, this is one of the highest – this was the highest license bookings quarter in recent memory. Would you describe this as really just a function of the strength of big deals or was it – to what extent was it beyond that or just – how would you describe that?

Bob Burke

Hi, this is Bob. I think that certainly we had strength in big deals, but I think we also had that spread out over a number of those deals. So we had a higher number of seven-figure deals. But we also had as we mentioned, a lot of new customers and not all those customers by the way make a significant purchase upfront. Some customers buy a CPU or two, get the thing up and running, and then come back for more of a volume purchase downstream. So, we were very pleased with the diversity and the quality of the deals that we had in the quarter.

Nathan Schneiderman – Roth Capital Partners

When you look at CleverSet, what kind of contribution is that making to the license bookings on a dollar basis?

Julie Bradley

License bookings only include the value of the perpetual licenses that are sold. It does not include any related services.

Bob Burke

Yes. Since most of these deals, by the way, were probably pleased [ph] at the early stages of progression before we announced the CleverSet acquisition, we did not say that any of them were the deciding factor in terms of determining that we won these deals but it certainly has been a great add-on capability that people recognize as valuable. As I mentioned, in the case of Figleaves, they wanted it in fact on their current site before they get translated over to an ATG-powered environment.

Nathan Schneiderman – Roth Capital Partners

On competition and pricing, would you describe the environment as the same, better, or worse than recent quarters, and any detail you can provide there?

Bob Burke

I think it has been relatively the same. I don’t think the market has changed in terms of competition. So, it basically tends to be the same competitors and the same competitive landscape. We didn’t see a big shift there at all.

Nathan Schneiderman – Roth Capital Partners

Okay. And final question area for you, in February, you filed an 8-K with 2009 targets of $205 million and you implied in that EPS of approximately $0.23 or maybe a little greater than that. I’m just wondering how you feel about – I know you’re not out with 2009 guidance explicitly, but how do you feel about those financial modeling targets at this point?

Julie Bradley

Sure. So, as we said, our scalable business model that is not guidance but our follow up on 2009 and 2010, the assumptions that underlie the revenue for those years are all the assumptions that underlie our current guidance. And from the gross margin, the operating expenses reflect our thoughts on how some of our investments that we have been making in 2007 and 2008 in areas like our Partner Ecosystem and our on-demand services start to leverage those investments in the later years. So we remain confident that these targets are reasonable and we will – it will be in our Q3 investor presentation.

Nathan Schneiderman – Roth Capital Partners

I’m sorry. What will be your (inaudible) 2009 guidance?

Julie Bradley

No. Just the same our business model thoughts for 2009 and 2010 as they have been in our Q2 investor relations presentation.

Nathan Schneiderman – Roth Capital Partners

Okay. But it sounds like you’re still comfortable with those numbers though?

Julie Bradley

Yes, we are.

Nathan Schneiderman – Roth Capital Partners

Okay, thank you very much.

Bob Burke

Thank you.

Operator

Your next question comes from the line of Derrick Wood.

Bob Burke

Hey, Derrick.

Derrick Wood – Pacific Growth Equities

Hey guys. Nice job on the quarter.

Bob Burke

Thank you.

Julie Bradley

Thank you.

Derrick Wood – Pacific Growth Equities

Julie, I was wondering, what was the maintenance revenue again and if you add the eStara contribution as well?

Julie Bradley

So the maintenance revenue for the quarter was $11.9 million and the other recurring services which include ATG on-demand, eStara, and also now automated recommendation was $11 million.

Derrick Wood – Pacific Growth Equities

Okay. In terms of the 15 new customers that you generated, that seems to be one of the highest quarterly numbers in the recent history, can you just go over a little bit more – what’s going on? What’s the driver? I guess you said there was no change in competition but are you seeing better productivity, better market environment? Did your partners help generate some new deals? If you could kind of drill onto that, that would be great.

Bob Burke

Sure. I think all of those have contributed. We ramped up our sales organization towards the end of the last year and the beginning of this a bit, so I think certainly we have those people becoming more productive. That is something that we think are enjoying the results of a lot of hard work in sales management for that. I think our market has continued to remain strong and as you mentioned, we have stronger partners out there and certainly those partners have contributed to our success. If you look at our deal flow in Q2, more than half of those deals, there was a partner playing an active selling role in the sales process.

Derrick Wood – Pacific Growth Equities

Okay. And how – what’s the outlook in terms of Europe? Has there been any change in pipeline there?

Bob Burke

Yes. I think it is, as you may remember, we have a new gentleman that was announced awhile back who is our Head of Europe and I think that were starting to see the results of presence in the European community and it’s just – I think there is a lot of opportunity over there. Obviously, we’re looking forward to the plans that we have next year in terms that where we want to make selective investments, but international in general I think is a definitely an area of growth for the company and we look forward to future success there.

Derrick Wood – Pacific Growth Equities

And again, I just wanted to – I guess, reiterate, you did say that you haven't seen any change in budgets or sales cycles as of late?

Bob Burke

Yes. So, the way I would characterize it, certainly, in this environment, customers are scrutinizing all investments. But so far, we seem to be in an area that continues to benefit from people’s investment decision. So as I mentioned earlier, there are several examples of retailers that chose to buy e-commerce solutions from ATG this past quarter while at the same time, they were closing stores.

Derrick Wood – Pacific Growth Equities

Right. And lastly, Julie, in terms of – as we look at OpEx quarterly, it did jump up as expected as you accelerated some hiring. How should we think about that seasonally for the second half of the year?

Julie Bradley

In our Q1 call, we said that we would expect there to be about a 15% increase in OpEx in the second quarter, as we accelerated some of the – we saw some of the delays in hiring in Q1 that we thought would accelerate into Q2. Q2 was up about 11% over Q1 and as we had said earlier, we did see some continued delay in hiring as we are searching for those right people. So I would say that we will see some push into the back half of the year, but on a minimal basis. I would say, probably, for Q3 and Q4, less than 5% increase.

Derrick Wood – Pacific Growth Equities

In each quarter?

Julie Bradley

Yes.

Derrick Wood – Pacific Growth Equities

Okay.

Julie Bradley

Just based on the timing of when we make the hires.

Derrick Wood – Pacific Growth Equities

Okay. All right. Thanks, guys.

Bob Burke

Thank you.

Julie Bradley

Thank you.

Operator

Your next question comes from the line of Rod Ratliff.

Bob Burke

Hey, Rod.

Julie Bradley

Hi, Rod.

Rod Ratliff – Stanford Group

Hi, guys. Very nice quarter. Nice job. I got into the queue so bloody late that most of my questions have been asked and answered, but – let’s see here, sales headcount now and forecast for the end of year.

Bob Burke

Right now, the total sales headcount is about 110 people and about 67 of those are actually quota-carrying. I think you will see that tick up. We haven’t given guidance in terms of what that number in that being, but we do expect it to be a bit higher by the end of the year.

Rod Ratliff – Stanford Group

Okay. It looks like the on-demand business kicked back up a little bit more. Any update on the hosting business? What is the trend there for hosted sites?

Bob Burke

So, the good news is in terms of the overall on-demand business, we are focusing more on larger customers, larger sites. As I mentioned, we had a couple of larger sites that we launched this last quarter. One that we put in another category actually in the script but also that was launched this past quarter was NutriSystem. So, I think the good news is we expected an uptick in revenue this past quarter and that in fact is what happened. Going forward obviously, this business also is influenced by some deferrals in terms of revenue recognition, but we do see strength in this business. Julie, you want to add new comments?

Julie Bradley

I’m sure. So, carrying on from Bob, we did see a small decrease in the number of hosted sites. Last quarter was 31 – I think the one was 31 and the past quarter was 25 because we have been provided –

Rod Ratliff – Stanford Group

Was there consolidation with that, Julie? Because that has happened in previous quarters where you had one customer with multiple sites that sort of consolidated, am I right?

Julie Bradley

That happens and also this past quarter, we did some culling of some of our smaller sites.

Rod Ratliff – Stanford Group

Okay.

Julie Bradley

So, which is further evidenced by our average revenue per customer increased over 30%.

Rod Ratliff – Stanford Group

Right.

Julie Bradley

Sequentially and on a year-over-year basis. So we do and that's the trend that we expect to see going forward.

Rod Ratliff – Stanford Group

Okay. Bob, what are your thoughts about CleverSet contributing to the boost of sales leads going forward? You think that’s going to help and to what extent?

Bob Burke

I think it definitely will help the overall business. This has been something that customers have been asking for, for some time. In many cases, we provide this very robust set of tools and capabilities for people that are knowledgeable about what they want to merchandise. But a lot of times, when people start in the online business, or they are not as into it as may be some of the more advanced leaders into it, they almost need to have an automated recommendations capability to almost kind of discover the segments that they want to target and how to promote and offer things to those segments. So, I think that this is going to help people get into the game faster, to ramp revenues and actually adopt the technology faster, so that they need to come back and get more of our platform capabilities as well.

Rod Ratliff – Stanford Group

And one last small one. Julie, would you repeat the leads generated by the Sapient Partnership? I think it was in the script.

Bob Burke

Yes. I think it was actually in my part of the script.

Rod Ratliff – Stanford Group

Okay. Sorry.

Bob Burke

We may have mentioned that there was actually – right now they have targeted about 250 people. Number of engagements was mentioned, was that they were currently working on over 10 engagements.

Rod Ratliff – Stanford Group

Okay, that’s great. Thanks a lot.

Julie Bradley

Another point that Bob had made earlier is that over 50% of our license business this past quarter was influenced by our partners. Not all Sapient, of course, but that is further evidence that our partner – the mix [ph] in our Partner Ecosystem is starting to pay off in our results.

Rod Ratliff – Stanford Group

Great, congrats again, thank you.

Julie Bradley

Thank you, Rod.

Operator

Your next question comes fro the line of Michael Huang.

Michael Huang – ThinkPanmure

Thanks very much. Good morning guys.

Julie Bradley

Good morning.

Bob Burke

Michael, how are you doing?

Michael Huang – ThinkPanmure

Doing well. A couple of questions for you, just with the respect to the Partner Ecosystem, obviously we are focused on that. So when is the Partner Ecosystem at full strength relative to where you want it to be? And Julie, could you comment on how the Partner Ecosystem impact gross margins and closed rates and lead gen in '09?

Bob Burke

Yes, I will take the first part of that Michael. If you look kind of where we think this could add – there is a lot of other geographies, for example, where we don’t have partner capabilities completely built out. So I think obviously it will be a journey there is never a final conclusion to, but we certainly have made progress over where we were even six months ago. I think that we still have a ways to go. We are certainly more solid in a lot of areas of North America. There is some verticals and some parts elsewhere in the world that we still need to get more robust partners in place and/or the partners that we have to get more trained people.

Michael Huang – ThinkPanmure

Okay

Bob Burke

So we are not done yet.

Michael Huang – ThinkPanmure

And Julie, the question about margins.

Julie Bradley

Right. The investment really in the Partner Ecosystem has been on two fronts, on professional services and educational services. The educational getting them trained and then with our professional services, in some cases, we’ve been more in a support role for our partners to make sure that they are successful and they get great references coming off of their training and as we see them come more up to speed, we can transfer our professional services to some value added type engagements and becoming more utilized going forward. From a win rate perspective, we are seeing our partners continue to have a strong influence on our sales and as more are trained and referenceable, we should be able to leverage their global reach going forward.

Michael Huang – ThinkPanmure

Great. So obviously, in terms of the target customer and the ramping sophistication of this customer with respect to e-commerce, when you look out into 2009 and 2010, is there a bigger market opportunity for automated recommendations or for eStara? I just want to get your perspective on that.

Bob Burke

So I think for me, volume perspective obviously just given the initial starting point of the businesses, eStara which has a number of service offerings included in that. It is not just click to call or click to chat. We will continue to, from a volume perspective, obviously, be larger than ATG recommendations. If you look at what we are doing here, overall, we are really trying to come up with a complete portfolio and suite offerings that we have that fit into this category of business optimization services and we are going to add to the eStara set of offerings and we are going to add to other offerings similar to ATG recommendations. But from a volume standpoint, eStara is obviously in a much larger position out of the starting gate.

Michael Huang – ThinkPanmure

Okay. And last question for you. Just an update on the integration and productivity of the sales team, so, obviously, you've brought eStara and ATG together, how has that integrated team impacted bookings activity and win rates versus last year? Thanks. And are there still more productivity improvements ahead?

Bob Burke

Well, I think there is more to be gained but we have made tremendous stride. I think if we just look at the cross-sell activity that is going on right now, I think that is evidence of that happening. So, I think we certainly have made some great strides this year.

Michael Huang – ThinkPanmure

Thanks very much.

Bob Burke

Okay.

Julie Bradley

Thanks.

Operator

There are no further questions at this time. I would now like to turn the call over to Mr. Bob Burke, CEO.

Bob Burke

Okay. Thank you all and again, we are very pleased with what happened this past quarter and we look forward updating you on our progress throughout the upcoming months. So, thanks again for joining us. Take care.

Operator

This concludes today’s conference call. You may now disconnect.

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